New loan sale rule to give Rs 20k-cr lift to bank profits

bad bank.

The Reserve Bank of India (RBI) allowed lenders (on Saturday) across the spectrum and ownership types to reverse excess provisions in their profit and loss (P&L) accounts if a loan is transferred to an asset reconstruction company (ARC) at a value exceeding its net book value.

The relaxation, the RBI said, would apply if the deal with an ARC includes cash payments upfront and government-guaranteed security receipts (SR).

The RBI leeway allows income on all loans transferred to the National Asset Reconstruction Co (NARCL) to be booked upfront in the fourth quarter itself, and banks need not wait for the recovery to be made by NARCL and passed on to the banks.

However, the relaxed RBI guidelines require lenders to deduct the non-cash component from the common equity tier 1 (CET1) capital, and gains from such deals do not qualify for dividend payments.

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«This could be a game-changer and could result in gains of around ₹20,000 crore for banks,» said a senior banker. «In cases like Jaiprakash Associates, banks collectively stand to gain around ₹10,000 crore. Until now, they could only recognise profits when cash was received, but this provision allows them to do so upfront.» Under the old framework, lenders would have had to wait for final recoveries, often a process stretching years, to recognise income. Now, they can book profits immediately upon sale to NARCL, the state-backed bad bank.

The RBI has said that any SRs outstanding after the final settlement of the government guarantee or the