What changed
RBI formalized a framework for banks to purchase and sell non-performing assets directly among themselves, excluding securitisation and reconstruction companies. The guidelines mandate Board-approved policies, valuation based on estimated cash flows, and a 'without recourse' basis to transfer full credit risk. They also set prudential norms for asset classification, provisioning, capital adequacy, and exposure.
What it means for you
Banks now have a structured option to clean up their balance sheets by selling NPAs to other financial entities, which can specialize in recovery. Purchasing banks must have robust systems to value and manage these assets, as they assume full credit risk. The three-year recovery timeline and half-yearly minimum recovery threshold impose discipline on recovery expectations.
What you must do
- Place the RBI guidelines before your Board at the next meeting and obtain approval for a purchase/sale policy.
- Ensure your Board policy covers eligible NPAs, valuation procedures, delegation of powers, and accounting policies.
- Verify that any NPA sale is on a 'without recourse' basis, transferring all credit risk to the buyer.
- Set up systems to estimate cash flows from purchased NPAs, ensuring recovery within three years and at least 5% of estimated cash flows each half-year.
- Update internal prudential norms for asset classification, provisioning, capital adequacy, and exposure limits for purchased NPAs.
Who it affects
All Commercial Banks (excluding RRBs), All India Term Lending and Refinancing Institutions, All Non-Banking Financial Companies (including RNBCs)
Can we sell NPAs to ARCs under these guidelines?
No, these guidelines specifically exclude securitisation companies and reconstruction companies. They apply only to sales/purchases among banks, FIs, and NBFCs.
What is the minimum recovery requirement for purchased NPAs?
The estimated cash flows from a purchased NPA must be realized within three years, with at least 5% of those estimated cash flows recovered in each half-year period.
Do we need Board approval for each NPA transaction?
The Board must approve an overarching policy covering norms, valuation, delegation, and accounting. Individual transactions can then follow that policy, but the policy itself requires Board approval.