Fair Practices Code for Asset Reconstruction Companies (RBI)

Ashish M. Shaji

06 Sep, 2022

The Reserve Bank of India issued the Fair Practices Code for Asset Reconstruction Companies (ARC) on July 16, 2020.  It stated that these entities must follow transparent and non-discriminatory practices in the acquisition of the assets.

What are Asset Reconstruction Companies?

Asset Reconstruction Companies are a special type of financial institution that specializes in the business of acquiring non-performing assets and stressed assets from the bank and financial institutions and reconstruct them. The ARCs are registered under RBI and regulated under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

What is the main objective of issuing the Fair Practices Code for ARCs by the RBI?

As we know that the business of ARCs involves frequent dealing with the borrowers of loans; therefore, they must be led by principles of fairness in their dealings with the borrowers. Hence the main objective of this Fair Practices Code for ARCs is to ensure the highest standard of transparency and fairness in dealing with stakeholders. It has prescribed the minimum regulatory expectation, while every ARCs board is free to enhance its scope and coverage.

What is the guideline with respect to the acquisition of assets?

The guidelines issued by RBI in that respect states that the ARC must follow transparent and non-discriminatory practices in the acquisition of assets. It further states that the ARC must maintain arm’s length distance in the pursuit of transparency.

What must be ensured in the process of the sale of secured assets?

With a view to increasing transparency in the sale of secured assets, the following guidelines have been laid down by the RBI:

• ARCs must enable the participation of as many prospective buyers as possible, and the invitation for participation in the auction must be publicly solicited.
• While finalizing the terms and conditions of the sale of underlying assets, it may be decided in wider consultation with the investors in the security receipts according to the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act)^[1].
• Another critical provision in the fair practices code is that the spirit of section 29 A of Insolvency and Bankruptcy Code, 2016, may be followed to deal with prospective buyers.

What is the “spirit of section 29 A,” as mentioned in the Fair practices Code by RBI?

As we specified in the third point of the above-mentioned segment that the spirit of section 29 A of Insolvency and Bankruptcy Code, 2016, may be followed in dealing with prospective buyers.

It may be noted that Section 29 A of IBC provides the lists of person who are not eligible to be the resolution applicant or a buyer of assets in a liquidation sale. The reference made by the RBI here could be to disallow persons like un-discharged insolvents, wilful defaulters, etc. from buying assets. 

What are the measures to be undertaken by ARCs to prevent harassment by recovery agents?

The RBI has strictly warned the ARCs to not resort to harassment of the debtor in the matters of recovery of the loan.

The following things have been notified in this regard:

• The ARCs are required to ensure that the staff is trained adequately to deal with the customers in an appropriate manner. 
• ARCs must put in place a board-approved code of conduct for recovery agents and obtain their undertaking to abide by that code. It is critical to know here that ARCs are responsible for the actions of their recovery agents.
• The recovery agents and the staff of ARCs must observe strict customer confidentiality.
• ARCs must ensure that the recovery agents are trained properly to handle their responsibilities with care and sensitivity, especially in respect of aspects like hours of calling, the privacy of customer information, etc.
• ARCs must ensure that recovery agents do not induce the adoption of uncivilized, unlawful and questionable behavior or recovery process.

Outsourcing policy by ARCs

The ARCs that are looking to outsource any of their activity are required to put in place an outsourcing policy which is approved by the board and which incorporates the criteria for selection of such activities and service providers, delegation of authority depending on risks and materiality as well as systems to monitor and review the operations of these activities/service providers.

ARCs are required to ensure that outsourcing arrangements don’t diminish its ability to fulfill its obligations to customers and RBI and also doesn’t impede the effective supervision by RBI.

Grievance Redressal Machinery: Fair Practices Code

The following guidelines have been issued with respect to Grievance Redressal:

• ARCs must constitute grievance redressal machinery within the organization.
• The name and the contact number of designated grievance redressal officer must be mentioned in the communication with the borrowers.
• The officer is required to ensure that genuine grievances are addressed promptly.
• ARC’s Grievance Redressal Machinery will also deal with the issue concerning services provided by the outsourced agency and recovery agents, if any.

What are the exceptions to keeping the information acquired in the course of business confidential?

 The guidelines mention that the ARCs must keep the information strictly confidential, which is acquired in the course of business and must not disclose it to anyone.

However, there are certain exceptions to this:

• When required by the law;
• There is a duty towards public to reveal information; and
• Or there is borrower’s permission.

Conclusion

Read our article:What are the Challenges Faced by ARC in Case of NPAs