Some Indian asset conversion companies are circumventing regulations, says an RBI deputy

MUMBAI (Reuters): Some Indian asset reconstruction companies (ARCs) are circumventing regulations and have allowed themselves to be used to prop up the value of distressed assets, the deputy governor of the Reserve Bank of India said in a recent speech.

The RBI has increased supervision of regulated entities to prevent systemic risks and ensure regulatory compliance.

Swaminathan J. addressed a conference for ARC directors and CEOs in Mumbai earlier this month as part of the central bank’s supervisory engagement program, but on Wednesday the RBI posted the full speech on its website.

“Some ARCs, while taking full advantage of the special position granted to them, have been found to be… adopting innovative ways of structuring transactions to circumvent the regulations,” Swaminathan said.

“During our on-site inspections, we have come across cases where ARCs have been used or allowed to be used, if I may say so, as a conduit to access perpetually distressed assets.”

Evergreening is the practice of extending further loans to companies that are close to insolvency to help them repay existing loans.

ARC boards should give due importance to assurance functions such as risk management, regulatory compliance and internal audit, Swaminathan said, noting that such functions play a key role in identifying and mitigating risks, ensuring compliance and protecting the organization’s reputation.

The deputy governor added that the RBI also observed that several entities found new ways to circumvent the regulations when a particular practice was found to be a violation or deviation.

“We have directed the entities to organize remedial actions, including waiving the capital charge on the resulting profits, but only responsible behavior of the supervised entities themselves can ensure the required efficiency of the system,” Swaminathan said.

“In extreme cases, this may require regulatory or supervisory action, which of course we would only want to pursue as a last resort.”

(Reporting by Swati Bhat; Editing by Janane Venkatraman)