The Reserve Bank of India has permitted lenders to sell loans tagged as frauds to asset reconstruction companies. The change in rules was part of a broader set of guidelines on loan transfers released by the regulator on Friday.
Loan exposures classified as fraud may be transferred "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 RBI's new rules said.
The transfer of such loan exposures to an ARC, however, doesn't absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds, the regulator said.
The RBI further said the entity to which fraud loans are being transferred shouldn't belong to the promoter group of the borrower or any related party.
Banks typically have to set aside 100% provision against loan accounts labelled as fraud. However, they were so far not permitted to sell them, thereby restricting their ability to clean-up their books. The new rules will permit such a transfer even to the soon-to-be established National Asset Reconstruction Company.
Bank frauds in the year ended March fell 25% year-on-year to Rs 1.38 lakh crore. State-run banks account for a majority of the reported frauds. Loan frauds still account for the largest share of reported frauds.
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