RBI comes up with uniform accounting rules for asset reconstruction companies

MUMBAI: The Reserve Bank of India has come up with some uniform accounting rules for asset reconstruction companies or ARCs probably to stop them inflating short term profits.

In the wake of deteriorating credit quality, banks have of late started selling bad loans to ARCs, which acquire them from lenders and try recovering pending dues from defaulting borrowers. In between companies earn commissions. Such transactions can take place in a combination of security receipts or SRs and cash.

The central bank has mandated certain regulations in terms of revenue recognition, valuation of SRs, acquisition costs and others.

RBI has asked all ARCs to show expenses incurred at the time of acquiring bad loans on account of due diligence, immediately in the statement of profit and loss.

The central bank said, yield should be recognised only after the full redemption of the entire principal amount of SRs. Higher income should be recognized only after full redemption of Security Receipts.

SRs are securities to be subscribed by select qualified institutional buyers including banks and traded in the secondary market. As and when ARCs recover loans, it repays back to those SR holders.

In case of more than expected recovery, the ARCs receive incentives and vice-a-verse. SRs are rated by rating companies. Higher the ratings, better is the quality.

“Considering nature of investment in SRs where underlying cash flows are dependent on realization from non performing assets, it can be classified as available for sale. Hence investments in SRs may be aggregated for the purpose of arriving at net depreciation/ appreciation of investments under the category,” RBI said.