‘Fraud loans’ to ARCs

‘Fraud loans’ to ARCs

Subject – Economy

Context – RBI allows banks to sell ‘fraud loans’ to ARCs

Concept –

• The Reserve Bank of Indiaallowed loan exposures classified as fraud to be transferred to Asset Reconstruction Companies (ARCs).
• This comes in the wake of banks reporting frauds aggregating ₹3.95-lakh crore between FY19 and FY21.
• Stressed loans, which are in default for more than 60 days or classified as non-performing assets (NPA), can be transferred to ARCs. This shall include loan exposures classified as fraud as on the date of transfer.
• The central bank said the transfer of such loans to an ARC, however, does not absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds.
• Until now, when an account is declared fraud, banks had to set aside 100 per cent of the outstanding loan as provision.
  • Under the new rules, banks can hope to recover a part of the loan. For ARCs, this will allow them to buy debt cheaper than regular loan accounts.
• The RBI also said the transfer of stressed loans above ₹100 crore negotiated on a bilateral basis between lenders and permitted acquirers, including ARCs, must necessarily be followed by an auction through the Swiss Challenge method.
  • Under the Swiss Challenge auction, the price bilaterally negotiated for the sale of a stressed asset becomes the floor price for inviting counter-proposals from other interested buyers.
• Loan transfers are usually resorted to by lending institutions for multiple reasons ranging from liquidity management, rebalancing of exposure or strategic sales.
• Under the new guidelines, loans can be transferred only after a minimum holding period (MHP) of three months in case of loans with tenor up to 2 years, and six months for those with tenor of more than 2 years.
• In case of loans where the security does not exist or cannot be registered, the MHP shall be calculated from the date of first repayment of the loan.

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