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ARCs will now have to take the auction route to acquire NPAs

Mumbai: To bring in more transparency into bad-loan exchanges and ring-fence these deals from likely allegations of conflict of interests, the Reserve Bank of India (RBI) has barred asset reconstruction companies (ARCs) from acquiring financial assets on a bilateral basis.

This will impact bilateral transactions involving banks or financial institutions, such as Fortune Group or Edelweiss, and their ARCs.

RBI has put a ban on any bilateral transaction involving a bank or financial institution that is either a lender to the ARC, or a subscriber to the fund or an entity in the group to which the ARC belongs. They may participate in auctions of financial assets conducted in a transparent manner or at arm’s length basis — at market-determined prices.

Total NPAs in the banking system are pegged at Rs 9.3 lakh crore. Of this, experts say Rs 2 lakh crore can be sold to ARCs.

Private banks normally sell down bad loans in private transactions, while public sector banks sell bad loans through auctions. With the new rules in place, lenders cannot sell to ARCs without going through a bidding process. For instance, Fortune Group cannot sell bad assets to Suraksha ARC on a bilateral basis but will have to run a bidding process.

ARCs are playing an important role in cleaning up the bad debt in the financial system. After the introduction of the bankruptcy code, ARCs have bought non-performing assets worth Rs 40,000 crore from banks.

Earlier, restrictions on bilateral deals were imposed on sponsors of the ARCs, and these curbs have now been extended to investors of funds and group entities.

“The regulation is intended to bring in more transparency in the process of asset sales to ARC, from its lenders, investors and group entities and ring-fence the transactions from conflict of interest,” said Hari Hara Mishra, director, UV Asset Reconstruction.

Banks are opting for the assetdisposal route as some large NPAs from the first list referred to the NCLT by the RBI in 2017, including Alok Industries, JBF Petro and Reliance Communications, are yet to be resolved.

In cases where there’s little interest on the part of bidders in distressed assets, banks are resorting to other measures such as sales to ARCs.

India’s 30 ARCs bought assets worth Rs 24,000 crore from banks last financial year.

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