Supreme Court Slams ‘Peanuts Deals’: Banks, ARCs, Borrowers Under Scrutiny
Apex Court questions steep loan write-offs hurting taxpayers
Calls for revisiting ARC framework to safeguard public funds
By Legal Reporter
New Delhi: June 20, 2026:
The Supreme Court of India has raised alarm over the way public sector banks sell distressed loans to Asset Reconstruction Companies (ARCs) at steep discounts, often allowing borrowers to settle massive debts for a fraction of their value. The Court flagged a “deep-rooted nexus” between banks, borrowers, and ARCs, suggesting that the statutory framework governing ARCs may need to be revisited to protect public money.
The case of Dhani Ram (Died Through LRs) & Others Appellant vs Shiv Singh Respondent highlights important legal principles involving civil disputes, evidentiary assessment, and judicial interpretation. This judgment serves as a useful reference for advocates, litigants, and legal researchers seeking precedent-based legal insights.
Introduction
India’s financial sector is once again under judicial scrutiny. The Supreme Court’s recent observations on the functioning of Asset Reconstruction Companies (ARCs) highlight systemic concerns about how distressed loans are managed. The Court’s remarks, made while hearing a petition involving JKM Infra Projects Ltd., underscore the risks of public money being siphoned off through questionable settlements.
Background of the Case
The petition alleged that JKM Infra Projects Ltd. availed loans worth ₹1,537 crore from a consortium led by State Bank of India. These loans were eventually settled through ARC transactions for just ₹73.50 crore, resulting in a loss of over 95% of public money. A forensic audit by Ernst & Young in 2018 reportedly found diversion of ₹902 crore through shell companies and fake invoices.
Key Legal Framework
SARFAESI Act, 2002: Provides for creation of ARCs to acquire non-performing assets (NPAs) from banks.
RBI Guidelines: Regulate ARC functioning, including asset acquisition and resolution.
Banking Regulation Act, 1949: Governs prudential norms for banks, including loan recovery.
Supreme Court’s Role: While acknowledging limits in interfering with banks’ “commercial wisdom,” the Court emphasized its duty to protect public money.
Court’s Observations
ARC Mechanism Misused: Banks sell loans at steep discounts, ARCs profit, and borrowers escape liabilities cheaply.
Public Money at Stake: Taxpayers’ funds meant for welfare are diverted into private hands.
Nexus Identified: A “deep-rooted nexus” exists between banks, borrowers, and ARCs.
Need for Reform: The Court suggested revisiting the statutory framework governing ARCs.
Implications
For Banks: Their loan recovery practices face judicial and regulatory scrutiny.
For ARCs: Their role as intermediaries may be redefined to prevent misuse.
For Borrowers: Settlements at throwaway prices may no longer be tolerated.
For Regulators: RBI, SEBI, SFIO, and ED may need to tighten oversight.
Comparative Perspective
United States: Distressed debt is traded, but strict SEC oversight prevents abuse.
Europe: Loan resolution often involves transparent auctions.
India: ARC mechanism lacks transparency, enabling collusion.
Critical Analysis
The Court’s intervention is timely. While ARCs were created to clean up NPAs, their misuse undermines financial discipline. The lack of transparency in ARC transactions raises questions about accountability. Judicial scrutiny may push regulators to strengthen oversight, but systemic reforms are essential.
Conclusion
The Supreme Court’s remarks could be a turning point in India’s banking sector. Revisiting ARC laws, ensuring transparency, and protecting public money are now urgent priorities. The ruling signals that judicial oversight will not shy away from questioning “commercial wisdom” when taxpayers’ funds are at risk.
FAQ Section (Searchable Index Format)
1. What are Asset Reconstruction Companies (ARCs)?
ARCs are entities created under the SARFAESI Act, 2002 to acquire and resolve non-performing assets from banks.
2. Why did the Supreme Court criticize ARCs?
Because banks sell loans to ARCs at steep discounts, allowing borrowers to settle debts cheaply, causing massive losses to public money.
3. What was the JKM Infra case about?
JKM Infra Projects Ltd. allegedly diverted ₹902 crore and settled loans worth ₹1,537 crore for just ₹73.50 crore through ARC transactions.
4. What laws govern ARCs?
Primarily the SARFAESI Act, 2002, RBI guidelines, and the Banking Regulation Act, 1949.
5. Can the Supreme Court interfere in bank decisions?
While it respects banks’ commercial wisdom, the Court can intervene when public money is misused.
6. What reforms may follow?
Revisiting ARC laws, stricter RBI oversight, forensic audits, and possible investigations by ED, SFIO, and CBI.
7. How do ARCs differ internationally?
In the US and Europe, distressed debt resolution is more transparent and regulated, unlike India’s opaque ARC mechanism.
8. What is the impact on taxpayers?
Losses from discounted settlements directly affect public funds, reducing resources for welfare schemes.