Supreme Court Flags Flaws in Bank NPA Sales to ARCs

The Supreme Court of India has raised serious concerns regarding the systemic practice of public sector banks divesting non-performing assets (NPAs) to Asset Reconstruction Companies (ARCs) at substantially undervalued rates. A Bench, led by Chief Justice of India Surya Kant, identified this pattern as a “deep-rooted nexus” involving borrowers, financial institutions, and ARCs, underscoring the unacceptable misapplication of public funds.

This judicial observation highlights a structural vulnerability where taxpayers’ money, initially disbursed as loans, is not being recovered through diligent efforts. The Chief Justice specifically noted that the very creation and operational methodology of ARCs require re-evaluation, particularly concerning their handling of public capital.

The Mechanism of Discounted Sales

The core issue revolves around ARCs seemingly colluding with banks, forming a mechanism that permits borrowers to settle significant debts by remitting only a fraction, typically 10-20%, of the original loan principal. This highly discounted recovery rate, as observed by the court, raises fundamental questions about the integrity of the debt resolution process.

A specific petition brought to the court’s attention alleged that public sector bank debts amounting to Rs 1,537 crore were resolved through two ARCs for a mere Rs 73.50 crore. While acknowledging the limitations in interfering with the commercial discretion of banks, the Supreme Court deemed the reckless release of public money, coupled with inadequate recovery efforts or security, to be indefensible.

Systemic Implications and Regulatory Scrutiny

In response to these grave concerns, the court has issued notices to key regulatory and governmental bodies, including the Central government, the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI). Major public sector lenders such as State Bank of India, Canara Bank, and Union Bank of India, alongside the Serious Fraud Investigation Office (SFIO) and several ARCs, have also been summoned.

Advocate Ashwini Upadhyay, representing the petitioners, argued that these instances of transferring large loan portfolios at steep discounts represent merely the “tip of the iceberg,” leading to substantial losses for the national exchequer. The petitioners advocate for the establishment of a judicial or expert committee, comprising officials from the RBI, SEBI, SFIO, Enforcement Directorate (ED), and CBI, to probe the alleged corporate and banking fraud facilitated by ARCs.

As factual evidence illustrating this structural pattern, the petitioners cited a case involving a Noida-based infrastructure firm. This company reportedly secured a Rs 912 crore loan from a consortium of seven banks, led by SBI, between 2012 and 2015. A forensic audit conducted in 2018 allegedly uncovered the diversion of over Rs 902 crore through shell companies, non-existent vendors, undisclosed bank accounts, and other suspected fraudulent transactions, underscoring the mechanisms through which public funds may be siphoned.

The Supreme Court’s intervention signals a critical re-examination of the structural framework governing NPA resolution and the accountability of public sector banks. The ongoing scrutiny aims to address the fundamental question of how public money, entrusted to financial institutions, can be protected from practices that allow significant debt write-offs at the expense of national welfare.