Supreme Court Flags Bank-ARC Nexus Over Rs 1,537 Crore Settlement at Rs 73.50 Crore

The Supreme Court of India has flagged a deep-rooted nexus between banks, asset reconstruction companies (ARCs), and borrowers while hearing a public interest litigation alleging that Rs 1,537 crore owed to public sector banks was settled through two ARCs for just Rs 73.50 crore. The bench of Chief Justice Surya Kant and Justice V Mohana issued notice to the Centre, the Reserve Bank of India, and other respondents, calling for closer scrutiny of how large public sector bank loans are settled at steep discounts.

The JKM Infra Case: What the PIL Alleges

The PIL centres on JKM Infra Projects Ltd, a Noida-based infrastructure company that obtained loans of approximately Rs 912 crore from a consortium of seven banks led by the State Bank of India between 2012 and 2015. The total exposure across the banking system grew to Rs 1,537 crore. The petitioner relies on an Ernst & Young forensic audit submitted on May 23, 2018, which allegedly detected the diversion of more than Rs 902 crore through shell companies, struck-off entities, non-existent vendors, fake invoices, undisclosed bank accounts, and suspicious transactions.

Despite these red flags, the loans were sold to two ARCs at a fraction of their face value, reportedly settling the entire Rs 1,537 crore exposure for Rs 73.50 crore, a recovery of under 5 percent. The PIL seeks a court-monitored investigation into the settlement.

What Are Asset Reconstruction Companies?

ARCs are specialised financial institutions registered with the RBI under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Banks sell their non-performing assets (NPAs) to ARCs, which then attempt to recover the dues from borrowers. The mechanism is designed to clean up bank balance sheets and allow professional recovery of stressed assets.

However, the Supreme Court observed that when public money given as loans is settled for a fraction of the original amount, and no effective efforts are taken to recover the full dues, the process warrants scrutiny. The Court noted that banks selling loan liabilities to ARCs 'for peanuts' is a matter of public concern.

Supreme Court's Observations

The bench expressed concern about what it called the misutilisation of public money that should have been spent for public welfare. The Court observed that the functioning of ARCs and the mechanism of settling large public sector bank loans at steep discounts required closer examination, particularly where forensic audits had already identified potential fraud.

The Court's notice directs the respondents to explain the regulatory framework governing such settlements and whether adequate safeguards exist to prevent collusive arrangements between banks, ARCs, and borrowers. The RBI, which regulates both banks and ARCs, has been asked to respond on whether its existing guidelines are sufficient to prevent such outcomes.

Regulatory Framework and RBI Guidelines

The RBI's guidelines on sale of stressed assets require banks to follow a transparent process, including valuation by independent agencies, before selling NPAs to ARCs. Banks must also ensure that the sale price is not significantly below the net book value of the asset. The RBI's anti-mis-selling framework and its broader regulatory oversight of the banking sector are relevant to this case.

Under Section 9 of the SARFAESI Act, ARCs must obtain a certificate of registration from the RBI to commence business. The RBI has the power to cancel this registration if the ARC fails to comply with conditions. Recent regulatory developments, including the RBI Credit Derivatives Direction 2026, reflect the central bank's ongoing efforts to strengthen the financial system's resilience.

Implications for Banking Sector Accountability

This case highlights a persistent concern in Indian banking: the gap between the amount of public money disbursed as loans and the amount actually recovered when those loans turn bad. While the Insolvency and Bankruptcy Code (IBC) has improved recovery rates for large NPAs through the NCLT process, the ARC route remains less transparent and subject to fewer checks.

The matter is next listed for hearing after the respondents file their replies. Investors and depositors who are concerned about the handling of bank NPAs can also file complaints with the RBI Banking Ombudsman if they believe their bank has failed to follow proper procedures.

Related Reading

For more on banking regulation and financial oversight, see our guides on how to file a complaint with the RBI Banking Ombudsman, the RBI model risk management guidance for 2026, and SEBI's legal standard for proving securities fraud.

Key Takeaways

The Supreme Court has issued notice in a PIL alleging that Rs 1,537 crore in bank loans was settled through ARCs for just Rs 73.50 crore. The Court flagged a deep-rooted nexus between banks, ARCs, and borrowers. The case involves JKM Infra Projects Ltd and a consortium of seven banks led by SBI. A forensic audit by Ernst & Young allegedly found over Rs 902 crore diverted through shell companies and fake invoices. The Court has asked the Centre and RBI to respond on the adequacy of regulatory safeguards governing such settlements. The matter highlights the need for greater transparency and accountability in the sale of stressed assets by public sector banks.