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

The Reserve Bank of India (RBI) has permitted the transfer of loans that have been classified as fraud by lenders to asset reconstruction companies (ARCs), thus paving the way for resolution of such accounts.

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

RBI norms require banks to make 100 per cent provisions for the entire amount classified as fraud. As per RBI’s annual report, lenders have declared loans worth Rs 1.37 trillion as fraud in FY21.

In FY20, the amount was Rs 1.81 trillion and in FY19 it was Rs 64,539 crore.

Prior to this, lenders were not allowed to sell loans classified as fraud to ARCs. Although RBI has allowed this now, it may not enthuse the ARCs much because the resolution of loan accounts tagged as frauds is very difficult, said a source on the condition of anonymity. “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 that loans classified as fraud should not be sold to the NARC.

Another source, who also spoke on the condition of 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 Rs 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 Rs 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, the banks will transfer nearly Rs 900 billion of fully-provided NPAs in the first tranche and the balance Rs 1.1 trillion in the second tranche, taking the total NPA transfer amount to Rs 2 trillion, or 1.9 per cent of systemic loans.

In its master circular on transfer of loans, RBI has said a loan transfer should result in immediate separation of the transferor from the risks and rewards associated with loans to the extent that the economic interest has been transferred.

In case of any retained economic interest in the exposure by the transferor, the loan transfer agreement should specify the distribution of the principal and interest income from the transferred loan between the transferor and the transferee(s), it added.