Non-performing assets Current Affairs - 2019

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RBI permits ARC to buy financial assets from Peers

The Reserve Bank of India (RBI) has permitted Asset Reconstruction Companies (ARCs) to acquire financial assets from peers i.e. other such entities. However, RBI, the apex banking regulator cleared that all such transactions have to be settled in cash.

Key Highlights

The ARCs have been allowed to acquire financial assets from other ARCs, in the view of amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002.

Conditions: for transfer of assets by one ARC to another includes-

  • Price discovery for such transaction shall not be disadvantageous to interest of Security Receipt holders. Also selling ARC must utilise proceeds so received for redemption of underlying security receipts.
  • Redemption date of underlying Security Receipts and total Period of Realisation (conversion of assets, goods & services into cash or receivables through sale) should not extend beyond a period of 8 years from date of acquisition of financial asset by 1st ARC.
  • All such transactions have to be settled in cash.

Significance: This decision by RBI will help improve liquidity in Asset Reconstruction Companies’ market.

About SARFAESI Act, 2002

It lets banks as well as other financial institutions (FIs) of India auction commercial or residential properties (of defaulters) for purpose of loan recovery.

Asset Reconstruction Companies (ARC) was established under this act.

It was made to identify and rectify problem of Non-Performing Assets (NPAs) via multiple mechanisms.

Prompt Corrective Action framework restrictions lifted for Three Banks

The Reserve Bank of India (RBI) has lifted the Prompt Corrective Action (PCA) framework operational curbs on Bank of India (BoI), Bank of Maharashtra (BoM) and Oriental Bank of Commerce (OBC).

These public sector banks are out of the prompt corrective action (PCA) framework. This will aid in making marked improvements in the capital positions and asset quality.

The PCA restrictions were lifted after these banks provided a written commitment that they would comply with the norms of minimum regulatory capital, net NPAs (Non-performing Assets) and leverage ratio on an ongoing basis. These Banks have also apprised RBI of the structural and systemic improvements they have put in place.

Prompt Corrective Action (PCA) Framework

Prompt Corrective Action (PCA) framework has been issued by the RBI to maintain the sound financial health of banks. The RBI will initiate certain structured and discretionary actions for the bank under the PCA when the Banks breach any of the three key regulatory trigger points:

  • Capital to risk-weighted assets ratio
  • Net non-performing assets
  • Return on assets.

The PCA framework is aimed at nudging the banks to take corrective measures in a timely manner, in order to restore their financial health.