RBI rejects lenders’ bid to acquire pre-NPA assets, resell to same borrowers

The Reserve Bank of India (RBI) on Thursday said it has rejected lenders’ requests to allow them to acquire certain non-financial assets before a borrower turns non-performing, as well as to sell such assets back to the same borrower.

On 5 May, the RBI had released draft guidelines on the so-called specified non-financial assets (SNFA). It had said that entities regulated by the RBI usually do not transact in immovable assets as part of their core business operations, other than in exceptional cases where they acquire such immovable assets to satisfy claims on the borrower.

Under Section 9 of the Banking Regulation Act, banks are barred from holding such non-banking assets beyond a specified period. It had said in May that the idea of the draft guidelines was to provide clarity on the prudential treatment of such assets.

In its draft, the RBI had said that such specified non-financial assets shall be acquired only in cases where a regulated entity’s exposure to a borrower is classified as non-performing, and where other means of recovery have been explored and deemed unviable.

On Thursday, the RBI said that it received feedback that such acquisitions should be allowed for assets classified as SMA (special mention account) as well. “SNFA acquisition is strictly a measure of last resort, not a primary recovery tool, hence, permitting the same for standard or SMA accounts may not be prudentially desirable,” it said.

Under RBI norms, borrowers must be categorized into SMAs based on repayment delays. Special mention account-0 (SMA- 0) loans are where the repayment overdue is between one and 30 days, SMA-1 (between 31 and 60 days) and SMA-2 (61-90 days).

Moreover, the central bank has also shot down a demand to allow lenders to sell such assets back to the borrower or its related parties. It said that this could create moral hazard and dilute credit discipline by allowing defaulting borrowers a preferential opportunity to regain the asset. The regulator’s stance here is on the lines of what is disallowed under Section 29A of the Insolvency and Bankruptcy Code, which bars promoters from buying back defaulting assets.

Lenders had also sought inclusion of movable assets under this framework but did not receive the RBI’s approval. The RBI said it received feedback that a separate framework could provide for assets acquired under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) where there are legal disputes; and for rural and industrial assets where transfer restrictions exist.

“Given the highly depreciating nature of movable assets (other than gold and investments), and the shorter economic life, there may be little incentive for taking ownership of such assets unless the same can be put to regulated entity own use immediately,” it said.

Moreover, the RBI said that for gold and securities, a separate regulatory framework is already in place governing the prudential aspects of such assets. “Assets which are under legal dispute or where restrictions are there on transfer, would not meet the criteria of SNFA which requires clear title transfer to a regulated entity.

According to the RBI, a bank will have to dispose of such assets within seven years and should make all efforts to do it at the earliest through a public auction.