The Reserve Bank of India (RBI) may tweak its framework for Asset Reconstruction Companies (ARCs) as recoveries of retail and MSME loans by these companies via one-time settlement (OTS) have been severely impacted.

After the framework was issued in October last year, recovery of retail loans (such as housing, auto, education and unsecured loans) and MSME loans has become a rigmarole as settlement of dues can be done only after each OTS proposal is examined by an independent advisory committee (IAC), based in whose recommendation, the ARC’s Board takes a call.

Malpractices in OTS

Experts underscored that some of the ARCs, focused on retail and MSME loans, deal with hundreds of OTS cases daily and it would be almost impossible for the IAC and the Board to meet every other day to decide on OTS cases. Prior to the revised framework, ARCs could decide OTS at various levels — MD, chief operating officer, resolution head and recovery agents.

The RBI brought in IAC and the ARC Board into the picture due to malpractices in OTS. But then the long-winded process prescribed by the revised framework is proving to be a drag when it comes to loan recovery. Moreover, the framework also requires ARCs to enter into OTS only after exhausting all other recovery avenues such as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, debt recovery tribunals and the Insolvency and Bankruptcy Code.

Experts said if a retail or a MSME borrower has been proceeded against under other recovery avenues and if no headway is made, it is unlikely the borrower will be having resources to do OTS.

Need relaxation

According to Raj Kumar Bansal, MD & CEO, Edelweiss ARC, the recent regulatory framework has laid down certain stringent processes for ARCs to enter into settlement which has impacted the major source of recovery for ARCs. He observed that necessary clarifications/relaxations would be required from the RBI to make it more practical for ARCs, especially in the area pertaining to settlement of retail accounts.

“As per a study by the Asian Development Bank, 63 per cent assets resolved by number are through settlement/compromise within an average time of 1-1.5 years. For optimal outcome resolution and ease of doing business, at least the retail, SME and unsecured loans should be exempt from the arduous process, bordering on impracticability — of examination of thousands of such cases by the IAC and approval by Board,” said Hari Hara. Mishra, Director, UV ARC Ltd.

For such loans, Boards should be empowered to delegate the authority to competent authorities based on certain pre-approved parameters. ARCs have represented to the RBI that the prescription relating to OTS under the revised framework be relaxed for cases where loan outstanding is below ₹500 crore.

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