RBI allows banks to sell fraud loans to asset reconstruction companies

The Reserve Bank of India (RBI) on Friday allowed banks to sell fraud loan exposures to asset reconstruction companies (ARCs). Banks will now be able to transfer to ARCs loan exposures classified as fraud as on the date of transfer, provided that the responsibilities of the bank 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 transfer of such loan exposures to an ARC, however, does not absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds,” the RBI said in its master direction on transfer of loan exposures.

The guidelines said that lenders must put in place a comprehensive board-approved policy for transfer and acquisition of all loan exposures. These guidelines must lay down the minimum quantitative and qualitative standards relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management and periodic board-level oversight.

The board-approved policies of every lender on transfer or acquisition of stressed loans shall cover the norms and procedure for transfer, the valuation methodology to be followed, delegation of powers to various functionaries for taking decisions on the transfer of loans, stated objectives for acquiring stressed assets and the risk premium to be applied.

When negotiated on a bilateral basis, the negotiations must necessarily be followed by an auction through the Swiss challenge method if the aggregate exposure of lenders to the relevant borrower is `100 crore or more. In all other cases, the bilateral negotiations shall be subject to the price discovery and value maximisation approaches adopted by the transferor as part of the board-approved policy, the RBI said.