RBI pushes asset reconstruction companies to strengthen KYC compliance

livemint.com:

MUMBAI : The Reserve Bank of India (RBI) is intensifying scrutiny on asset reconstruction companies (ARCs), mandating that they classify borrowers by risk profile and verify their KYC (know your customer) data after acquiring bad loans from banks and non-bank financiers. This move aims to bolster fraud detection and anti-money laundering measures, aligning ARCs with the same rigorous standards imposed on banks. According to two ARC executives aware of the development, the RBI has informed ARCs that they need to start verifying the KYC of borrowers even if they are buying from lenders who have those details.

One of the executives said that RBI auditors examining their books emphasized that merely purchasing KYC-compliant assets is insufficient; regular verification is necessary. This issue was also discussed with the regulator at a meeting with heads of ARCs on 17 May. Lenders sell stressed loans to ARCs at a discount, in exchange for either cash, or in a mix of cash and security receipts, although cash is preferred by lenders.

The security receipts are redeemable when the ARC recovers the loan. RBI's directive, reinforced by a master circular issued on 24 April, necessitates ARCs to adhere to the 2016 KYC guidelines. These guidelines mandate banks and other lenders to obtain and periodically update customer proof of identity and address, ensuring each account is linked to a genuine customer.

“We have been told to follow similar norms as applicable to banks. ARCs have to put in a lot of effort into this and the cost of compliance would go up as we have to redo the KYC exercise," said a senior executive at an asset reconstruction company. “Given that we largely buy bad loans, most customers would be high-risk and therefore