AIB is to sell 2,150 non-performing loans in long-term default to Mars Capital Finance Ireland, as part of a consortium that includes Ellington Management Group.
Once completed, AIB will receive around €400 million.
"The proceeds will be used for general corporate purposes, including the continuation of support for customer restructuring," the bank said in a statement.
It said the loan portfolio had a gross NPE value of €400 million as of last June, and a fully loaded risk-weighted assets (RWA) position of €300 million.
In the year ended 31 December 2020, it said the loan portfolio incurred a loss before tax and post-provisions of €56 million.
The bank said that all customers in the loan portfolio sale will continue to have the same regulatory protections under the Consumer Protection Code (CPC) and the Code of Conduct on Mortgage Arrears (CCMA) after the sale.
It said all customers were in default prior to the onset of the Covid-19 pandemic.
"The loans will be sold with the benefit of existing legal protections under the customers' loan contracts," the statement said.
AIB said the reduction of long-term NPEs remains a priority for the bank.
The completion of this transaction brings the June 2021 pro-forma NPE ratio to under 6% from 6.5%.
"We continue to make progress towards our medium-term NPE target of 3%," it said.