RBI Proposes 7-Year Limit For Banks To Dispose Of Collateral Assets Seized From Defaulters

The Reserve Bank of India (RBI) issued a draft circular on Tuesday laying out a structured framework for how banks and non-banking financial companies should handle immovable assets acquired from borrowers who have defaulted on their loans.

The assets in question are called Specified Non-Financial Assets, or SNFAs. These are properties that lenders take over in full or partial settlement of claims against a borrower when other recovery options have been tried and found unworkable.

The draft circular sets out clear rules on how these assets must be acquired, valued, held and eventually sold. Stakeholders have until 26 May to submit feedback.

What An SNFA Is And When It Can Be Acquired

An SNFA can only be taken over against a non-performing exposure where the lender has exhausted other recovery routes. The acquisition is only valid if the title of the asset is formally transferred to the bank or non-banking financial company, and the lender must be in a clear position to deal with the asset independently. The takeover must also result in a proportionate reduction of the underlying loan exposure.

Where only part of the claim is extinguished, the remaining exposure must be treated as restructured rather than written off.

Valuation Rules

The Reserve Bank of India has proposed that SNFAs be recorded at the lower of the net book value of the extinguished exposure or the distress sale value. This valuation must be updated at least once every two years on a distress sale basis.

The rules on revaluation are strict. Any increase in value must be ignored entirely. Any fall in value must be recognised in the profit and loss statement immediately. The valuation is also calculated net of notional provisions, as though the original loan had remained on the books.

The Seven-Year Disposal Window

The RBI has proposed that lenders get a maximum of seven years to sell an SNFA. It also wants disposal to happen through public auction, and early disposal is explicitly encouraged. If a lender fails to sell the asset within the maximum period, or before its carrying value reaches zero, the asset stops being classified as an SNFA and must be reclassified under fixed assets or another relevant accounting head.

One restriction stands regardless of timing. Lenders are barred from selling the asset back to the original borrower or any related party, even after the asset has been reclassified. The concern is that defaulting borrowers should not be able to quietly recover the same assets through a back-door transaction.

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What Banks Must Put In Place

Banks and non-banking financial companies will be required to build internal policies covering:

• The maximum limit of SNFAs as a share of total assets.

• Eligibility criteria for acquisition.

• A delegation matrix for approvals.

• Recovery efforts that must be explored before acquisition.

• The maximum holding period for disposal.

• Periodic disclosure of SNFA holdings on the balance sheet.

SNFAs must be disclosed separately under the heading of non-banking assets acquired in satisfaction of claims. They usually cannot be clubbed with total residual exposures, stressed exposures or the provisioning coverage ratio calculation.

Sources:

Financial Express

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