Greater transparency: No indemnity clause in NPA sale pact between banks and ARCs
banks and stressed asset firms last week adopted a 'model agreement' for selling loans, but were unable to reach a meeting point on the tricky issue of 'indemnity' which banks typically refuse to give once sticky assets move out of their books.
Lenders, according to documents reviewed by ET, would also have the right to declare an account as 'fraud' and make asset reconstruction companies (ARCs) that acquired the stressed loan responsible for dealing with the investigative agencies looking into the offence.
Even though a model template settles several differences arising in the course of loan sales, the two issues, pertaining to indemnity and fraud, place selling banks at a comparatively advantageous position.
Lenders, under the aegis of the industry body Indian Banks' Association, on May 17 approved a final draft of the Model Assignment Agreement and Model Trust Deed for adaptation by member banks, financial institutions, finance companies and ARCs, said a note sent to all banks.
The standardised agreement between buying ARCs and selling banks is expected to bring in greater transparency and fair play, said a senior banker involved in the drafting.
ARCs had been nudging banks to offer indemnity even after selling loans to take care of situations where damaging facts, which were not known at the point of sale, surfaced later. However, large banks, unwilling to deal with such eventualities once they wash their hands of an asset, used their influence to scuttle the proposal. Now, the provision of 'indemnity'
