Supreme Court Raises Alarm Over Alleged Misuse of Public Funds in Bank-ARC Settlement

On the nineteenth day of June in the year two thousand and twenty‑six, a bench of the Supreme Court of India, composed of the Chief Justice Surya Kant and Justice V. Mohana, pronounced its principal apprehension to be the alleged diversion of fiscal resources which, under ordinary circumstance, might have been deployed for the amelioration of the populace’s essential needs. The judicial pronouncement, issued amidst a petition contending that public‑sector banks were induced to write off loans totalling one thousand five hundred thirty‑seven crore rupees through mechanisms that purportedly transferred merely seventy‑three point five hundred crore rupees to two designated Asset Reconstruction Companies, thereby engendering a purported discrepancy of nearly fifteen hundred crore rupees, was accompanied by a formal requisition for responses from the Union Government, the Reserve Bank of India, and the implicated financial entities.

According to the material placed before the Court, the two Asset Reconstruction Companies, identified in the pleading as ARC1 and ARC2, purportedly received the full quantum of the outstanding public‑sector bank liabilities, yet the consideration tendered, as recorded in the settlement agreements, amounted to a paltry seventy‑three rupees and fifty paise per hundred rupees of principal, thereby presenting a mathematical shortfall of an extraordinary magnitude that warrants rigorous financial scrutiny. The petitioner contends that such a disproportional settlement not only contravenes the fiduciary responsibilities of the lending institutions but also engenders a situation wherein the exchequer, through indirect subsidisation, is compelled to absorb the residual deficit, thereby impinging upon the treasury’s capacity to fund health, education, and infrastructure projects that serve the broader citizenry.

In accordance with procedural propriety, the Supreme Court issued formal notices to the Union Minister of Finance, the Governor of the Reserve Bank of India, and the chief executives of the four principal public–sector banks named in the petition, directing each to submit within a stipulated period a comprehensive account of the transaction chronology, the regulatory approvals obtained, and the substantive basis upon which the nominal consideration was sanctioned. The Court further indicated that should any of the respondents fail to demonstrate, on the balance of probabilities, that the settlement complied with extant statutory provisions and prudential guidelines, it would be compelled to consider appropriate remedial measures, inclusive of directing restitution to the public coffers and ordering a forensic audit of the entire arrangement.

Observers and policy analysts have remarked that, if the allegations prove substantiated, the net loss of approximately one hundred and forty‑seven crore rupees to the treasury would represent a misallocation of resources that could otherwise have been employed to mitigate the chronic deficits afflicting India’s expansive primary health‑care network and the under‑financed programs aimed at universal elementary education. In the context of the nation’s fiscal year 2025‑26, wherein the central government projected a primary deficit of merely 3.4 percent of gross domestic product, the purported diversion of such a substantial sum raises questions concerning the efficacy of inter‑agency coordination between the Ministry of Finance, the RBI’s supervisory mechanisms, and the statutory oversight functions vested in the Securities and Exchange Board of India.

The episode unfurls against a backdrop of prior controversies surrounding the asset‑reconstruction sector, notably the 2023 revelation that several ARCs had indulged in the practice of “ever‑greening” stressed loans, thereby prompting the RBI in its February 2024 circular to tighten capital adequacy norms and mandate heightened transparency in the valuation of transferred assets. Nevertheless, despite the regulatory tightening, the present allegations suggest that the mechanisms designed to monitor and approve the transfer of distressed debt may remain either inadequately enforced or subject to discretionary interpretations that enable privileged entities to secure preferential treatment at the expense of the fiscus.

In a brief communiqué issued on the twenty‑first of June, the Ministry of Finance asserted that all transactions involving public‑sector banks are conducted in strict accordance with the Banking Regulation Act, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, and that any deviation therefrom would have been flagged for immediate corrective action by the appropriate supervisory bodies. The Reserve Bank, in a separate statement, maintained that its oversight framework, which incorporates regular on‑site inspections, stress‑testing of loan portfolios, and mandatory reporting of asset‑sale transactions, had been duly applied in the present case and that no evidence of regulatory breach had been identified to date.

Thus, the juxtaposition of the Court’s pronounced vigilance over the alleged fiscal impropriety with the executive’s categorical denial of any procedural lapse engenders a paradoxical tableau wherein the mechanisms of accountability appear, on paper, robust yet, in practice, possibly rendered impotent by institutional inertia, opaque decision‑making channels, and the tacit acceptance of negotiated settlements that may, in effect, constitute a covert reallocation of public capital without transparent justification or demonstrable public benefit. Consequently, one must inquire whether the statutory provisions governing the transfer of distressed assets to reconstruction entities possess sufficient safeguards to preclude the de‑valuation of sovereign funds, whether the Reserve Bank’s supervisory architecture is empowered to intervene decisively when nominal consideration deviates starkly from market norms, whether the Ministry of Finance can be held answerable for authorising or overlooking settlements that appear to contravene the principle of fiscal prudence, and finally, whether the aggrieved citizenry possesses an effective legal avenue to compel the judiciary to enforce restitution in the absence of overt legislative direction.

In light of the foregoing, it is incumbent upon legislators to reevaluate the extant framework delineated under the Banking Regulation Act and the recently amended Insolvency and Bankruptcy Code, to ascertain whether these statutes, as currently operational, afford adequate recourse for the reclamation of public wealth when private intermediaries procure distressed obligations at far below intrinsic value, and whether the procedural transparency mandated in such transactions is merely perfunctory or substantively enforced by an empowered oversight regime. Accordingly, one may again pose the pivotal queries: does the current appellate architecture permit an expeditious and financially efficacious challenge to settlements that appear to subvert the public interest, should the RBI be mandated to publish comprehensive audit trails for every asset‑sale arrangement involving state‑owned lenders, can the Comptroller and Auditor General be granted expanded jurisdiction to scrutinise post‑settlement fiscal impacts, and, perhaps most fundamentally, will the collective expectation of accountability be translated into tangible corrective measures or remain confined to rhetorical affirmations within judicial pronouncements?

Published: June 19, 2026