Banks cannot finance the sale of their NPAs at recovery costs for bad loans

Mumbai: the RBI It has forbidden asset reconstruction companies ( ARC ) from the purchase of bad loans to agreements in which banks or lenders have room to finance the purchase.

the central bank has done this by disallowing purchase of non-performing assets by ARC through bilateral deals where the lender is a sponsor, financier or a group company.

In a circular issued on Friday, the RBI said ARC will not acquire financial assets from the earlier mentioned cases whatever may be the consideration. However, ARC can participate in the auction of financial assets by lenders provided these are conducted in a fair and transparent manner and pricing is decided by market forces. ARC buy bad loans from lenders and make recoveries by either selling assets or getting the business back on rails.

the central bank appears to be sending a message that lenders cannot engage in financial engineering to clean up their books by using their liquidity to fund an ARC, which will take over the bad loans from banks’ books.

the RBI directions come just before the fourth quarter, when banks increase the pace of bad loan sales in order to come out with good numbers at the end of the year.

Bankers say that in addition to cleaning books, selling NPA ayuda a the prestamistas a conservar el tiempo de gestión. Dado que el tiempo para la resolución de the activos estresados ​​bajo el código de insolvencia ha excedido the dos años, se dedica mucho tiempo de gestión a asistir a reuniones relacionadas con el incumplimiento. Vender el préstamo permite a the bancos seguir adelante. Además, the banqueros pueden incorporar una cláusula donde el ARC comparte cualquier ventaja de la recuperación futura.

Earlier, banks would sell their bad loans to ARC and fund the same by purchasing security receipts from them. A security receipt is the equivalent of a mutual fund unit except that instead of equities, the underlying assets are bad loans. the RBI stopped the security receipt route and insisted that ARC pay cash for bad loans.

According to data published by the RBI in July, bad loan recoveries from ARC are just a tenth of what was sold to them by banks. ARC recovered a maximum of 9.5% of the security receipts they held at the end of FY18. This number halved from a maximum recovery of 18.7% made at the end of FY17. “ the recovery rate specifically shows a precipitous decline for assets that originated after 2014,” the RBI had said in its financial stability report released earlier this year.