Context
Recently, the RBI had organised a conference for the directors and MD/ CEOs of ARCs in Mumbai that was attended by more than 80 participants representing all 27 ARCs.
- The Deputy Governor of the Reserve Bank of India (RBI) has identified several supervisory concerns in the functioning of Asset Reconstruction Companies (ARCs).
About Asset Reconstruction Company (ARC)
- A Type of Financial Institution: An asset reconstruction company is a type of financial institution that specializes in acquiring and managing distressed assets, typically loans or non-performing assets (NPAs) from banks and other financial institutions.
- When borrowers are unable to repay their loans, these loans become NPAs, and banks might decide to offload these troubled assets to ARCs.
- Importance: ARCs play a crucial role in the financial system by helping banks clean up their balance sheets and recover some value from the troubled loans.
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Crucial Insights of the Conference
- To Adopt Regulation Plus Approach: RBI asked asset reconstruction company to adopt a “regulation plus” approach, ensuring compliance with both the letter and the spirit of regulations.
- Due Importance to Functions: Boards should accord due importance to assurance functions, namely, risk management, compliance and internal audit.
- These functions play a critical role in identifying and mitigating risks, ensuring compliance with laws and regulations as well as safeguarding the organisation’s reputation.
- Ethical Conduct & Integrity: Setting the right tone from the top is crucial in fostering a culture of integrity and ethical conduct.
- Emphasising the Importance of Sound Governance: The sound governance provides a strong foundation for ARCs to build a robust business model.
- Responsibility: The onus to develop sound governance lies largely with the Boards of the ARCs and the top functionaries who will have to develop a strong and institutional culture based on the above mentioned principles.
- Essence: Need for responsible conduct in the recovery process and emphasised that ARCs should follow transparent and non-discriminatory practices in line with the comprehensive fair practice code (FPC) put in place by the Reserve Bank.
About Reserve Bank of India (RBI)
- Formation: The Reserve Bank of India (RBI) was established through the Reserve Bank of India Act of 1934, based on the recommendations of the Hilton Young Commission, with a share capital of Rs. 5 crore.
- The Central Office of the Reserve Bank was set up in Kolkata but was permanently shifted to Mumbai in 1937.
- Initially, the RBI was owned privately but was nationalized in 1949. It is completely owned by the Government of India.
- Mandate: RBI is responsible for the control, issuing, and maintaining supply of the currency in the country. It also manages the country’s main payment systems.
- Organisation Structure: The operation of the Reserve Bank of India lies with a 21-member central board of directors consisting of:
- Governor
- 4 Deputy Governors
- 2 Finance Ministry representatives
- 10 government-nominated directors
- 4 directors to represent local boards’ headquarters of RBI
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May 18, 2024