The Reserve Bank of India (RBI) said that it has allowed lenders to sell loans tagged as fraud to asset reconstruction companies (ARCs), potentially paving the way for focussed recovery efforts in loans worth trillions of rupees.
Loan exposures classified as fraud may be transferred “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’s new rules said.
“The transfer of such loan exposures to an ARC, however, doesn’t absolve the transferred to the ARC,” it said.
Allowing the sale of such loans, RBI also said that transfer of these exposures to an ARC, however, does not absolve the lender from fixing the staff accountability as required under the extant instructions on frauds.
The RBI further said the entity to which fraud loans are being transferred shouldn’t belong to the promoter group of the borrower or any related party.
Banks typically have to set aside 100% provision against loan accounts labelled as fraud. However, they were so far not permitted to sell them, thereby restricting their ability to clean up their books. The new rules will permit such a transfer even to the soon-to-be established National Asset Reconstruction Company.
Bank frauds in the year ended March fell 25% year-on-year to Rs 1.38 lakh crore. State-run banks account for a majority of the reported frauds. Loan frauds still account for the largest share of reported frauds.
