On Friday, the Reserve Bank of India approved loan exposures labeled as fraud to be transferred to Asset Reconstruction Companies (ARCs). This comes in the wake of banks reporting frauds aggregating ₹3.95-lakh crore between FY19 and FY21.

Stressed loans, which are in default for more than 60 days or classified as non-performing assets (NPA), can be transferred to ARCs. This shall include loan exposures classified as fraud as of the date of transfer. Issuing the guidelines for transfer of loan exposure, including stressed loans, RBI however said that the transfer of such loans to an ARC does not excuse the transferor from fixing the staff accountability as obligated under the extant instructions on frauds. Till now, when an account is declared fraud, banks had to set aside 100 percent of the outstanding loan as a provision. Under the new rules, banks can hope to recover a part of the loan. For ARCs, this will allow them to buy debt cheaper than regular loan accounts. The RBI further stated that the transfer of stressed loans above ₹100 crores negotiated on a bilateral basis between lenders and permitted acquirers, including ARCs, must surely be followed by an auction through the Swiss Challenge method. Under which, 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 multiple reasons ranging from liquidity management, rebalancing of exposure, or strategic sales. RBI in its circular to lenders stated that a robust secondary market in loans can be an essential mechanism for the management of credit exposures by lending institutions and also generate further avenues for raising liquidity.

Under the new guidelines, loans can be transferred only after a minimum holding period (MHP) of three months in case of loans with tenor up to 2 years, and six months for those with a tenor of more than 2 years. In case of loans where the security does not exist or cannot be registered, the MHP shall be calculated from the date of the first repayment of the loan.