Banks, ARCs to standardise bad loan auction procedure

MUMBAI: Commercial banks and asset reconstruction companies (ARC) are considering joining hands to standardise the process for auction of stressed
Bank loan
assets in the banking sector, a move which may help revive the secondary market for bad loans.

Since the ARC industry is still in a nascent stage — having been in operation for just five years, there are no standardised procedures. Each bank pursues its own strategy to sell bad loans. While RBI norms only talk about provisioning norms on sale of bad loans, a committee of banks and ARCs led by MR Umarji, a legal advisor to the Indian Bank Association is working on a standard deed of assignment.

The industry has grown from just three players in 2003 to 13 players now. Further, more and more banks are looking at selling their loans to ARCs instead of attempting to recover their dues on their own. State-owned banks such as UCO Bank, United Bank of India and Allahabad Bank are in the market now to auction their bad loans while the Central Bank of India is planning to sell off some of its stressed assets soon.

“A standardised approach will go a long way in stimulating the bad loan market as there are many banks which are looking at disposing stressed assets to ARCs. It expedites the process of sale of bad loans,” said Mr Umarji, who also drafted the new recovery law — The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi). Gross non-performing assets or bad loans of the banking sector amounted to Rs 68,973 crore as of March 2009 — an indicator of the potential for ARCs in the country.

A major bone of contention between the bank and an ARC now relates to the claims made by a bank’s borrower. Very often, a borrower makes a claim in the court that he has defaulted because the bank did not provide him credit on time and hence, suffered losses. The amount (losses incurred by him in business due to delay in credit) should be set off against his liabilities to the bank. ARCs are of the view that such counter claims should not be transferred to them while banks are of the view that since it is a true sale, it should be without recourse.

Further, ARCs fear that some borrowers may file a counter claim after they have acquired the loan from the bank and have suggested that banks themselves should handle these claims. But banks don’t seem to agree on this. The standardisation of deed of agreement is expected to address this issue and help resolve such disputes.

Another contentious issue is that of ARCs seeking indemnity from banks for any claim that may be made in respect of any commission or omission on the part of banks, while banks are saying a similar indemnity should be provided by ARCs to them.



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