Computer raids on 4 ARCs: banks might be wary of selling NPAs

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Bankers may be reluctant to sell bad debt to asset rebuilding companies (ARCs) as recent Income Tax Department research on four ARCs found that they had engaged in various unfair business practices and fraudulent when acquiring these loans.

This development could be a blow to CRAs, as banks could avoid this collection channel, preferring instead to pursue collections through the Insolvency and Bankruptcy Code (IBC) and National Asset Reconstruction Company Ltd (NARCL) directed routes. by banks.

RBI panel sets standards to streamline CRA operations

Referring to the Income Tax (IT) department which recently uncovered an unholy link between borrower groups and ARCs, a senior official at a public sector bank (PSB) said: “Now, it is feared that the old cases of non-performing assets of banks (NPAs) sale to ARCs may be opened.

“So this development will certainly be a drag when it comes to assigning bad loans / NPAs to ARCs by banks. Banks will be wary of selling assets to CRAs.

A senior official from another PSB noted that bankers are unlikely to have been involved / aware of the corrupt link between some of the CRAs and borrowers. However, investigative agencies can dig deeper.

Bankers pointed out that in the future, decision-making about selling stressed assets to CRAs could become a challenge, as staff responsibility hangs like a sword of Damocles over them. her head.

Attracting “new funds” will be a challenge for the CRA

The Reserve Bank of India’s “ARC Operation Review Committee” observed that the ARC framework is designed to allow originators to focus on their primary lending function, with ARCs acquiring financial assets subject to review. lingering stresses from their books.

However, data analyzed by the committee showed that the performance of ARCs has been poor, both in terms of securing business recovery and relaunching.

Borrower-ARC link

The Central Council of Direct Taxes (CBDT), in a recent statement, said that the amount at which the NPAs were acquired by the ARCs turned out to be much lower than the actual value of the collateral covering said asset / NPA.

The IT department’s research found that the minimum cash payment made by ARCs to lending banks for the acquisition of distressed assets / NPAs typically used up the borrower pool’s funds.

These funds were funneled through multiple layers of shell companies controlled by the borrower group or through hawala channels, according to the CBDT statement.

“It was also found that CRAs follow non-transparent methods to dispose of the assets they have acquired from banks.

“More often than not, the underlying assets had been purchased by the same group of borrowers, albeit at a fraction of their actual value,” said CBDT.

Hidden benefits

The IT department discovered that the CRAs were hiding the profits from the divestiture of the underlying assets by diverting the actual profits to their related concerns, under the guise of advisory receipts or unsecured loans / investments.

The Board noted that by this method, the CRAs not only evaded the payment of taxes owed, but also deprived the lending bank (s) of their share of the actual profits.

CBDT said, “One of the CRAs was found to maintain a parallel set of accounts on the Tally accounting software, in a USB drive, retrieved from the custody of the promoter’s trusted employees.

“This parallel set of accounts contained cash transactions totaling over 850 crore’s.”

The IT department also found handwritten diaries during the search, containing detailed entries attesting to the deliberate act of superimposing transactions by the promoter group and the use of a network of intermediaries for them.

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


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