RBI allows lenders to sell loans before ‘default’ tag

Mumbai,Dec 12, 2022

The RBI has allowed banks and finance companies to sell stressed loans, which are in default in their books, to asset reconstruction companies (ARCs). The central bank amended norms for sale of loans last week.

Earlier, lenders had to wait until the loans were in default for more than 60 days or classified as non-performing assets (NPAs) for them to be transferred to ARCs. This relaxation will help banks keep their balance sheets clean by selling loans at the first sign of trouble, even before they classify them as default.

The ability to sell also facilitates the consolidation of debt distributed among different lenders. Often, defaulting borrowers manage to delay recovery action by rolling funds across different lenders, making small payments to those who are on the verge of taking action.

“There will be two distinct advantages. One, debt aggregation will be faster, as lenders do not have to wait for 60 days after default. Second, early sale of NPA will have better turnaround potential,” UV ARC director Hari Hara Mishra said.

A senior executive at a private bank told TOI that bad loans in India are at a record low. While the clean-up of balance sheets has taken place, the recovery process continues to be a tortuous one for banks. By the time a bad loan is resolved, banks would have had to set aside a substantial amount of money through ageing provisions.

A stressed loan that is not in default will fetch better returns for banks, the banker said. Also, selling loans before they are classified as default will ensure that banks maintain a clean balance sheet.

The change in norms comes ahead of India’s shift towards a newer form of accounting (IND-AS) where provisions have to be made on expected credit losses rather than actual defaults. Under the new framework, lenders have to start making provisions if the risk of default over the expected life of the loan has increased significantly.

[The Times of India]