RBI’s Swaminathan comes down hard on dubious ARC practices

"During our , we have come across instances where ARCs have been used or allowed themselves to be used, if I may say so, as a conduit to evergreen distressed assets," Swaminathan stated.

ET had reported on May 11 that RBI is concerned about ARCs striking deals with defaulting promoters, effectively giving them a back-door entry.

The also pointed out that their has found that some ARCs are acquiring assets on their books but the selling bank does the recovery. "We have also come across instances where ARCs have warehoused the stressed assets while the originator has continued to remain responsible for the collection and custody of the security provided by the borrower," Swaminathan said.

"ARCs may like to introspect whether they would like them to be a for a fee, which is certainly not in consonance with the underlying intent of the framework," he added.

RBI was also critical of the way ARC's disposal of assets. "Assets are sold to group entities without following the arms-length principle and without subjecting them to scrutiny under related party transactions," Swaminathan said. "Another surprising behaviour is the 'Swiss challenge', which often goes unchallenged! This has become a routine affair, giving rise to a suspicion that there may be some implicit understanding among the various participants," he added.

He also pointed out that the RBI's supervision is moving toward a principle-based approach, requiring supervisors to focus more on the substance of transactions rather than their legal form. "This means that supervisors, instead of relying on the technical compliance presented by the management, may have to scrutinise the economic purpose and the underlying unstated intent behind the transactions."

The DG urged all ARCs' to adopt a 'regulation plus' approach where they not only comply with the letter of the regulation but also its spirit.

"There seem to be more missed opportunities and less than optimal performance by ARCs in fulfilling the principal mandates," he stated.

While highlighting that ARC are sidestepping regulations, the DG said some ARCs are "using innovative ways to structure transactions in a manner to circumvent regulations."

RBI DG said that a few entities have found "new ways of achieving their designs once a particular practice has been called out as a violation or deviation."

He said that RBI has directed entities that have deviated from regulations to 'arrange for remediation including setting aside capital charge on gains.' He warned that in 'extreme cases, it may call for regulatory or supervisory actions which, of course, we would like to use only as a last resort.'