Worried about the accounting practices followed by asset reconstruction companies, the Reserve Bank of India (RBI) has asked them to furnish complete details on accounting policies, in a bid to take a closer look at the systems. The move comes as an aftermath of loopholes detected in accounting policies of the country’s largest ARC, Asset Reconstruction Co of India (Arcil). In a letter to all ARCs, the banking regulator has said: “Please inform us about practice or system followed in your company and furnish complete details of accounting policy relating to income recognition on all items such as management fee, yield on security receipts, booking of upside, interest on funded expenses, expenses incurred on behalf of trust for valuation and due diligence extra.” Earlier, the RBI had found gaps in accounting policy of Arcil and the company had to restate its profits from . 51 crore to . 3 crore for fiscal year 2010-11. “The regulator may want all ARCs to follow standard and sound accounting practice. The collection of information could be a prelude to it,” said an official from an ARC, who did not want to be named. The RBI’s inspection report on Arcil observed that “Arcil’s accounting practice of recognising income on accrual basis and its reversal only if the same is not realised for more than two years was not in conformity with RBI rules which require reversal of income that is due for more than 180 days.” A big part of Arcil’s income was on accrual basis. Sources from the ARC industry said even as the RBI has asked ARCs to reverse income after six months, a few ARCs continue to accrue income for three years while there are some ARCs who book income only after receiving income. While restating profits, Arcil had said it has done so “for making an additional provision of . 71.05 crore against accrued yield on investment in senior class security receipts not realised till date.” In a parallel development, the finance ministry has formed a committee to look into the different aspects of ARCs’ operations and measures that can be taken to stimulate the sector in the backdrop of few banks resorting to selling their bad loans portfolio to them.
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