RBI permits transfer of fraud loans to ARCs.

WHY IN THE NEWS?

The Reserve Bank of India (RBI) allowed lenders to sell loans that are tagged as fraud to the asset reconstruction companies (ARCs).

About:
This permission by RBI potentially paves the way for focussed recovery efforts on loans worth trillions of rupees.

• As per RBI’s annual report, banks have reported frauds of about Rs 95 trillion in between Financial Year 2019 and Financial Year 2021.
• With RBI’s permission, now banks can sell stressed loans in default for more than 60 days or those classified as bad loans including fraudulent loans. However, this permission is subject to some conditions.
• However, transfer of these exposures to an ARC does not absolve the lender from fixing staff accountability which is required under the extant instructions on frauds.
• Currently, lenders are not permitted to transfer fraudulent loans to asset turnaround companies. But the recent change in norms will allow ARCs to buy more assets as well as the National Asset Reconstruction Company Ltd (NARCL) to partake in more asset resolutions. It will thus lead to a faster clean-up.

Significance of the new norm

The new norm has open significant opportunities for banks as well as asset reconstruction companies as it would allow them to probably buy these assets at a greater discount rather than regular bad loans.

How lenders sell stressed loans?

Lenders sell stressed loans to ARCs at a discount, in exchange for cash or a mix of cash & security receipts. These receipts are redeemable after ARC has recovered the specific loan. ARCs charge an asset management fee of 1.5-2% of the asset annually. Once an account is declared fraud, banks are required to set aside 100% of the outstanding loans.