RBI revises norms for govt-guaranteed security receipts issued by ARCs

Banks and financial institutions transferring stressed loans to ARCs can now reverse excess provisions to their Profit & Loss (P&L) accounts if the sale consideration consists only of cash and Government-guaranteed SRs.  However, the non-cash component (SRs) must be deducted from Common Equity Tier 1 (CET1) capital, and no dividends can be paid from this portion. 

These changes are part of the Reserve Bank of India’s (RBI’s) revised prudential norms for Government of India-guaranteed Security Receipts (SRs) issued by Asset Reconstruction Companies (ARCs). The new guidelines, announced via a circular, aim to provide a differentiated regulatory approach for SRs backed by sovereign guarantees, ensuring better risk management while facilitating smoother loan resolution. 

The new norms also revise the valuation methodology SRs. Government-guaranteed SRs must be periodically valued based on the Net Asset Value (NAV) declared by ARCs, linked to recovery ratings.  Any unrealized gains from fair valuation adjustments must also be deducted from CET1 capital, with restrictions on dividend payouts from such gains. 

Rationale Behind the Move

The RBI’s Master Direction on Transfer of Loan Exposures (MD-TLE), 2021, previously applied uniform norms to all SRs, including those with sovereign backing. The revised framework acknowledges the lower risk profile of Government-guaranteed SRs, allowing banks to optimize provisioning while maintaining capital discipline. 

The circular applies to:  All commercial banks (including SFBs, RRBs, and LABs); Cooperative banks (urban, state, and central); All-India Financial Institutions (AIFIs); and NBFCs (including HFCs).

Industry Implications

The move is expected to: 

– Boost investor confidence in ARC transactions involving government-backed SRs. 

– Encourage faster resolution of stressed assets by providing clearer valuation guidelines. 

– Strengthen capital buffers by preventing premature dividend distributions from unrealized gains. 

The RBI’s latest directive marks a significant shift in the regulatory treatment of government-guaranteed SRs, balancing flexibility in loan sales with prudent capital management. This could accelerate bad loan resolutions while ensuring financial stability in the banking sector.  The revised norms come into immediate effect. 

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