A Reserve Bank of India (RBI) panel has suggested for overhauling rules to govern Asset Reconstruction Companies (ARC).
RBI panel calls for overhauling ARC regulations
Overhauling ARC regulations will enhance the availability of bad loans for transactions.
It will also bring in a wide set of investors for distressed assets to the market.
Recommendations of the panel
RBI panel recommends for:
Purchase of loans classified as fraud
An online system for transparency in transactions
permission to transact in financial assets that are owned by mutual funds.
Defining ‘substantial part of business’ for ensuring change in management
Permission to participate in the resolution under Insolvency and Bankruptcy Code (IBC) by ARCs.
Streamlining and standardising sale process of stressed assets undertaken by banks or Financial Institutions (FIs).
RBI’s Revised PCA framework- Things to Know
Reserve Bank of India (RBI) modified its prompt corrective action (PCA) framework on November 3, 2021 to exclude the profitability parameter from its triggers list.
In its 2017 framework, capital, asset quality & profitability were the key areas to monitor.
In recent modification, round capital, asset quality & leverage will be key areas.
RBI has also modified the level of shortfall in total capital adequacy ratio. It will push the lender to “risk threshold three” category. Lenders who breach this risk threshold, will be placed under stringent PCA restrictions.
PCA framework are put in place with the objective of enabling supervisory intervention at appropriate time. It requires the supervised Entity to implement remedial measures in a time bound manner, for restoring its financial health.
The PCA framework was introduced in December 2002. It acts as a tool for effective market discipline. These regulations were revised in April 2017, on the recommendations of working group of Financial Stability & Development Council. Under this framework, RBI puts banks with weak financial metrics under watch. It aims to check the Non-Performing Assets (NPAs) problems in banking sector of India. It helps in alerting regulator, investors and depositors in case bank heading for trouble.
PCA framework is applicable only to commercial banks. Co-operative banks and non-banking financial companies (NBFCs) are not covered under it.
