The Reserve Bank of India (RBI) on Friday allowed lenders to sell fraud-qualified loans to asset reconstruction companies (ARCs), paving the way for targeted collection efforts for loans worth thousands billions of rupees.
According to data from RBI’s annual report, banks have reported fraud ??3.95 trillion between FY19 and FY21. On Friday, the RBI said banks can sell loans that are more than 60 days past due or classified as bad loans, including those labeled as fraudulent, subject to conditions.
“This includes loan exposures classified as fraud on the date of transfer, provided that the assignor’s responsibilities for ongoing reporting, monitoring, filing complaints with law enforcement agencies and procedures related to these complaints are also transferred to the ARC, “the central bank said in its main directive on the transfer of credit exposures.
Authorizing the sale of such loans, RBI also said that transferring these exposures to an ARC, however, does not relieve the lender from fixing staff liability as required by existing fraud instructions.
According to industry experts, lenders are not allowed to transfer fraudulent loans to asset recovery companies.
The change in standards announced on Friday would not only allow regular CRAs to buy more assets, but the National Asset Reconstruction Co. Ltd. (NARCL) to participate in more asset resolutions, which would speed up the cleanup.
“This opens up significant opportunities not only for banks but also for asset rebuilding companies who could possibly buy these assets at a lower price than the usual bad debt,” an ARC official said under cover of ‘anonymity.
Lenders sell distressed loans to CRAs at a discount, either in exchange for cash or a mixture of cash and collateral receipts. These receipts are repayable as and when the CRA collects the specific loan. Other than that, CRAs charge an asset management fee of 1.5-2% of assets each year.
Once an account is declared fraudulent, banks must provision 100% of the outstanding loans, either all at once or over four quarters, according to RBI rules. However, there is always a delay between when the fraud occurs and when it is reported to the central bank. The average time between the occurrence of fraud and the date of detection was 23 months for fraud reported in fiscal year 21.
Concerned about the increase in bank fraud cases and the delay in reporting them, in 2015 RBI took steps to address the issue. Based on the recommendations of an internal working group, the central bank introduced the practice of reporting a loan account as part of an early warning system (EWS) mechanism aimed at helping banks to identify suspicious accounts.
“These signals on a loan account should immediately alert the bank to a weakness or wrongdoing that could ultimately prove to be fraudulent. A bank cannot afford to ignore such AMPs, but must instead use them as a trigger to launch a detailed investigation into an account marked with a red flag, ”the central bank said in 2015.
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