New Hurdle for Asset Reconstruction Companies as High Deposits Deter Buyers in Stressed Loan Bids

In a recent twist to the sale of stressed advances to Asset Reconstruction Companies (ARCs), a fresh challenge has emerged in the form of hefty Earnest Money Deposits (EMDs) demanded during the initial bidding process for bad loans.

While traditional banks and Non-Banking Financial Companies (NBFCs) argue that a substantial EMD ensures serious and committed participation, maintaining confidentiality, ARCs hold a differing view, suggesting that this practice discourages broader involvement.

Typically, stressed asset sales are restricted to specific regulated entities, with most sellers not requiring any EMD from ARCs. However, a recent trend has seen some private banks and non-banking finance companies, such as Yes Bank and IndoStar, introducing EMDs during the sale of distressed loans to ARCs.

To address concerns and enhance transparency, industry bodies like the Indian Banks Association are actively working to standardize processes in distressed asset sales. The push is for greater openness and a level playing field. As part of these efforts, banks are now advised to share auction information on their websites, facilitating wider participation from potential bidders.

This development marks a pivotal moment in the ongoing efforts to streamline the distressed asset market, bringing attention to the need for a balanced approach that ensures both commitment and inclusivity in the bidding process.