Banks won't auction stressed loans covertly
stressed loans will soon come to an end. Under a new framework that high-street banks agreed on last week, lenders will have to ensure that the decision to auction loans is notified to all key players in the market.
This will end the practice of pushing through a sale by putting out the auction advertisement in an innocuous newspaper while keeping many potential bidders in the dark.
Banks have also come together to lay down a timeline to close such deals within seven working days after lending banks give a final approval to the transaction.
A model process document for transfer of stressed loans along with a checklist of information that banks would share with bidders at pre-deal stage was finalised and circulated among lenders last week, a senior banker told ET.
«This is a code of conduct to enable wider participation in loan sale deals and bring more transparency.
Also, due to changes in the market dynamics, the document mentions all the information about a loan that banks must provide,» said an industry person.
Due diligence in 2-3 weeks
Under the circumstances, banks will have to give the information on the auction to the Association of Asset Reconstruction Companies (ARCs) which in turn would pass it on to the member ARCs which are the prime acquirers of bad loans. ARCs, sometimes in tie-up with investors, buy loans from banks by paying at least 15% of the deal value in cash and the balance in the form of security receipts, which are bond-like instruments whose return and redemption depend on the recovery from the underlying assets.
