RBI eases norms for ARCs acquiring assets under restructuring

Mumbai: Asset reconstruction companies can now take more than eight years to recover loans that are under a restructring programme that allows for a longer period of recovery, the Reserve Bank of India (RBI) said on Thursday.

This easing is valid for assets that are seeking some form of restructuring through corporate debt restructuring (CDR), the Board for Institutional and Financial Reconstruction (BIFR) or joint lenders’s forum (JLF).

The ARCs are also permitted to accept a resolution period in accordance with other secured lenders to the asset, the central bank said in its notification.

When a reconstruction company purchases a stressed asset from a lender, it pays 15% of the net value of the asset upfront and issues security receipts for the remaining 85%. These security receipts can then be redeemed after a designated period.

Sales to ARCs have slowed down because of the 15-85 norm for issuing security receipts, enforced in August last year. Prior to this, ARCs used to pay only 5% of the net value of the asset upfront. A higher initial payment means ARCs demand a larger discount on the value of the stressed asset, which in turn results in disagreements with banks.

According to the circular for ARCs issued by the central bank in July 2014, ARCs are permitted a maximum of eight years to resolve the recovery from the stressed assets they purchase from a bank, which is usually the period for which security receipts are issued.

“However, in most cases of restructuring proposals of stressed assets, as approved by BIFR/CDR/JLF, the repayment period goes beyond a time frame of 8 years,” RBI said in a notification on its website.

In such cases the ARCs find themselves unable to go along with the asset beyond the eight-year period and usually demand an exit at the end of five or eight years, jeopardizing restructuring efforts by other lenders, the central bank said.

ARCs will now be allowed to extend the duration of the security receipts which they have issued in such cases, to the duration of the BIFR, CDR or JLF programme. However, this will be subject to a positive rating of these securities by rating agencies and as long as their net asset value remains positive, the central bank said.

“Any kind of relaxation from the RBI is always welcome, though the benefit will depend on how many such assets which are under restructuring, have been acquired by a reconstruction company,” the chief of an ARC said on condition of anonymity.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.