What changed
Previously, all SRs including government-guaranteed ones followed uniform valuation and provisioning rules under MD-TLE. Now, for SRs backed by a Government of India guarantee, banks can reverse the entire excess provision to P&L in the transfer year if consideration is only cash and such SRs. However, the non-cash portion must be deducted from CET1 capital, and no dividends can be paid from it. Valuation of these SRs will be based on ARC-declared NAV using recovery ratings, with any unrealized gains also deducted from CET1 capital and dividend-restricted. SRs outstanding after guarantee settlement or expiry must be valued at ₹1.
What it means for you
This circular gives banks a clearer, more favorable accounting treatment for government-guaranteed SRs, potentially encouraging loan sales to ARCs. However, the CET1 capital deduction and dividend restriction on the non-cash component impose a capital cost, so banks must weigh the liquidity benefit against capital impact. The NAV-based valuation with recovery ratings adds transparency but requires banks to monitor ARC disclosures closely. For lenders holding such SRs, the final ₹1 valuation post-guarantee expiry creates a clear exit trigger.
What you must do
- Review existing and new SR investments to identify those with Government of India guarantee and apply the new valuation and capital treatment.
- Adjust capital adequacy calculations to deduct the non-cash excess provision component from CET1 capital and restrict dividends accordingly.
- Update internal policies for loan transfers to ARCs to reflect the revised reversal of excess provisions and capital treatment.
- Monitor ARC-declared NAV and recovery ratings for periodic valuation of government-guaranteed SRs.
- Plan for eventual valuation at ₹1 after guarantee settlement or expiry, and assess resolution options if SRs are converted.
Who it affects
All commercial banks including SFBs, LABs, and RRBs, Primary (Urban) Co-operative Banks, State Co-operative Banks, Central Co-operative Banks, All-India Financial Institutions, Non-Banking Financial Companies including HFCs, Asset Reconstruction Companies
Can we reverse the entire excess provision on a loan sale to an ARC if we receive government-guaranteed SRs?
Yes, if the sale consideration is only cash and government-guaranteed SRs, you can reverse the full excess provision to P&L in the transfer year. However, the non-cash portion (excess provision minus cash received) must be deducted from CET1 capital, and no dividends can be paid from that component.
How should we value government-guaranteed SRs after the guarantee period ends?
Any SRs outstanding after the final settlement of the government guarantee or the expiry of the guarantee period, whichever is earlier, must be valued at ₹1. This applies to all such SRs held by you.
What happens if the SRs are converted into other instruments during resolution?
If the SRs are converted to any other form of instruments as part of resolution, the valuation and provisioning for those instruments will be governed by the provisions under paragraph 19 of Annex 1 to the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019.