Mumbai, May 29 (IANS): The RBI has found several instances of Asset Reconstruction Companies, which have been set up to recover NPAs of banks, not fulfilling their role but instead using innovative ways to structure transactions in order to circumvent regulations.

The RBI has sent a clear message to ARC chiefs that they must follow the regulations in both letter and spirit.

“During the course of our onsite examinations, we have come across instances where ARCs have been used or allowed themselves to be used as a conduit to evergreen distressed assets. In many cases, there is a lack of transparency and consistency in the issuance and periodical valuation of Security Receipts (SRs). The practices surrounding levy of management fee leaves much to be desired,” RBI Deputy Governor Swaminathan J said at a meeting with ARCs recently.

He pointed out that some ARCs while enjoying the full benefits of the special position granted to them under the SARFAESI Act and the RBI regulations, have been found to be using innovative ways to structure transactions in order to circumvent regulations.

Swaminathan also warned that in extreme cases, the RBI may be forced to take regulatory or supervisory actions.

He pointed out that with regulations shifting towards a more principles-based approach, supervision is required to focus more on the substance of transactions rather than their legal form.

The RBI Deputy Governor urged ARC chiefs to adopt a regulation-plus approach where you not only comply with the letter of the regulation but also its spirit.

After a perusal of the scorecard of ARCs, the RBI has concluded that there are more missed opportunities and less than optimal performance by ARCs in fulfilling the principal mandates under the SARFAESI Act.

ARCs enjoy a special place in the financial ecosystem as they are special purpose vehicles set up to help lighten the banking system from the high-value NPAs and are also specialised agencies for maximising recovery and reconstruction efforts.