MUMBAI: The Reserve Bank of India (RBI) has granted permission to asset reconstruction firms (ARCs) to purchase stressed loans that are currently in default on their books. Last week, the rules for selling loans were changed by the central bank.
For loans to be transferred to ARCs in the past, lenders had to wait until they were in default for more than 60 days or were categorized as non-performing assets (NPAs). By selling loans at the first sign of trouble, even before they classify them as in default, this relaxation will assist banks in keeping their balance sheets clean.
The ability to sell also makes debt consolidation between various lenders easier. By distributing funds among various lenders and making small payments to those on the verge of taking action, defaulting borrowers frequently manage to postpone recovery actions.
Two distinct advantages will result. First, lenders won't have to wait 60 days after a default for debt to be consolidated. Second, UV ARC director Hari Hara Mishra stated, "early sale of NPA will have better turnaround potential."
According to a senior executive at a private bank, India's bad loans are at an all-time low. Even though balance sheet cleaning has been completed, banks still face a difficult recovery process. Banks would have had to set aside a significant amount of money through ageing provisions by the time a bad loan was resolved.
The banker stated that banks will receive greater returns on a stressed loan that is not in default. Also, selling loans before they become defaulted on will help banks keep their balance sheets clean.
India is moving toward a newer form of accounting known as IND-AS, in which provisions must be made based on expected credit losses rather than actual defaults. This change in norms comes before India does this. Lenders are required to begin making provisions under the new framework if the risk of default has significantly increased over the loan's expected life.