Robust governance led by the Board is a pre-requisite to ensuring that Asset Reconstruction Companies (ARCs) fulfill their intended mandate, said the RBI Deputy Governor Swaminathan J.
In a speech at the Conference of ARCs, the Deputy Governor said, “Effective functioning of the board requires several elements including competent leadership, committed directors with diverse expertise, independence, clarity in roles and responsibilities and diligence.
“ARCs potential for resolving stressed assets within the system can only be realised with sound governance and adherence to ethical practices by a responsible ownership and a professional management.”
He opined that ARCs enjoy a special place in the financial eco system by being the special purpose vehicles set up to help lighten the banking system from the high value NPAs and release the management bandwidth to the lenders for continuing with their normal banking activities.
The Deputy Governor said that the effective functioning of the board requires several elements including competent leadership, committed directors with diverse expertise, independence, clarity in roles and responsibilities and diligence.
The Chairperson of the Board is the guardian of governance acting as a lynchpin between the Board, the management, and the shareholders. A good chairperson facilitates constructive discussions, encourages diverse perspectives, and guides the board towards consensus on critical matters.
“However, it has been observed that in some ARCs, there were long vacancies in the post of chairperson along with instances of chair of the Audit Committee (ACB) also chairing the Board meetings as well as a non-independent Director chairing the Board meetings, contrary to the extant framework. These things only go to show that the governance has not been receiving the required attention.”
The Deputy Governor further said that the ARC framework was intended to allow loan originators to focus on their core function of lending by removing the sticky stressed assets from their books. It also envisioned the revival of businesses through resolution of viable and productive assets.
A review of the data indicates that one-time settlements and rescheduling of debt are the predominant measures of reconstruction employed by ARCs.
Arguably, these measures could have been taken by the lenders themselves. We have also come across instances where ARCs have warehoused the stressed assets, while the originator has continued to remain responsible for the collection as well as custody of the security provided by the borrower, he said.
ARCs may like to introspect whether they would like them to be a warehousing agency for a fee, which is certainly not in consonance with the underlying intent of the framework, he added.
