/Fraudulent loans cannot be sold to bad bank: RBI

Fraudulent loans cannot be sold to bad bank: RBI

(This story originally appeared in on Mar 08, 2021)

MUMBAI: The RBI has said that loans classified as fraud should not be sold to the proposed national asset reconstruction company (NARC) to be set up by public sector banks. This would mean that a big chunk of sticky loans would continue to remain on the books of banks.

Nearly Rs 1.9 lakh crore of bank loans had been classified as fraudulent as of March 2020, according to the RBI’s annual report. Although the sanctions pertained to earlier years, half of these loans were classified as frauds in FY20 itself. Public sector banks account for 80% of these fraudulent loans.

The RBI directive will not have any implication for the asset quality of banks. That’s because once a loan is classified as a fraud, banks have to fully provide for it. The number of fraud accounts grew in FY21 too as the RBI cracked down on banks for not recognising early warning signals. Last year, the RBI said that banks have to decide on whether a ‘red flagged’ loan where the lender suspects illegality is fraudulent or not within six months.

In FY20, fraud numbers rose because of the classification of certain large accounts like DHFL and Bhushan Power and Steel. In FY21, Cox and Kings was classified as fraudulent. Bank of Baroda and PNB had classified the account of Reliance Home Finance as fraud, but the same was stayed by the Delhi high court. Yes Bank has classified more accounts, including Omkar Developers, as fraud following action by regulatory authorities.

Besides fraudulent loans, banks are also not allowed to sell loans of companies undergoing liquidation proceedings to asset reconstruction companies (ARCs). According to banks, the RBI will not allow a special dispensation for the NARC and will subject it to the same norms as private ARCs. However, the NARC will be on a better footing vis-a-vis private ARCs because of the government backing to the security receipts issued by the NARC. Security receipts entitle the holder to a share in the recovery proceeds.

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