RBI issues fair practices code for asset reconstruction companies

The companies will be required to put in place a board-approved policy on the management fee, expenses and incentives, if any, claimed from trusts under their management.

The Reserve Bank of India (RBI) on Thursday issued a fair practices code for asset reconstruction companies (ARCs), stating that these entities must follow transparent and non-discriminatory practices in acquisition of assets. They must also maintain an arm’s length distance in the pursuit of transparency and avoid harassing debtors while making recoveries, the RBI said.

In order to enhance transparency in the process of sale of secured assets, invitation for participation in auctions shall be publicly solicited and the process should enable participation of as many prospective buyers as possible. The terms and conditions of such sale may be decided in wider consultation with investors in the security receipts as per SARFAESI Act 2002 and the spirit of Section 29A of the Insolvency and Bankruptcy Code, 2016 may be followed in dealing with prospective buyers, the central bank said.

ARCs shall release all securities on repayment of dues or on realisation of the outstanding amount of loan, subject to any legitimate right or lien for any other claim they may have against the borrower. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled or paid.

The companies will be required to put in place a board-approved policy on the management fee, expenses and incentives, if any, claimed from trusts under their management. The policy should be transparent and ensure that management fee is reasonable and proportionate to financial transactions.

“ARCs intending to outsource any of their activity shall put in place a comprehensive outsourcing policy, approved by the board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers,” the RBI said. They shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and the RBI nor impede effective supervision by RBI. If the outsourced agency is owned or controlled by a director of the ARC, the same may be made part of the disclosures specified in the master circular.

In the matter of recovery of loans, ARCs shall not resort to harassment of the debtor. They shall ensure that the staff are adequately trained to deal with customers in an appropriate manner, the RBI said, adding that the ARCs will have to establish a board-approved code of conduct for recovery agents and obtain their undertaking to abide by that code. ARCs, as principals, are responsible for the actions of their recovery agents. The agents must observe strict customer confidentiality. The ARCs shall ensure that recovery agents are properly trained to handle their responsibilities with care and sensitivity, particularly in respect of aspects such as hours of calling and privacy of customer information. They should ensure that recovery agents do not induce adoption of uncivilised, unlawful and questionable behaviour or recovery processes.

The companies should also constitute grievance redressal machinery within the organisation. The name and contact number of the designated grievance redressal officer of the ARC should be mentioned in the communication with the borrowers. The designated officer should ensure that genuine grievances are redressed promptly. ARCs’ grievance redressal machinery will also deal with the issue relating to services provided by the outsourced agency and recovery agents, if any.

ARCs shall keep the information they come to acquire in course of their business strictly confidential and shall not disclose the same to anyone including other companies in the group, except when required by law, when it has a duty towards the public to reveal information or when there is borrower’s permission. Compliance with the fair practices code shall be subject to periodic review by the board.