The RBI has told the top executives of Asset Reconstruction Companies (ARC) that they should not directly or through their recovery agents harass distressed borrowers while recovering overdue loans and play by the rule book.
The issue was taken up by RBI Deputy Governor J. Swaminathan at a meeting with the CEOs, managing directors and executive directors of ARCs in Mumbai recently.
“ARCs need to be conscious of their conduct vis-a-vis the distressed borrowers. Even a single incident of misconduct can potentially snowball into a controversy which the sector should guard against. While we acknowledge the rights of the ARCs to recover overdue loans, they or their recovery agents should not resort to harassment of borrowers,” Swaminathan told the top executives of ARCs.
He highlighted the fact that a comprehensive fair practice code (FPC) for ARCs has been put in place which requires ARCs to follow transparent and non-discriminatory practices in this regard.
“This becomes that much more critical at the present juncture when the share of retail loans in the financial assets acquired by the ARCs has increased (from 9 per cent, as of March 31, 2020, to 16 per cent as of March 31, 2023),” Swaminathan said.
Swaminathan emphasised that ARCs must improve their overall governance by bringing more independent directors on their boards in accordance with the regulations.
He pointed out that not all ARCs have implemented the revised guidelines on the composition and functioning of the Board.
“I would take this opportunity to urge all ARCs to implement these guidelines in the right spirit. Also, failure to meet regulatory guidelines and wilful violations would invite strict supervisory and enforcement action, if warranted,” Swaminathan was cited as saying in an RBI statement issued on Friday.
The Deputy Governor said that the RBI regulations were intended to promote the integrity and effectiveness of the sector.
The leaders of the ARC sector should endeavour to ensure that the sector remains focused on course charted through legislative and regulatory intent and should ensure that any negative perception about the functioning and governance standards of the ARCs is dispelled, he added.
Swaminathan observed that the thrust of RBI regulations going forward is on developing a market for distressed assets by considering the inclusion of additional stakeholders with strong fundamentals and possessing expertise in resolution.
This is expected to increase competition among buyers of distressed assets, giving a competitive advantage to the entities with superior resolution and recovery mechanisms capable of achieving optimal outcomes.
