The Reserve Bank of India (RBI) has unveiled a new mechanism for banks and non-banking financial companies (NBFCs) to offload bad loans, allowing them to bundle and sell stressed assets directly to investors via special purpose entities established by regulated financial firms, TOI has reported.
Previously, this function was solely managed by asset reconstruction companies (ARCs). This initiative, introduced alongside the April monetary policy, aims to expand the market for distressed debt and lessen reliance on ARCs.
A notable aspect of this new framework is the introduction of resolution managers, who will be responsible for recovering value from the underlying assets. These managers must be independent of the originating lender. RBI-regulated entities are permitted to serve as resolution managers for such loans, while insolvency professionals and regulated institutions may also qualify for other cases.
Lenders are required to incrementally provision for the securitized notes over a span of five years, with capital requirements varying based on recovery ratings—favoring senior tranches. Any remaining exposure after the five-year period is to be marked down to Re 1.
With this new setup, ARCs may face a reduction in their market share, as larger cases currently funnel into the National Asset Reconstruction Company Limited (NARCL). The revised framework enables lenders to circumvent ARCs for mid-sized and retail loans.
Additionally, RBI has mandated that ARCs increase their net owned funds to Rs 300 crore by FY26, a benchmark that many have yet to meet.
(With TOI inputs)
Previously, this function was solely managed by asset reconstruction companies (ARCs). This initiative, introduced alongside the April monetary policy, aims to expand the market for distressed debt and lessen reliance on ARCs.
A notable aspect of this new framework is the introduction of resolution managers, who will be responsible for recovering value from the underlying assets. These managers must be independent of the originating lender. RBI-regulated entities are permitted to serve as resolution managers for such loans, while insolvency professionals and regulated institutions may also qualify for other cases.
Lenders are required to incrementally provision for the securitized notes over a span of five years, with capital requirements varying based on recovery ratings—favoring senior tranches. Any remaining exposure after the five-year period is to be marked down to Re 1.
With this new setup, ARCs may face a reduction in their market share, as larger cases currently funnel into the National Asset Reconstruction Company Limited (NARCL). The revised framework enables lenders to circumvent ARCs for mid-sized and retail loans.
Additionally, RBI has mandated that ARCs increase their net owned funds to Rs 300 crore by FY26, a benchmark that many have yet to meet.
(With TOI inputs)
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