India bans banks from selling stressed assets back to defaulters
The Reserve Bank of India has banned lenders from selling seized assets back to defaulting borrowers, a move that closes a key loophole and forces banks to overhaul their balance sheet accounting.
The Reserve Bank of India has prohibited commercial banks, small finance banks and non-banking financial companies from selling stressed assets back to the original borrowers or their associated parties. The new rules, issued under the Resolution of Stressed Assets Directions, 2025, take effect on October 1, 2026. "A SNFA shall not be sold back to the borrower or its related parties," the central bank stated, defining related parties as per the Insolvency and Bankruptcy Code, 2016.
The regulations govern specified non-financial assets (SNFAs), which include immovable property or non-banking assets acquired by a lender to satisfy a claim. When a lender takes an asset against partial extinguishment of a loan, any remaining exposure must now be classified as a restructured loan. This triggers standard prudential norms, increasing the regulatory cost of partial settlements.
To prevent the undervaluation of seized collateral, the RBI has mandated strict pricing rules. These assets must be recorded on the balance sheet at the lower of the net book value of the extinguished loan or the distress sale value. That distress valuation cannot be an internal estimate; it must be determined by at least two independent external valuers.
Furthermore, lenders are instructed to make all possible efforts to dispose of these assets through public auctions. These auctions must adhere to the principles laid down in the SARFAESI Act, 2002. The goal is to ensure transparent price discovery and prevent distressed assets from being quietly moved off bank books at unfavorable terms.
Financial institutions are also required to draft board-approved policies governing the lifecycle of these assets. These internal frameworks must set strict limits on SNFAs as a proportion of total assets and establish eligibility criteria for acquisition. Crucially, lenders must document their recovery efforts prior to taking possession and enforce a maximum disposal period of seven years.
Legacy assets still on the books by September 30, 2026, will have a one-year grace period until September 30, 2027, to achieve full compliance.
The accounting overhaul carries significant implications for how market participants evaluate Indian lenders. Going forward, SNFAs will be completely excluded from gross non-performing assets, net non-performing assets, stressed exposures and provisioning coverage ratios. Banks and NBFCs will instead be forced to disclose these holdings under separate accounting heads.
This structural change provides analysts and investors with a cleaner view of core loan book performance. It also effectively dismantles a loophole where defaulting companies could wait for banks to seize collateral, only to buy it back at a steep discount.
