RBI Bars AIFIs from Booking Unpaid Interest on SNFA Assets from Oct 1, 2026

Ravi, CFO of an AIFI, had booked ₹50 lakh of unpaid interest as income after taking over a warehouse to settle a ₹10 crore NPA. Under a new RBI rule, he must reverse that entire amount by September 30, 2027 — even if the warehouse hasn't earned a rupee yet.

What Changed and Why

Before this amendment, some All India Financial Institutions (AIFIs) were booking unpaid interest from old loans as income the moment they took over a physical asset — like a factory or a piece of machinery — to settle a bad loan. This inflated profits on paper, even though no cash had come in.

The RBI has now closed that loophole. From October 1, 2026, any interest or charges that were due before the asset was acquired cannot be counted as income. If an AIFI had already booked such income for an SNFA it held as of September 30, 2026, it must reverse that amount from its Profit and Loss account by September 30, 2027 — unless the cash has actually been received by then.

The rule applies to all AIFIs covered under the RBI's Income Recognition, Asset Classification and Provisioning (IRAC) Directions. It was issued under Section 45L of the Reserve Bank of India Act, 1934.

What Is a Specified Non-Financial Asset (SNFA)?

An SNFA is a physical asset — such as land, a building, machinery, or equipment — that an AIFI takes over from a borrower as part of a stressed asset resolution. Think of it as the bank becoming the owner of a factory or a warehouse because the borrower couldn't repay the loan.

The term is defined in the RBI's Stressed Assets Directions. It does not include financial assets like shares or bonds. The key point: once the asset is acquired, the original loan (the 'exposure') is considered extinguished.

The Two New Rules in Plain English

The amendment inserts two new paragraphs — 116C and 116D — into the IRAC Directions. Here is what each one does:

• Paragraph 116C (The reversal rule): An AIFI cannot recognise any accrued but unrealised interest or charges from the old loan as income when it acquires an SNFA. If it had already recognised such income for an SNFA in its books as of September 30, 2026, it must reverse that amount through the Profit and Loss account by September 30, 2027 — to the extent the income is still unrealised (i.e., not yet received in cash).
• Paragraph 116D (The recognition rule): Any income actually received from an SNFA — such as rent, lease payments, or sale proceeds — must be recorded as 'non-interest / other income' in the financial year it is realised. Similarly, any expense incurred to maintain the SNFA (like property taxes, repairs, or insurance) must be recorded in the year it is spent.

Worked Example: How This Hits the P&L

Let's say an AIFI took over a commercial building in December 2025 to settle a ₹10 crore non-performing asset (NPA). At the time of takeover, the borrower owed ₹50 lakh in unpaid interest. The AIFI booked that ₹50 lakh as income in its March 2026 financial statements.

Under the new rule, the AIFI must reverse that ₹50 lakh from its Profit and Loss account by September 30, 2027 — unless the borrower (or a third party) has actually paid that interest in cash by then. If the building generates ₹20 lakh in rent between October 1, 2026, and March 31, 2027, that rent goes into the books as 'other income' only when the rent cheque is cleared, not when the lease is signed.

This means the AIFI's reported profit for FY 2026-27 could take a significant hit if it has large SNFA holdings with unrealised interest booked in prior years.

Who Must Comply — and What You Must Do

The rule applies to all All India Financial Institutions (AIFIs) covered under the RBI's IRAC Directions. This includes institutions like NABARD, SIDBI, NHB, EXIM Bank, and others. Credit risk teams, finance teams, and auditors at these institutions need to act now.

Here is the compliance checklist:

• Identify: List all SNFA acquisitions in your books as of September 30, 2026. For each, calculate the accrued but unrealised interest and charges that were recognised as income.
• Reverse: Reverse that income through the Profit and Loss account by September 30, 2027, to the extent it remains unrealised on that date.
• Reclassify: From October 1, 2026, classify all SNFA income as 'non-interest / other income' and recognise it only upon cash realisation.
• Update systems: Modify your accounting policies and software configurations to prevent automatic recognition of unrealised SNFA income.
• Train teams: Educate credit and finance staff on the new treatment to avoid misreporting in regulatory filings.

How This Rule Connects to Other RBI Circulars

This is not an isolated change. The RBI has been systematically tightening income recognition rules for SNFA acquisitions across all regulated entities. Similar amendments have been issued for:

• Regional Rural Banks (RRBs)
• Local Area Banks (LABs)
• Urban Co-operative Banks (UCBs)
• Small Finance Banks (SFBs)
• Non-Banking Financial Companies (NBFCs)
• Rural Co-operative Banks

If you work at any of these entities, check the respective circular for your specific compliance date and rules.

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