RBI Bars Local Area Banks from Booking Unpaid Interest on Acquired Assets from Oct 1, 2026
Ravi, a credit officer at a Local Area Bank, stares at a defaulted ₹2 lakh loan. The borrower offers a plot worth ₹1.4 lakh to settle part of the debt. Under new RBI rules, Ravi must now value that plot at the lower of two independent valuations, set a disposal deadline, and treat the remaining loan as a restructuring case.
- RBI issued the Reserve Bank of India (Local Area Banks – Resolution of Stressed Assets) Second Amendment Directions, 2026 on July 16, 2026, effective October 1, 2026.
- A 'specified non-financial asset' (SNFA) is an immovable asset acquired by a bank in satisfaction or part satisfaction of its claims on a borrower, including non-banking assets under the Banking Regulation Act, 1949.
- Upon acquisition, an SNFA must be recorded at the lower of the proportionate net book value of the extinguished exposure or the distress sale value from at least two independent external valuers.
- Banks must dispose of any SNFA within a maximum period set by their policy, not exceeding seven years from acquisition.
- Legacy SNFAs outstanding as of September 30, 2026 must achieve full compliance with these Directions by September 30, 2027.
- SNFAs must be valued at the lower of proportionate NBV or distress sale value from two independent valuers.
- Maximum holding period for any SNFA is seven years from acquisition.
- Partial extinguishment of a loan via SNFA is treated as restructuring, with higher provisioning norms.
- Legacy SNFAs as of September 30, 2026 must comply by September 30, 2027.
- SNFAs cannot be sold back to the borrower or related parties, even after reclassification.
What is an SNFA and why does it matter?
A specified non-financial asset (SNFA) is an immovable asset — like land or a building — that a bank gets when a borrower cannot repay a loan. Banks are not in the business of holding real estate. But sometimes, to recover money, they accept a property in exchange for the debt. This is called 'acquisition in satisfaction of claims.'
Until now, there were no clear rules on how to value these assets or how long a bank could hold them. The new RBI directions change that. They apply to all Local Area Banks (LABs) and cover assets acquired through bilateral deals or even through the SARFAESI Act, 2002.
For context, similar rules have been issued for other bank types. You can read about them in our articles on UCBs, Small Finance Banks, NBFCs, and Rural Co-op Banks.
How must a bank value an SNFA?
The rule is simple: record the asset at the lower of two numbers.
- Proportionate net book value (NBV) of the extinguished exposure — that is, the loan amount (minus provisions) that the property replaces.
- Distress sale value (DSV) from at least two independent external valuers.
Here's an example from the circular itself. Suppose a loan of ₹2 lakh has a net book value of ₹1.7 lakh (after 15% provisions). The borrower offers a property worth ₹1.4 lakh to extinguish ₹1.5 lakh (75%) of the loan. The SNFA is valued at the lower of: proportionate NBV (75% of ₹1.7 lakh = ₹1.275 lakh) or DSV (₹1.4 lakh). So the bank records the asset at ₹1.275 lakh.
At each reporting date, the SNFA is carried at a revised NBV — the value of the extinguished exposure minus notional provisions that would have applied had the loan stayed on the books.
What happens to the rest of the loan?
If a bank takes a property for only part of the loan, the remaining exposure is treated as a restructured loan. That means it attracts the same prudential norms as any other restructuring under the Directions.
In the example above, after extinguishing ₹1.5 lakh, the residual loan is ₹0.5 lakh with associated specific provisions of ₹0.075 lakh. That residual must be managed under restructuring rules — which typically require higher provisioning and closer monitoring.
How long can a bank hold an SNFA?
The bank's policy must set a maximum disposal period that cannot exceed seven years from the date of acquisition. The bank must try to sell the asset as soon as possible, preferably through a public auction following the principles of the SARFAESI Act, 2002.
There is one important restriction: the SNFA cannot be sold back to the borrower or its related parties (as defined in the Insolvency and Bankruptcy Code, 2016). This rule applies even if the asset later stops being classified as an SNFA.
If the bank decides to use the asset for its own operations — say, as a branch office — it stops being an SNFA and is reclassified as a fixed asset.
What about assets the bank already holds?
Any SNFA that is already on the bank's books as of September 30, 2026 is called a 'Legacy SNFA.' The bank has until September 30, 2027 to bring it into full compliance with these Directions. That means getting proper valuations, setting disposal timelines, and ensuring the asset is recorded correctly.
What must a bank's policy include?
Every Local Area Bank must now have a board-approved policy that covers:
- Limit on SNFAs as a share of total assets
- Eligibility criteria for acquiring SNFAs
- Delegation matrix (who can approve what)
- Recovery efforts to be tried before acquisition
- Maximum disposal period (not exceeding seven years)
The policy must also ensure that an SNFA is acquired only if the bank's exposure to the borrower is already classified as non-performing. And the asset is deemed acquired only when the title is transferred to the bank and the bank has clear control over it.
Disclosure and reporting requirements
SNFAs must be disclosed under a separate accounting head in the balance sheet: 'non-banking assets acquired in satisfaction of claims.' They cannot be included in Gross NPA, Net NPA, stressed exposures, or provisioning coverage ratio calculations.
Banks must also report SNFA details to the RBI through the CIMS portal in the format specified in Annex-2 of the Directions.
Questions people ask
An SNFA is an immovable asset — like land or a building — that a bank gets when a borrower cannot repay a loan. It includes non-banking assets (NBAs) acquired under the Banking Regulation Act, 1949.
The bank's policy must set a maximum disposal period, but it cannot exceed seven years from the date of acquisition. The bank must try to sell it earlier through a public auction.
That partial extinguishment is treated as a restructuring. The remaining loan amount must follow restructuring rules, which typically require higher provisioning and closer monitoring.
No. The Directions explicitly prohibit selling an SNFA back to the borrower or its related parties (as defined in the Insolvency and Bankruptcy Code, 2016). This restriction continues even if the asset later stops being classified as an SNFA.
Any SNFA outstanding as of September 30, 2026 must achieve full compliance with these Directions by September 30, 2027. That includes proper valuation, disposal timeline, and disclosure.
SNFAs must be shown under a separate accounting head: 'non-banking assets acquired in satisfaction of claims.' They cannot be included in Gross NPA, Net NPA, or stressed exposure calculations.