Reserve Bank not happy with ARC show

Periodic interaction of the regulator and any regulated entity has positive takeaways. Such engagements improve communication and better understanding of the regulator and regulated entity - Hari Hara Mishra, CEO, Association of ARCs in India, tells Bizz Buzz

Mumbai: Even as RBI recognises the crucial role assigned to asset reconstruction companies (ARCs), it is unhappy with their functioning. It was crystal clear during the day-long conference which was conducted by the RBI with all the 27 ARCs in the country on last Friday in Mumbai. The conference was attended by over 80 participants representing all 27 ARCs.

On condition of anonymity, one of the participants of the meeting said: “Quality governance, strict compliance, and complete transparency were the key takeaways from the deliberations between ARCs and the RBI top management. While RBI recognised the crucial role assigned to ARCs, they expressed in no uncertain terms that they were generally not happy with their functioning. However, they were quick to add that there were better compliant ARCs too.”

Retail assets increased from nine per cent in March 2020 to 16 per cent in March 2023. Retail share is expected to grow at a faster pace in coming years. There are 27 ARCs, but top 5 have almost 75 per cent overall share. Total assets that came to ARCs were Rs8.4 lakh crore as on March 31, 2023. Redemption of SR instruments improved from 21.1 per cent to 43.3 per cent in in the last five years.

Talking to Bizz Buzz, Hari Hara Mishra, CEO, Association of ARCs in India, says: “Periodic interaction of the regulator and any regulated entity has positive takeaways. Such engagements improve communication and better understanding of the regulator and regulated entity.”

While ARCs have been made aware of regulatory concerns and expectations, RBI has been sensitized on problems faced by ARCs on the ground and suggestions to improve the sector. This interaction will help strengthen the ARC framework for sustainable growth, he said.

The RBI Deputy Governor M Rajeshwar Rao, in his keynote address, highlighted that sound governance provides a strong foundation for the ARCs to build a robust business model. The onus in this regard lies largely with the boards of the ARCs and the top functionaries, who will have to develop a strong and institutional culture based on these principles. He also stressed on the need for responsible conduct in recovery process and emphasised that ARCs should follow transparent and non-discriminatory practices in line with the comprehensive fair practice code (FPC) put in place by the Reserve Bank.

Another RBI Deputy Governor Swaminathan J, who was also present in the event, emphasised that setting the right tone from the top is crucial in fostering a culture of integrity and ethical conduct. He highlighted several supervisory concerns in the functioning of ARCs. He urged the ARCs to adopt a regulation plus approach where there is compliance with both the letter of the regulation and also its spirit.

Boards should accord due importance to assurance functions, namely, risk management, compliance and internal audit. These functions play a critical role in identifying and mitigating risks, ensuring compliance with laws and regulations as well as safeguarding the organization’s reputation, it is said.

An industry expert, requesting anonymity, said that the Income-Tax (I-T) department had conducted raid at the premises of the four ARCs way back in 2021. However, three years have passed since then. Still, there was no word of communication from the department about its findings in the raid.