FAIR PRACTICES CODE, RBI BY NAVNEE GULATI @LEXCLIQ

 

History of Asset Reconstruction companies dates to the time when Narsimaham-I contributed in setting up central Asset Reconstruction Fund in which money was contributed by Central Government for the banks to recover their Non- performing Loans. Underperformance of this idea led to formation of Narisimaham-II through which the idea of Reconstruction companies came in. The aim of reconstruction companies is not just to release bad loans but to also do reconstruction which includes transforming the bad loans into good ones.

 

Asset Reconstruction Companies are those companies which are in form of a specific financial institution and are also registered with Reserve Bank of India. These companies purchase the Non-Performing Assets from bank which helps the bank to remove NPA’s from their balance sheet and clear all the debts. Therefore, by selling up the NPA’s banks are easy to focus on their routine activities and save their time and resources of running after defaulters.

 

There are various challenges faced by ARCs which halts the lead play of these companies. Some of the problems are-

  1. The very first and foremost problem is availability of funds in relation to the huge NPA market. There is a huge market of NPA for which there is scarcity of funds from government’s end and Reserve of Bank of India.
  2. Other than insufficiency of funds another major problem is mismanagement and mismatch of price expectations between the banks and ARCs
  3. There is absence of mature secondary market which leads in buy backing of own stressed loans by the banks.
  4. All ARCs are operated under the umbrella of Reserve Bank of India. There is no defined regulation and constraint on the performance of Asset Regulation Companies which leads to high variability in growth and expansion.

Rigorous and realistic approach is very necessary for ensuring smooth regulation of Asset Reconstruction Companies.

 

FAIR PRACTICES CODE

 

RBI has issued a regulatory framework “Fair Practices Code” for Asset Reconstruction companies registered with it. To ensure transparency in progressively growing environment and smooth regulation companies are advised to adopt the Fair Practices Code.

NEED FOR FAIR PRACTICE CODE –

Reserve Bank of India extended the proposition of Fair practices Code to Asset Reconstruction Companies to prohibit the unlawful means for debt recovery. To overcome the high intensity issues like allocation of funds in relation to the market need, mismatched expectations of the Banks and ARCs and to bring the working under circumscribed guidelines. In the exercise of powers conferred by section 9 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, Reserve Bank of India said –

 

  1. Asset Reconstruction Companies must follow transparent and non -discriminatory practices in acquisition of assets. It shall maintain armed length distance in pursuit of transparency. By adapting transparent and non- discriminatory practices it aims to ensure better functioning and unbiased approach.
  2. To enhance transparency in the process of sale of secured assets, following measures are enacted-
  3. invitation for participation in auction shall be publicly solicited; the process should enable participation of as many prospective buyers as possible.
  4. terms and conditions of such sale may be decided in wider consultation with investors in the security receipts as per SARFAESI Act 2002
  • spirit of Section 29A of Insolvency and Bankruptcy Code, 2016 may be followed in dealing with prospective buyers.
  1. ARCs shall release all securities on repayment of dues or on realisation of the outstanding amount of loan, subject to any legitimate right or lien for any other claim they may have against the borrower. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled/ paid.
  2. ARCs shall put in place Board approved policy on the management fee, expenses, and incentives, if any, claimed from trusts under their management. The Board approved policy should be transparent and ensure that management fee is reasonable and proportionate to financial transactions.
  3. ARCs intending to outsource any of their activity shall put in place a comprehensive outsourcing policy, approved by the Board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers. ARC shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and the RBI nor impede effective supervision by RBI. The outsourced agency, if owned/controlled by a director of the ARC, the same may be made part of the disclosures specified in the Master Circular.
  4. In the matter of recovery of loans, ARCs shall not resort to harassment of the debtor. ARCs shall ensure that the staff are adequately trained to deal with customers in an appropriate manner.
  • ARCs shall put in place a Board approved Code of Conduct for Recovery Agents and obtain their undertaking to abide by that Code. ARCs, as principals, are responsible for the actions of their Recovery Agents.
  • It is essential that the Recovery Agents observe strict customer confidentiality.
  • ARCs shall ensure that Recovery Agents are professionally trained to handle their responsibilities with care and sensitivity, particularly in respect of aspects such as hours of calling, privacy of customer information, etc. They should ensure that Recovery Agents do not induce adoption of uncivilized, unlawful, and questionable behaviour or recovery process.
  1. ARCs should constitute Grievance Redressal machinery within the organisation. The name and contact number of designated grievance redressal officer of the ARC should be mentioned in the communication with the borrowers. The designated officer should ensure that genuine grievances are redressed promptly. ARCs’ Grievance Redressal machinery will also deal with the issue relating to services provided by the outsourced agency and recovery agents, if any.
  2. ARCs shall keep the information, they come to acquire in course of their business, strictly confidential and shall not disclose the same to anyone including other companies in the group except when (i) required by law; (ii) there is duty towards public to reveal information; or (iii) there is borrower’s permission.
  3. Compliance with FPC shall be subject to periodic review by the Board.

 

CRITICAL ANALYSIS ON THE GUIDELINES

 

By creating a regulatory conduct RBI has proved on moving one step ahead for the better working of Asset Reconstruction Companies. Ensuring transparency and non- discriminatory activities are a way to create an unbiased atmosphere for smooth and proper function as well as it contributes in building the trust of banks and investors. Regulation of policy of management fees and expensive are drive towards achieving high level of credibility and smooth working. RBI has also initiated regulations against the wrongful approaches of retrieving the money from debtors which is a very mandatory move to make appropriate environment. Where there are numerous advantages of Fair Practices Code, to some extent it has-

  • Hampered the autonomy of working of Asset Regulation Companies due to which they would be bound to work within a web which can be misused by those who are interlinked to it.
  • Goodwill of certain companies will be moved to an edge because of high level of transparency, companies would have to display their performance and assets. Startup Asset Regulation Companies will face a major hurdle trouble.
  • Interference in between different companies will gradually increase due to a lot of transparency which would lead in finding the loopholes of the act and gaining credibility. The internal fights of companies would affect externally on the banks.
  • Competition in between the companies would automatically lead in resorting to unfair practices and finding means to hide those practices and moving forward in the race which all would form a vicious circle of problems.

 

To a conclusion, yet there are some disadvantages but the guidelines by RBI are much needed enactments because a proper regulatory framework always ensures higher growth towards the end through the pathway of troubles.

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