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The Reserve Bank of India (RBI) will constitute a committee to review the working of asset reconstruction companies (ARCs) to help the sector realize its full potential, governor Shaktikanta Das said on Wednesday.

“Asset reconstruction companies play an important role in the resolution of stressed assets. Their potential, however, is yet to be fully realized," Das said. A committee will undertake a comprehensive review of the working of ARCs and recommend measures to enable them meet the growing requirements of the financial sector, he said.

RBI’s concerns of unrealized potential seem to have stemmed from the fact that extant regulations are not conducive for ARC participation as equity buyers in stressed companies.

Last year, the central bank had rejected a resolution plan submitted by UV Asset Reconstruction Co Ltd for acquiring assets of Aircel, citing that the plan does not conform to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act. The UV ARC resolution plan involved the ARC getting a 76% stake in the company in the first five years, with the financial creditors getting the rest.

Following this, the ARC association and lenders such as State Bank of India (SBI) sought clarifications from RBI on the involvement of ARCs in resolution plans under the Insolvency and Bankruptcy Code (IBC).

Mint reported on 26 September that RBI has decided not to approve bankruptcy resolution plans submitted by ARCs. However, ARCs can purchase the debt of the stressed accounts from banks and participate as a creditor under IBC.

Bankers on Wednesday lauded RBI’s move to set up a panel to review the working of ARCs and said it would help stressed asset resolution. Banks in India are saddled with bad loans of 7.38 trillion, a number that is expected to rise in the coming months as covid-19 makes a comeback.

The setting up of a panel to review the working of ARC’s could open up new vistas of faster resolution, SBI chairman Dinesh Khara said.

Since guidelines for ARCs were issued in 2003, they have grown in number and size but their potential for resolving stressed assets is yet to be realized fully, RBI said on Wednesday.

“It was high time that RBI looked into the difficulties faced by the ARC sector. Pricing of assets by banks is one issue where there is always a mismatch of expectations," said the head of an ARC.

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