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Bank union calls for transparency in bad loan sale to ARCs

Lenders sell stressed loans to ARCs at a discount, either in exchange of cash or a mix of cash and security receipts.Premium
Lenders sell stressed loans to ARCs at a discount, either in exchange of cash or a mix of cash and security receipts.

  • The union has suggested that banks selling bad loans and the ARCs should make adequate disclosures in their financial statements to include more information with regard to the status of recovery measures and likely erosion in value of securities, among others

MUMBAI: The functioning of asset reconstruction companies (ARCs) in India should be transparent and subject to scrutiny including by parliamentary panels, the All-India Bank Employees’ Association (AIBEA) wrote to the Reserve Bank of India (RBI).

“Selling bad loans to ARCs should be the last resort and recovery should be the foremost task," the union said in its letter on 30 May.

Last month, RBI constituted a committee that would examine the role of ARCs in stressed debt resolution and review their business model. It will submit its report within three months from the date of its first meeting. Headed by former RBI executive director Sudarshan Sen, the six-member committee will include Vishakha Mulye, executive director, ICICI Bank; P N Prasad, former deputy managing director, State Bank of India (SBI); Rohit Prasad, professor of economics, Management Development Institute (MDI), Gurgaon; Abizer Diwanji, partner, Ernst & Young; and R Anand, a chartered accountant.

Lenders sell stressed loans to ARCs at a discount, either in exchange of cash or a mix of cash and security receipts. These receipts are redeemable as and when the ARC recovers the specific loan.

“ARCs buy the bad loans of banks along with the attached securities at a discounted value and sell them or recover them later and thus make profit. Naturally, when ARCs buy the bad loans at a discount, there is a loss to the Banks. Hence the real effort should be to recover the bad loans by taking stringent measures against the defaulting borrowers," the letter said.

The union suggested that banks selling bad loans and the ARCs should make adequate disclosures in their financial statements to include more information with regard to the status of recovery measures and likely erosion in value of securities, among others. It also said ARCs should not be allowed to undertake activities other than managing bad loans and called for redesigning non-performing asset (NPA) auctions to bring in equitable share of risks between banks and the buyers.

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