RBI meets heads of ARCs amid reports of use of unfair recovery methods

The Reserve Bank of India (RBI) held a meeting with heads of Asset Reconstruction Companies (ARCs) following concerns about their practices. News reports alleged ARCs lacked proper governance, used unfair methods to recover stressed assets, and even allowed original debtors (promoters) to regain control through unofficial means. The meeting was attended by over 80 participants representing all 27 ARCs.

While clarifying this was a regular meeting, the RBI emphasized the importance of good governance for ARCs’ success. Officials stressed the responsibility of ARC boards and leadership to build an ethical culture. They called for responsible debt collection methods, transparency, and following fair practices as outlined by the RBI.

The RBI also highlighted supervisory concerns. They urged ARCs to go beyond simply following regulations and ensure the spirit of the rules is upheld. Strong internal controls like risk management and internal audits were emphasized to identify and manage risks, comply with regulations, and protect the ARC’s reputation.

This meeting comes after tax authorities raided several ARCs in December 2021. The raids uncovered suspicious links between borrowers and ARCs, along with the use of dummy companies to acquire bad loans. Authorities believe borrowers may have been using their own money, routed through shell companies, to buy back these bad debts from ARCs. This practice could potentially allow them to regain control of their assets despite defaulting on loans. It’s important to note that bankruptcy code regulations prohibit such actions by defaulting promoters.

Deputy Governors M. Rajeshwar Rao and Swaminathan J. addressed the participants. Executive Directors S C Murmu, Saurav Sinha, J K Dash, and Rohit Jain along with other senior officials representing Regulation and Supervision departments of the Reserve Bank also participated in the Conference.

Shri 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.

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