MUMBAI: The Reserve Bank of India (RBI) may allow Security Receipts (SR) holders to change the trusteeship of Asset Reconstruction Companies (ARCs). This change would enable ARCs to retain stressed assets without acting as trustees, thereby expediting the resolution process.
Banks, non-banking financial companies (NBFCs) and foreign portfolio investors are the holders of SRs issued by ARCs.
Security Receipt (SR) is an instrument like a pass through certificate which is issued by ARCs to investors, which represent rights of the investors over realisations from underlying assets.
Under the extant guidelines, when an ARC acquires distressed debt, it becomes trustee of the underlying asset. So, currently there cannot be a trustee without a debt.
“The RBI has completed the groundwork for this. It had sought feedback from different stakeholders, including banks and asset reconstruction companies,” a banker told FE.
“We have already submitted our feedback to the central bank,” he added. According to sources, a meeting of select bankers was held few weeks back to discuss allowing the change in trusteeship of ARCs.
Bankers say that the idea behind allowing the change in trusteeship is to have a single trustee for pooled distressed debt.
Usually, multiple ARCs acquire distressed debts of a bank.
This creates multiple trustees for debt acquired by the ARCs. “Having multiple trustees slows down the decision making and delays the resolution process,” said a banker.
“A single trustee would speed up the entire resolution process,” he added.
The Sudarshan Sen Committee, in 2021, had also recommended allowing change in trusteeship of ARCs. Last month, RBI deputy governor Rajeshwar Rao, in his address to the heads and representatives of ARCs, had said that there have been suggestions that a change in the trustee or manager role from one ARC to another should be allowed, without necessarily extinguishing the SRs. Currently, there are 27 ARCs operating in the country.
ARCs have witnessed a robust growth over the past years, the Reserve Bank of India data show. The book value of bad loans acquired by ARCs reached Rs 9.35 trillion at the end of December 2023, from Rs 6.38 trillion as of March, 2022.
Banks and financial institutions prefer ARCs because lenders get some amount, ranging from 15% to 100%, as upfront cash when they sell bad loans.
Source: The Financial Express