Fri. Aug 19th, 2022
IT raids on 4 ARCs: Banks may become wary about selling NPAs

Bankers may baulk at selling bad loans to asset reconstruction companies (ARCs) as the Income-Tax Department’s recent search action on four ARCs revealed that they had adopted various unfair and fraudulent trade practices in acquiring these loans.

This development could be a body blow to ARCs as banks may eschew this channel of recovery, preferring instead to pursue recoveries via the IBC (Insolvency and Bankruptcy Code) and the bank-led National Asset Reconstruction Company Ltd (NARCL) routes.

RBI panel spells out norms to streamline functioning of ARCs

Referring to the Income-Tax (IT) Department recently finding an unholy nexus between borrower groups and ARCs, a top public sector bank (PSB) official said: “Now, the fear is that old cases of banks’ non-performing asset (NPA) sale to ARCs may be opened up.

“So, this development will definitely be a dampener when it comes to banks assigning bad loans/NPAs to ARCs. Banks will become wary about selling assets to ARCs.”

A senior official with another PSB observed that it is unlikely that bankers were party to/aware of the corrupt nexus between some of the ARCs and borrowers. However, investigating agencies may probe deeper.

Bankers underscored that, going forward, decision-making vis-a-vis sale of stressed assets to ARCs could become a challenge as staff accountability hangs like a Damocles sword over their head.

Attracting ‘new money’ will be a challenge for the ARC

The Reserve Bank of India’s “Committee to Review the Working of ARCs” has observed that the ARC framework is designed to allow originators to focus on their core function of lending, with ARCs acquiring sticky stressed financial assets from their books.

However, data parsed by the committee showed that the performance of the ARCs has been lacklustre, both in terms of ensuring recovery and revival of businesses.

Borrower-ARC nexus

The Central Board of Direct Taxes (CBDT), in a recent statement, said the amount at which NPAs have been acquired by ARCs has been found to be far less than the real value of the collateral securities covering the said asset/NPA.

The IT Department’s search revealed that the minimum cash payout made out by the ARCs to lender bank(s) for acquiring the stressed assets/NPAs has usually been using the funds of the borrower group.

Such funds have been routed through several layers of dummy companies controlled by the borrower group or through hawala channels, per the CBDT statement.

“It has also been found that the ARCs have been following non-transparent methods in disposal of assets that were acquired by them from the banks.

“More often than not, the underlying assets had been re-acquired by the same borrower group, albeit at a fraction of their real values,” CBDT said.

Profits concealed

The IT Department found that ARCs concealed the profits on disposal of the underlying assets by diverting the actual profit to their related concerns, under the garb of consultancy receipts or unsecured loans/investments.

The Board noted that through this method, the ARCs have not only evaded the payment of due taxes but also deprived the lender bank(s) of their share of actual profits.

CBDT said: “One of the ARCs was found to be maintaining a parallel set of accounts on Tally accounting software, in a pen drive, recovered from the custody of the trusted employees of the promoter.

“This parallel set of accounts contained cash transactions aggregating to more than ₹850 crore.”

The IT Department also found handwritten diaries during the search, containing detailed entries substantiating the deliberate act of layering of transactions by the promoter group and use of a network of middlemen for the same.

CBDT also referred to evidence of routing of funds through offshore structures to acquire the assets.

By admin