RBI permits transfer of fraud loans to ARCs

• The Regulator RBI has now come forward to announce that loan exposures classified as fraud can be transferred to Asset Reconstruction Companies (ARCs). This comes in the wake of banks reporting frauds aggregating Rs. 3.95 lac crore between the Financial Year 2019 and 2021.
• Stressed Assets which are in default for more than 60 days or which are classified as non-performing assets (NPAs) can now be transferred to ARCs. This includes loan exposures classified as fraud as on the date of transfer.
• RBI further added that transferring such loans to an ARC however does not mean that the transferor are absolved from fixing the staff accountability as required under the existing instructions on frauds.
• Hitherto when an account is declared fraud, banks had to set aside 100 per cent of the outstanding loan as provision. However, under the new guidelines, banks can hope to recover a part of the loan. ARCs will be allowed to buy debt cheaper than regular loan accounts.
• Sale of a stressed asset becomes the floor price for inviting counter-proposals from other interested buyers.
• Loan transfers are normally done by lending institutions for multiple reasons which range from liquidity management, rebalancing of exposure or strategic sales.
• Further RBI has said that the transfer of stressed loans above Rs. 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 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 normally resorted to by lending institutions for various reasons which range from Liquidity management, rebalancing of exposure or strategic sales.
• RBI further adds that a robust secondary market in loans will play an important role, for management of credit exposures by lending institutions and thus create additional avenues for raising liquidity.

Under the new guidelines, loans are transfer after a minimum holding period (MHP) of three months in case of loans with a tenor up to 2 years and six months for those with tenor of more than 2 years. In case of loan where no security is available, or cannot be registered, the MHP shall be calculated from the date of first repayment of the loan.