RBI Deputy Governor Swaminathan J has emphasised the importance of robust governance led by the Board as a pre-requisite for ensuring that Asset Reconstruction Companies (ARCs) fulfil their intended mandate.

In a speech at the Conference of ARCs, the Deputy Governor said, “Effective functioning of the Board requires several elements, including competent leadership, committed directors with diverse expertise, independence, clarity in roles and responsibilities, and diligence.

“The potential of ARCs to resolve stressed assets within the system can only be realised with sound governance and adherence to ethical practices by a responsible ownership and a professional management.”

He opined that ARCs enjoy a special place in the financial ecosystem by being the special purpose vehicles set up to help lighten the banking system from the high-value NPAs and release the management bandwidth to the lenders to continue their normal banking activities.

The Deputy Governor said that the effective functioning of the Board requires several elements, including competent leadership, committed directors with diverse expertise, independence, clarity in roles and responsibilities, and diligence.

The Chairperson of the Board is the guardian of governance acting as a lynchpin between the Board, the management, and the shareholders. A good chairperson facilitates constructive discussions, encourages diverse perspectives, and guides the board towards consensus on critical matters.

“However, it has been observed that in some ARCs, there were long vacancies in the post of chairperson along with instances where the chair of the Audit Committee (ACB) also chaired the Board meetings. Besides, there were instances of a non-independent Director chairing the Board meetings, which is contrary to the existing framework. These things show that the governance has not been receiving the requisite attention.”

The Deputy Governor further said that the ARC framework was intended to allow loan originators to focus on their core function of lending by removing the sticky stressed assets from their books. It also envisioned the revival of businesses through a resolution of viable and productive assets.

A review of the data indicates that one-time settlements and rescheduling of debt are the predominant measures of reconstruction employed by ARCs.

Arguably, these measures could have been taken by the lenders themselves. “We have also come across instances where ARCs have warehoused the stressed assets, while the originator has continued to remain responsible for the collection as well as custody of the security provided by the borrower,” he said.

ARCs may want to introspect whether they prefer to function as mere warehousing agencies for a fee, which is certainly not in consonance with the underlying intent of the framework, he added.