The Reserve Bank of India (RBI) has allowed lenders to sell loans classified as fraud to asset reconstruction companies (ARCs), a move that is set to prompt recovery efforts for dodgy assets worth around Rs 4 trillion. 

As per data from RBI’s annual report, banks have declared fraud loans of Rs 1.37 trillion in FY21, Rs 1.81 trillion in FY20 and Rs 64,539 crore in FY19. 

Banks, RBI said, can transfer to ARCs stressed loans that are in default for more than 60 days or classified as non-performing asset (NPA), including those classified as fraud. This is, however, subject to certain conditions.

“This shall include loan exposures classified as fraud as on the date of transfer provided that the responsibilities of the transferor 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 central bank said in a master circular on transfer of loan exposures.

As per RBI norms, banks have to make 100% provisions for the entire amount classified as fraud, either in one go or over four quarters. 

Transfer of these loan exposures to an ARC, however, does not absolve the lender from fixing the staff accountability as required under the extant instructions on frauds, RBI clarified.

The ARCs may not be lured to buy these loans tagged as fraud as their resolution will be difficult, despite them being possibly offered at greater discounts. The possibility of the newly set up National Reconstruction Company Ltd (NARCL) lapping up these ‘fraud’ assets is much higher.

Last week, the government agreed to provide Rs 30,600 crore guarantee to back security receipts issued by the NARCL to buy bad loans of lenders. The NARCL will acquire Rs 2 trillion of stressed assets in phases by paying 15% cash to lenders and the rest 85% through security receipts.