rajeshwar rao : building trust through governance - the backbone of stressed assets reconstruction keynote address by mr rajeshwar rao, deputy governor of the reserve bank of india, at the conference " governance in arcs – towards effective resolutions ", mumbai, 17 may 2024. * * * deputy governor shri swaminathan, executive directors, chairmen of the board and acb of arcs, mds & ceos of arcs, my colleagues from rbi, ladies and gentlemen, i am happy to be amidst you today to talk about the crucial topic of governance in arcs. but before i address the issue of governance, let me briefly discuss the importance of credit risk management and the critical role envisaged for arcs – both in terms of legislative intent and regulatory expectations, in india's financial landscape. role of arcs in the stressed asset management we all know that books of our financial institutions are largely susceptible to credit risk as loans and advances constitute a large proportion of the asset portfolio. the credit risk weighted assets ( credit rwas ), in fact, constitute around 80 per cent of total rwas of the banking system. therefore, any prudential regulation to safeguard the stability of financial system must remain alive to the credit risk in the books of financial entities, banks and non - banks alike. the credit life cycle involves four distinct stages. these include the stage of sourcing of credit proposal ; appraisal and underwriting ; disbursal and monitoring ; and, finally repayment which then starts off the next iteration of the credit cycle. if, however, for some reason, the borrower does not pay the dues on time and a loan does not enter the fourth stage, there could be a problem. arcs have been institutionalised to play a crucial role at this juncture. they are the institutions to enable loan originators to focus on their core function of lending by taking over stressed financial assets. the arc framework is also designed to help borrowers revive their businesses, if possible. this in some ways is also intended to preserve the productive asset generated out of the loan. reconstructing distressed assets is by no means an easy task. arcs are expected to step in, armed with expertise in recovery and reconstruction of ailing assets, and help reduce the level of non - performing assets in the banking system by taking possession of the secured asset of the borrower. however, efficacy of all such endeavours hinges upon the bedrock of governance. so, in today's address,

and pradeep kumar. 1 ref : dor. sig. fin. rec. 75 / 26. 03. 001 / 2022 - 23 dated october 11, 2022 ( https : / / rbi. org. in / scripts / notificationuser. aspx? id = 12399 ) 2 arcs shall, by transferring funds, invest in the srs at a minimum of either 15 % of the transferors'investment in the srs or 2. 5 % of the total srs issued, whichever is higher, of each class of srs issued by them under each scheme on an ongoing basis till the redemption of all the srs issued under such scheme. 3 at present, arcs are permitted to convert part of their own debt into equity of a borrower entity and when acting as resolution applicants under ibc, they can acquire equity of the borrower entity 5 / 5 bis - central bankers'speeches