The Reserve Bank of India (RBI) has raised several supervisory concerns on the functioning of asset reconstruction companies (ARCs) and urged them to follow better governance, risk management and compliance.

In a meeting with ARC representatives on Friday, the RBI officials said the regulator has come across several instances of non-compliances by these companies and transparent and non-discriminatory practices need to be followed.

In his keynote address, RBI deputy governor M Rajeshwar Rao highlighted that sound governance provides a strong foundation for ARCs to build a robust business model.

“The onus in this regard lies largely with the boards of the ARCs and the top functionaries who will have to develop a strong and institutional culture based on these principles,” Rao said. 

Rao also stressed on the need for responsible conduct in 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 RBI.

RBI deputy governor J Swaminathan emphasised that setting the right tone from the top is crucial in fostering a culture of integrity and ethical conduct. 

Swaminathan highlighted several supervisory concerns in the functioning of ARCs. 

He urged the ARCs to adopt a regulation-plus approach, where there is compliance with both the letter of the regulation and also its spirit. 

Swaminathan also said 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, he added.

The conference was attended by over 80 participants representing all 27 ARCs.

The event, themed ‘Governance in ARCs – Towards Effective Resolutions’, is a part of the series of supervisory engagements RBI has been organising over the last one year with its regulated entities.

The ARCs raised issues like the lengthy settlement process with borrowers and the challenge to meet the regulator’s directive of having Rs 1,000 crore as net-owned funds to be a resolution applicant under the Insolvency and Bankruptcy Code, 2016.