Bank of baroda

Regulations relating to Sale of Assets to Asset Reconstruction Companies
The Securitisation Act provides for sale of financial assets by banks and financial institutions to asset reconstruction
companies. The RBI has issued guidelines to banks on the process to be followed for sales of financial assets to asset
reconstruction companies. These guidelines provide that a bank may sell financial assets to an asset reconstruction
company provided the asset is a non-performing asset. A bank may sell a standard asset only if the borrower has a
consortium or multiple banking arrangement, at least 75% by value of the total loans to the borrower are classified as
non-performing and at least 75% by value of the banks and financial institutions in the consortium or multiple banking
arrangement agree to the sale. The banks selling financial assets should ensure that there is no known liability devolving
on them and that they do not assume any operational, legal or any other type of risks relating to the financial assets sold.
Further, banks may not sell financial assets at a contingent price with an agreement to bear a part of the shortfall on
ultimate realisation. However, banks may sell specific financial assets with an agreement to share in any surplus realised

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BANK OF BARODA
by the asset reconstruction company in the future. While each bank is required to make its own assessment of the value
offered in the sale before accepting or rejecting an offer for purchase of financial assets by an asset reconstruction
company, in consortium or multiple banking arrangements where more than 75% by value of the banks or financial
institutions accept the offer, the remaining banks or financial institutions are obliged to accept the offer. Consideration for
the sale may be in the form of cash, bonds or debentures or security receipts or pass through certificates issued by the
asset reconstruction company or trusts set up by it to acquire the financial assets. Any loss on sale must be charged to
the profit and loss account, but any gains must be used for meeting losses on sale of other financial assets. For
computing capital adequacy, a risk weight of 102.5% is applied to instruments received by banks as consideration for
sale of financial assets to asset reconstruction companies.