The excess provision on any bad loan which is sold to an asset reconstruction company (ARC) for a higher value can be reversed to the bank’s profits, the RBI said on Tuesday.

“Sale of assets to ARCs at a stage when the assets have good chance of revival and fair amount of realisable value, for rehabilitation and reconstruction, is encouraged,” said an RBI discussion paper released on Tuesday.

This, the RBI said, was done to bring in uniformity and incentivise banks to recover the appropriate value of their non-performing assets promptly.

If the sale value is lower than the net book value, the shortfall can be spread over a period of two years. This facility of spreading the shortfall would however, be available for NPAs sold up to March 31, 2015, the RBI said.

Currently, the excess provision is not allowed to be reversed in case the asset sale value is higher and banks are required to provide for any shortfall if the sale value is lower.

The central bank will also allow banks to use floating provisions towards additional provisions incurred at the time of NPA sales without prior permission of the RBI.

Also, the RBI will withdraw the minimum holding period of at least two years for an NPA to be eligible for sale, however, maintaining that the bank purchasing the NPA cannot sell it for a year.

Banks could also be allowed to extend finance to adequately capitalised promoters to acquire troubled companies.

However, promoters of the defaulting borrowers will be barred from buying back the asset from the ARCs.

Between ARCs The RBI wants the Government to consider allowing sale of assets between ARCs to encourage liquidity and price discovery of stressed assets.

The central bank will also consider the ability of ARCs to raise limited debt funds to rehabilitate units increasing their minimum level of capitalisation, encourage assets under management targets for ARCs and make the bidding process for price discovery more transparent.

beena.parmar@thehindu.co.in

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