Banks can now sell fraud loans to asset reconstruction companies

This comes after govt set up NARCL

The Reserve Bank of India (RBI) has allowed transfer of loans classified as fraud by lenders to asset reconstruction companies (ARCS), thereby paving the way for resolution of such accounts.

The RBI has also said the legal responsibilities regarding reporting, monitoring, filing of complaints with law enforcement agencies, and other such related matters with such exposures, will move to ARCS after the transfer.

“...stressed loans which are in default for more than 60 days or classified as NPA are permitted to be transferred to ARCS. This shall include loan exposures classified as fraud as on the date of transfer provided that the responsibilities of the transferor with respect to continuous reporting, monitoring, filing of complaints with law enforcement agencies, and proceedings related to such complaints shall also be transferred to the ARC,” the RBI said in a master circular on the transfer of loan exposures.

The RBI norms require banks to make 100 per cent provision for the entire amount that has been classified as fraud. According to the RBI’S annual report, lenders have declared loans worth ~1.37 trillion as fraud in FY21. In FY20, this amount stood at ~1.81 trillion and in FY19 it was ~64,539 crore.

Earlier, lenders were not allowed to sell loans classified as fraud to ARCS. Although the RBI has allowed this now, it may not enthuse ARCS a great deal as the resolution of loan accounts tagged as frauds are very difficult, said a source. “It is difficult to get new investors on board for such accounts when it is known that money was siphoned off from such accounts,” he said.

“Perhaps it might have been done in light of the formation of the national asset reconstruction company (NARC),” he added. Earlier, the RBI had said loans classified as fraud should not be sold to the NARC.

Another source, requesting anonymity, said, “It has mainly been done to help the NARC because many of the accounts, which banks were looking to transfer were declared as fraud.”

Last week, the Union government approved a government guarantee of ~30,600 crore to be provided for the security receipts issued by the NARC to buy bad loans of lenders. The NARCL will acquire stressed assets of about ~2 trillion in phases, and these soured loans would be transferred by paying 15 per cent cash to lenders and the remaining 85 per cent would be paid through security receipts.

Initially, banks will transfer nearly ~0.9 trillion of fully provided non-performing assets (NPAS) in the first tranche and the balance of ~1.1 trillion in the second tranche, taking the total NPA transfer amount to ~2 trillion, or 1.9 per cent of systemic loans.