RBI Tightens Norms for Bad-Loan Settlements, Banks to Become More Selective

Banks are likely to become more selective in accepting land and buildings as part of bad-loan settlements after the Reserve Bank of India (RBI) tightened governance, valuation and disposal norms for specified non-financial assets (SNFAs). SNFAs include residential and commercial properties, industrial land, warehouses, among others. “The guidelines indirectly propose that banks focus on their core business operations and impose restrictions and guidelines on transactions in immovable assets in satisfaction of claims on borrowers,” said Biby Augustine, joint general manager and head, collection and recovery, South Indian Bank . He added that banks will be more vigilant in accepting assets as part of settlements, since recording SNFAs on the balance sheet brings more transparency. The final norms will come into effect from October 1. Any SNFA outstanding in a bank’s books as of September 30, 2026 (‘Legacy SNFAs’) will have to comply with the final directions by September 30, 2027. According to Dhananjai Charan, partner at Shardul Amarchand Mangaldas & Co, the seven-year holding period begins from the date a lender acquires the property. As a result, a bank that has already held an asset for five years would have only two years left to dispose of it. He added that since this has long been the legal position for banks under Section 9 of the Banking Regulation Act, and some bankers therefore believe there may not be significant difficulty in complying with the deadline. But the important difference is that the framework also brings uniformity to NBFCs and HFCs, which otherwise sat outside Section 9 of the Banking Regulation Act. “The significance is harmonisation and discipline, with the exception of valuation, which is where the RBI has done something quite new,” Charan said. In some cases, the norms may mean the clock is already ticking for banks to sell previously acquired land and buildings. “This may present an opportunity for buyers,” said Ashwin Bishnoi, partner at Khaitan & Co. Vishal Bansal, partner – debt and special situations, EY India, said the one-year transition window for legacy SNFAs appears broadly adequate, provided banks move early and do not treat it as a year-end compliance exercise. This means SNFAs will need to be assessed for clean title, legal ability to deal with the asset, age since acquisition, carrying value, revised notional provisioning requirements and monetisation feasibility, experts said. For assets that have remained unsold for long periods, banks may need to reassess reserve prices, auction strategies, marketability constraints and escalation mechanisms. According to Bansal, public auctions are expected to become the preferred disposal route, with sale back to the borrower or related parties expressly prohibited. “Over time, banks are likely to build stronger MIS, ageing analysis and market-linked disposal strategies for such assets,” he said. Under the final norms, when a lender acquires an SNFA, it must value the asset at the lower of the outstanding loan’s net book value or the asset’s distress sale value, based on assessments by at least two independent external valuers. “The requirement to obtain valuations from two independent external valuers at the time of acquisition, and to dispose of the assets through public auction in line with SARFAESI principles, creates a standing operational workload and a real cost line,” said Sagar Lakhani, partner at Uniqus Consultech. However, he said that by tightening the guidelines into a single code and adding the anti-evergreening rule and sale-back prohibition, the RBI has turned a loosely governed corner of bank balance sheets into a measured, time-bound and consistently supervised category.