RBI introduces prudential framework for immovable assets acquired from defaulting borrowers

The Reserve Bank of India on Thursday amended its Resolution of Stressed Assets Directions across commercial banks, small finance banks, urban co operative banks, non banking financial companies (NBFCs) and all India financial institutions, introducing a uniform prudential framework for immovable assets acquired from defaulting borrowers during the recovery of stressed loans.

The central bank said banks and NBFCs generally do not transact in immovable assets as part of their core business operations, except where such assets are acquired in satisfaction of claims on defaulting borrowers. To bring greater clarity and consistency in the prudential treatment of these assets, it has introduced a new framework governing their acquisition, valuation, holding, disposal and disclosure.

Why has RBI issued these norms?

According to the RBI, lenders increasingly acquire immovable properties while resolving stressed loans through mechanisms such as bilateral settlements or enforcement under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Since these assets are incidental to lending rather than part of a lender's regular business, the central bank felt the need to prescribe a uniform prudential treatment to ensure consistency in accounting, governance and disclosure.

What are Specified Non-Financial Assets (SNFAs)?

The amendments introduce the concept of Specified Non-Financial Assets (SNFAs).

For banks, SNFAs refer to immovable assets acquired in full or partial satisfaction of claims on borrowers, including non-banking assets acquired under the Banking Regulation Act. For NBFCs and all India financial institutions, the definition similarly covers immovable assets acquired against stressed exposures.

The framework applies to all such assets, whether acquired through bilateral arrangements or under SARFAESI proceedings.

When can lenders acquire these assets?

The RBI has made it clear that SNFAs can only be acquired where the lender's exposure to the borrower has already been classified as a non-performing asset (NPA).

Further, the property will be regarded as an SNFA only after legal title has been transferred to the lender and it is in a position to independently deal with the asset.

The norms also permit acquisition against either full or partial extinguishment of the outstanding loan. However, where only a part of the exposure is extinguished, the remaining loan will be treated as a restructured exposure and will continue to attract the applicable prudential norms on restructuring.

What policy must lenders put in place?

Every regulated entity covered under the framework will be required to formulate a Board-approved policy governing acquisition and disposal of SNFAs.

The policy should specify limits on SNFAs as a proportion of total assets, eligibility criteria, delegation of approval powers, recovery efforts to be explored before acquiring such assets and the maximum disposal period, which cannot exceed seven years.

How should these assets be valued?

At the time of acquisition, an SNFA must be recorded in the balance sheet at the lower of the net book value (NBV) of the extinguished exposure or the distress sale value (DSV) of the property, with the DSV determined by at least two independent external valuers.

Subsequently, the value of the SNFA will need to be updated at every reporting date based on the revised net book value of the extinguished exposure, as if the loan had continued on the books of the lender.

What are the disposal requirements?

The amendments require lenders to dispose of SNFAs within the maximum period specified in their Board-approved policy, subject to an overall cap of seven years.

The RBI has also directed lenders to make all efforts to sell these assets at the earliest through public auctions, following the auction principles laid down under the SARFAESI Act.

SNFAs cannot be sold back to the original borrower or related parties, as defined under the Insolvency and Bankruptcy Code, 2016. This restriction will continue even if the asset subsequently ceases to be classified as an SNFA.

Where an acquired property is put to the lender's own use, it will cease to be classified as an SNFA and will instead be recognised as a fixed asset or under another appropriate accounting head.

How will these assets be disclosed?

The RBI has clarified that SNFAs will not form part of Gross NPA, Net NPA, residual exposure, stressed exposures or Provisioning Coverage Ratio.

Instead, they will be disclosed separately in the balance sheet under a dedicated accounting head.

Regulated entities will also be required to report detailed information on the stock, ageing and movement of SNFAs through the RBI's Centralised Information Management System (CIMS), while NBFC-HFCs will report the information to the National Housing Bank.

What about existing assets?

The central bank has provided a one-year transition period for legacy assets. All SNFAs outstanding in lenders' books as on September 30, 2026 will have to be brought into compliance with the new framework by September 30, 2027.

The amendments will come into effect from October 1, 2026.

RBI also amended its Income Recognition, Asset Classification and Provisioning (IRACP) Directions for commercial banks to align them with the new SNFA framework. The central bank said banks will not be permitted to recognise any accrued but unrealised interest or charges relating to the extinguished loan as income upon acquisition of an SNFA. Any such unrealised income already recognised for legacy SNFAs as on September 30, 2026 will have to be reversed through the profit and loss account by September 30, 2027. Further, income generated from an SNFA will be recognised as non-interest or other income only in the financial year in which it is actually realised, while maintenance expenses will be recognised when incurred.