Giving Asset Reconstruction Company’s Financial Muscle Or Heading Intotroubled Waters

Giving Asset Reconstruction Company’s Financial Muscle Or Heading Intotroubled Waters: New RBI Framework

Shreya Sharma, Rajiv Gandhi National University of Law, Patiala

Introduction

In India, problems with inadequate infrastructure and excessive delays in the resolution of stressed assets still persist nearly six years after the adoption of the Insolvency and Bankruptcy Code 2016(IBC). The volume of cases, the dearth of adjudicating tribunals, and the rigorous deadlines imposed by the law have all contributed to a growth in the backlog of cases. On the other side, lenders had to drastically reduce their exposure to distressed businesses. So, to curb lacunas of this sector and enhance the investor pool, the Reserve Bank of India (RBI) on 11October 2022 took a welcoming step detracting from its dyed in the wool approach by providing limited permission to the Asset Resolution Companies (ARC’s) to function or engage as via Circular dated RBI/2022-23/128 DOR.SIG.FIN.REC.75/26.03.001/2022-23. This blog offers a quick assessment of the RBI's latest decision and expresses some reservations about it.

The creation of Asset Reconstruction Companies, the birth child of the Narasimham Committee-II, was envisioned with the prime purpose of effectively solve the crisis of mounting Non-Performing Assets (NPA) in 1998. These financial institutions were envisaged as specialized companies that try to recover NPAs they purchase from banks at a reduced price so that banks can improve their balance sheets. In essence they fundamentally reconstruct and securitise bad assets of financial institutions. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (SARFAESI), regulates them. Earlier besides securitization, reconstruction, and statutorily permitted activities, the ARCs were mandated by the SARFAESI plan to obtain the RBI’s prior permission before performing any other duty as per Section 10(1).