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RBI Guidelines on Purchase/Sale of Non Performing Assets (2007)

Current · Source: Reserve Bank of India · RBI/2007-2008/152 · issued 04 Oct 2007 · ~2 min read
Quick answerRBI mandates that banks selling NPAs must work out the net present value of estimated cash flows from the realisable value of available securities net of recovery costs, and the sale price should generally not be lower than that NPV. The same 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.
The rule, in the simplest words
How it plays out — a real example

A credit & lending officer in Mumbai is selling a bad loan where the borrower's gold is worth ₹10 lakh after selling costs. She calculates the net present value of that ₹10 lakh as ₹9.5 lakh today. She tells her team they must not accept any sale price below ₹9.5 lakh unless they document a strong reason, like the gold market crashing soon.

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

Who it affects

All Commercial Banks (excluding RRBs), All India Term Lending and Refinancing Institutions, All Non Banking Financial Companies (including RNBCs)

❓ Common questions

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.

📜 Read the original circular — full text as issued by RBI
RBI/2007-2008/152 DBOD.No.BP.BC.34 /21.04.048 /2007-08 October 4, 2007 All Commercial Banks (excluding RRBs) All India Term Lending and Refinancing Institutions All Non Banking Financial Companies (including RNBCs) Dear Sir, Guidelines on purchase/sale of Non Performing Assets Please refer to our Circular No.DBOD.BP.BC.16/21.04.048/2005-06 dated 13 July 2005 on the captioned subject. 2. In terms of the above banks' Boards are required to lay down policies and guidelines covering among other things, valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated based on the assessed cash flows arising out of repayments and recovery prospects. However, it has come to notice that in some cases NPAs have been sold for much less than the value of available securities and no justification has been given. 3. Banks should, while selling NPAs, work out the net present value of the estimated cash flows associated with the realisable value of the available securities net of the cost of realisation. The sale price should generally not be lower than the net present value arrived at in the manner described above. 4. Same principle should be used in compromise settlements. As the payment of the compromise amount may be in instalments, the net present value of the settlement amount should be calculated and this amount should generally not be less than the net present value of the realisable value of securities. Yours faithfully, (Prashant Saran) Chief General Manager-in-Charge
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-2008/152 · issued 04 Oct 2007. The plain-English explanation above is BankPulse’s own independent summary.
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Who does what — compliance checklist
⚙️ Operations
  • Apply the same NPV principle to compromise settlements, discounting installment payments to present value.
💰 Credit
  • Work out the net present value of estimated cash flows from realisable value of available securities net of recovery costs for NPA sales.
📜 Compliance
  • Ensure board-approved policies cover valuation procedures to estimate economic value based on assessed cash flows from repayments and recovery prospects.
  • Document justification if sale price is lower than NPV.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template

Example: if you are a Compliance officer at a bank this circular applies to (All Commercial Banks (excluding RRBs), All India Term Lending and Refinancing Institutions, All Non Banking Financial Companies (including RNBCs)), your first concrete step on “RBI Guidelines on Purchase/Sale of Non Performing Assets (2007)” is: “Ensure board-approved policies cover valuation procedures to estimate economic value based on assessed cash flows from repayments and recovery prospects.” (RBI issued this 04 Oct 2007).

  1. Circular: RBI/2007-2008/152 -- RBI Guidelines on Purchase/Sale of Non Performing Assets (2007)
  2. Issued: 04 Oct 2007
  3. Action required: Ensure board-approved policies cover valuation procedures to estimate economic value based on assessed cash flows from repayments and recovery prospects.
  4. Action required: Work out the net present value of estimated cash flows from realisable value of available securities net of recovery costs for NPA sales.
  5. Action required: Apply the same NPV principle to compromise settlements, discounting installment payments to present value.
  6. Action required: Document justification if sale price is lower than NPV.
  7. Owner: ____________ Target date: ____________
  8. Board/committee approval needed? Y / N
  9. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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BankPulse Compliance Evidence Pack — generated 05 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly).
Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=3844&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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