What changed
RBI amended the 2003 SC/RC Guidelines to prohibit ARCs from acquiring non-performing assets from their sponsor banks on a bilateral basis, regardless of consideration. Instead, ARCs may only participate in transparent, arm's-length auctions of such assets by sponsor banks. Additionally, promoters of defaulting companies, borrowers, or guarantors are now permitted to buy back assets from ARCs, subject to conditions including a board-approved policy and valuation that considers current settlement value versus alternative recovery timelines.
What it means for you
Banks and ARCs must shift from direct bilateral NPA sales to auction-based transactions, ensuring market-driven pricing and transparency. For lenders, this reduces potential conflicts of interest but may slow down asset resolution if auctions are less efficient. Promoter buybacks offer a new resolution avenue, potentially reducing litigation and preserving asset value, but require rigorous valuation and board oversight to prevent abuse.
What you must do
- Review and update your ARC's board-approved policy for asset buybacks, incorporating valuation components like current settlement value, time-related value changes, and statutory dues.
- Ensure all NPA acquisitions from sponsor banks are conducted only through transparent, arm's-length auctions, not bilateral deals.
- Train your credit and resolution teams on the new promoter buyback conditions, including documentation of cost-benefit analysis for each settlement.
- Monitor compliance with the revised guidelines in all ARC transactions to avoid regulatory action.
Who it affects
All registered Securitisation Companies and Reconstruction Companies (ARCs), Sponsor banks of ARCs, Promoters, borrowers, and guarantors of defaulting companies, Bank credit and resolution teams
Can an ARC still buy NPAs from its sponsor bank?
Yes, but only through a transparent, arm's-length auction where market forces determine the price. Direct bilateral purchases are no longer allowed.
What conditions must a promoter meet to buy back assets from an ARC?
The buyback must help minimize litigation costs, prevent asset value erosion, or aid restructuring. The ARC must value the asset considering current settlement value, time-related changes, statutory dues, and other recovery factors, all under a board-approved policy.
Does this circular apply to all ARCs?
Yes, it applies to all registered Securitisation Companies and Reconstruction Companies in India.