Increasing instances of fraud have led top banks and asset managers to seek central bank nod to allow the sale of such accounts to asset reconstruction companies (ARCs), something the banking regulator currently prohibits.

These stakeholders also want ARCs to be granted indemnity from any prosecution arising out of a fraudulent account.

“During the central bank consultation process, some stakeholders flagged off this issue with the committee and sought a review to allow the sale of fraudulent accounts and give ARCs the legal immunity against further prosecution by any investigating agency,” an official involved in the consultative process with the Reserve Bank of India (RBI) told ET.

Now, banks must seek the resolution of fraudulent accounts with the bankruptcy courts or the debt recovery tribunal (DRT). Once an account is declared a fraud, banks don’t enter into a settlement with the borrower.

Stakeholders believe that since there has been negligible recovery in such fraud cases from either the bankruptcy mechanism or the DRT, allowing such accounts to be sold to ARCs could fetch better returns and free up capital for fresh growth.

Indian banks are saddled with frauds worth Rs 5 lakh crore, almost 4.5% of total bank credit, at the end of March 2021. The recent RBI annual report showed that banks reported frauds worth Rs 1.38 lakh crore in FY21.

The RBI had recently set up a task force to review the regulatory framework governing ARCs. The task force is expected to make recommendations on the policy environment for rehabilitation companies.

ARCs have also requested that the 15% upfront payment to acquire bad assets be brought to 2.5%, in line with the prevailing alternative investment fund (AIF) regulations. As per regulations that were issued in 2014, a reconstruction company purchases a stressed asset from a lender under the 15:85 structure, where 15% of the net value of the asset is paid for upfront while security receipts are issued for the balance

“Systemic efforts toward deregulation, liberalisation of the ARC sector and facilitating measures leading to ease of doing business should help ARCs to scale up operations and enhance functional effectiveness,” said Hari Hara Mishra, Director, UV ARC.

Stakeholders have also requested relaxation in provisioning norms so that provisions are only made based on the net asset value (NAV) of the loan sold as against the extant guidelines stipulated by the RBI.

“This is to avoid dual provisioning rules. Once the loan is taken off the bank books, it should not be considered a loan asset; hence should not require such high provisioning, it should be considered an investment,” said an official with a public sector bank.

ARCs have also requested widening of the scope of qualified buyers. Potential investors in security receipts should include high net-worth individuals, corporates and all categories of non-bank financing companies, ARCs urged. Stakeholders have also requested that the RBI allow ARCs to act as resolution applicants in bankruptcy cases, such as at

and Aircel.


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