Summary of this article
RBI bars banks from reselling recovered properties to defaulters.
Banks must dispose of recovered assets within seven years.
New rules on valuation and accounting take effect October 1.
The Reserve Bank of India (RBI) has barred banks from selling immovable assets acquired during the recovery of stressed loans back to the defaulting borrower or related parties. According to the central bank, allowing such transactions could weaken credit discipline and could lead to moral hazards.
The RBI has issued final prudential norms for specified non-financial assets (SNFAs), including immovable properties, which banks acquire while recovering dues from defaulting borrowers. The directions will take effect from October 1, 2026.
Framework For Recovery Assets
Banks are not supposed to own non-financial assets as part of their normal lending business. However, when a loan turns into a non-performing asset (NPA) and recovery proceedings begin, a bank may take possession of an immovable property that had been pledged as collateral.
The new framework sets out how such assets should be treated after acquisition. Banks will have to dispose of these properties within the period specified in their internal policy, with an upper limit of seven years.
Banks have also been directed by the regulator to try and sell such assets at the earliest possible time, through public auctions.
Borrowers Forbidden From Repurchasing Assets
One of the suggestions received during the consultation process with the stakeholders was to allow borrowers to buy back properties acquired by banks during recovery.
The RBI has declined the proposal, stating that such a provision could create moral hazard by giving defaulting borrowers a preferential opportunity to regain the asset. According to the central bank, such an arrangement could also dilute credit discipline.
Valuation And Accounting Rules
The norms also prescribe how banks should value these assets after taking possession. An SNFA will have to be recorded in the balance sheet at the lower of the net book value of the extinguished loan or the distress sale value determined by at least two independent external valuers.
The RBI has further clarified that if a bank starts using an acquired property for its own operations, it will no longer be treated as an SNFA. Instead, it will be classified under the relevant accounting head, such as fixed assets.
Bringing more clarity to the prudential treatment of non-financial assets which banks acquire during the recovery of bad loans while setting clear timelines for their disposal, is the main purpose of these prudential norms.
