Lacklustre performance by ARCs: RBI

Mumbai: Multiple factors have led to sub-optimal performance of the asset reconstruction companies (ARCs) in the country, said the Reserve Bank of India (RBI) Committee. The ARC framework was designed to allow originators to focus on their core function of lending, by removing sticky stressed financial assets from their books. It was also designed to help borrowers revive their businesses, which protects the viable and productive assets of the economy and often ensures a better return to banks and financial institutions (FIs).

Accordingly, the Committee constituted to "Review the working of ARCs said multiple factors behind the sub-optimal performance of the sector such as vintage NPAs being passed on to ARCs, lack of debt aggregation, non-availability of additional funding for stressed borrowers, difficulty in raising of funds by the ARCs on their balance sheet, among others."

"Also, ARCs have lacked focus on both recovery and acquiring necessary skill sets for holistic resolution of distressed borrowers." The RBI Committee cited data which showed that the performance of the ARCs has been lacklustre, both in terms of ensuring recovery and revival of businesses.

"Banks and other investors could recover only about 14.29 per cent of the amount owed by borrowers in respect of stressed assets sold to ARCs during the FY 2004-2013 period." "Similarly, data shows that approximately 80 per cent of the recovery made by ARCs has come through deployment of measures of reconstruction that do not necessarily lead to revival of businesses." Considering the challenges impacting the performance of the ARC sector, the Committee recommended sale of stressed assets by lenders at an earlier stage to allow for optimal recovery by ARCs.