What changed
RBI observed that some NPAs were sold for much less than the value of available securities without justification. The circular requires banks to compute the net present value of estimated cash flows from the realisable value of available securities net of recovery costs, and set the sale price generally not lower than that NPV. The same NPV principle applies to compromise settlements, where the NPV of the settlement amount should generally not be less than the NPV of the realisable value of securities.
What it means for you
Banks must ensure that NPA sale prices are based on the net present value of realisable security cash flows, preventing undervaluation. Lenders need to strengthen valuation procedures for security cash flows and recovery costs.
What you must do
- Ensure board-approved policies cover valuation procedures to estimate economic value based on assessed cash flows from repayments and recovery prospects.
- Work out the net present value of estimated cash flows from realisable value of available securities net of recovery costs for NPA sales.
- Apply the same NPV principle to compromise settlements, discounting installment payments to present value.
- Document justification if sale price is lower than NPV.
Who it affects
All Commercial Banks (excluding RRBs), All India Term Lending and Refinancing Institutions, All Non Banking Financial Companies (including RNBCs)
Does this circular apply to all NPA sales, including those to ARCs?
The circular applies to all commercial banks (excluding RRBs), term lending institutions, and NBFCs when selling NPAs. It does not specifically mention ARCs, but the guidelines cover sales to any buyer.
What if the NPV of security cash flows is negative or very low?
The circular does not address negative NPV. Banks should compute NPV and ensure the sale price is generally not lower than that value. If NPV is zero or negative, the bank must document the rationale for any sale price.
How should we handle compromise settlements with installment payments?
Calculate the net present value of the total settlement amount by discounting each installment. The NPV of the settlement should generally not be less than the NPV of the realisable value of securities.