The Reserve Bank of India has introduced uniform accounting rules for asset reconstruction companies or ARCs in order to prevent them from 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. RBI has mandated certain regulations in terms of revenue recognition, valuation of SRs, acquisition costs and others and 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. RBI 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.
