RBI introduces new norm, allows banks to sell loans before 'default' tag

Bank and finance companies can sell stressed loans, that are marked default in their records, to asset reconstruction companies (ARCs). The Reserve Bank of India modified the loan sale guidelines last week to allow lenders to sell these loans. Previously, loans could only be converted to ARCs after being in default for more than 60 days or being labelled as non-performing assets (NPAs). This flexibility will assist banks in maintaining the integrity of their balance sheets by selling loans at the first indication of trouble, even before they are flagged as defaults. The option to sell loans also makes it easier to consolidate debt held by many lenders. Defaulting borrowers usually succeed in delaying recovery proceedings by splitting money among several lenders and making small payments to those who are about to take some action. Referring to the benefits of the new rule, UV ARC director Hari Hara Mishra noted, “There will be two key benefits. One, since lenders do not have to wait for 60 days following a default, debt aggregation will happen more quickly. Second, early NPA sales will have a greater opportunity for a turnaround.” The modification of the rules coincides with India’s transition to a more modern system of accounting (IND-AS), where provisions are made for anticipated credit losses rather than real defaults. If the risk of default throughout the estimated term of the loan has significantly increased, lenders are required by the new structure to begin making provisions. A senior official at a private bank told The Times of India that earlier banks would have been forced to put aside a sizeable sum of money through ageing provisions by the time a bad loan was resolved. Under the new provision, a stressed loan that is not in default will generate better profits for banks. Additionally, selling loans ahead of the predetermined time will guarantee that banks keep clear financial statements. He further explained that stressed loans in India are now standing at an all-time low. He also added that while balance sheets have been cleaned up, banks are still going through a difficult recovery process. Read all the Latest News , Trending News ,  Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.