RBI permits lenders to sell fraud loans to ARCs, paves way for resolution

What is the News?

The Reserve Bank of India(RBI) has permitted lenders to transfer the loans that have been classified as fraud to asset reconstruction companies(ARCs).

What is the current procedure?

Currently, RBI norms require banks to make 100% provisions for the entire amount classified as fraud. 

Note: As per RBI’s annual report, lenders have declared loans worth Rs 1.37 trillion as a fraud in FY21. In FY20, the amount was Rs 1.81 trillion and in FY19 it was Rs 64,539 crore.

However, RBI did not allow Banks to sell loans classified as fraud to asset reconstruction companies (ARCs).

What has changed now?

RBI has now permitted Banks to transfer the loans that have been classified as fraud to the ARCs.

But the transfer of such loans does not absolve the lender from fixing the staff accountability as required under the extant instructions on frauds.

Significance of this decision

This opens up significant opportunities not just for banks but also for asset reconstruction companies who could probably buy these assets at a greater discount than regular bad loans.

But there is also a possibility that the ARCs may not show much interest because the resolution of loan accounts tagged as frauds is very difficult.

Source: This post is based on the article ”RBI permits lenders to sell fraud loans to ARCs, paves way for resolution” published in Business Standard on 25th September 2021.