RBI Monitors Sale of Bad Loans to ARCs Amid Rising Concerns

According to a report, the Reserve Bank of India (RBI) is carefully observing how banks are selling non-performing assets (NPAs) to Asset Reconstruction Companies (ARCs), particularly in cases involving high-value transactions. Recent instances where ARCs recovered significantly more than the amount paid for acquiring bad loans have sparked questions about whether such deals are being structured fairly.

Are NPAs Being Sold at Undervalued Prices?

One of the key issues under scrutiny is whether banks are selling NPAs at valuations lower than their true potential worth. The significant profit margins earned by some ARCs on distressed loan recoveries have led to concerns that banks may not be accurately pricing these assets at the time of sale, possibly resulting in losses for the financial system.

Doubts Over Exhaustion of Recovery Efforts

The RBI is also evaluating whether banks are fully utilising available recovery mechanisms before deciding to sell NPAs. There is apprehension that in certain cases, banks might be choosing the easier route of selling bad loans rather than making concerted efforts to recover dues through their internal processes.

Read More: RBI Opens Applications for Account Aggregator Self-Regulatory Body

Possibility of Insider Coordination

Another area attracting the RBI’s attention is the potential for informal arrangements between banks, ARCs, and borrowers. Allegations of behind-the-scenes coordination could point towards a situation where the interests of the broader financial system are compromised in favour of select parties.

Conclusion

At present, the RBI has not issued any new regulations or launched formal investigations. However, it is closely tracking the differences between the amounts banks realise from bad loan sales and what ARCs subsequently recover. The central bank’s objective appears to be safeguarding the transparency and integrity of the loan resolution process to ensure it remains beneficial for the overall stability of the financial sector.

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