RBI rejects lenders’ offer to acquire pre-NPA assets and sell them to same borrowers | Today’s news

The Reserve Bank of India (RBI) said on Thursday that it has rejected lenders’ requests to allow them to acquire certain non-financial assets before a borrower becomes insolvent and also to sell those assets back to the same borrower.

On May 5, the RBI published draft guidelines on the so-called Specified Non-Financial Assets (SNFA). He said that RBI-regulated entities do not normally transact in immovable property as part of their core business, except in exceptional cases where they acquire such immovable property to satisfy debts owed to a borrower.

According to Section 9 of the Banking Regulation Act, banks are prohibited from holding such non-bank assets for a specified period. It said in May that the idea behind the draft guidelines was to clarify the prudential treatment of such assets.

In its proposal, the RBI said that such specified non-financial assets will be acquired only in cases where the exposure of the regulated entity to the borrower is classified as non-performing and where other means of recovery have been explored and are considered non-viable.

On Thursday, the RBI said it had received feedback that such acquisitions should be allowed even for assets classified as SMA (special mention account). “The acquisition of SNFA is strictly a last resort and not a primary recovery tool and therefore it may not be prudent to allow the same for standard or SMA accounts,” the company said.

As per RBI norms, borrowers have to be placed under SMA on the basis of repayment delay. Special mention loans on account-0 (SMA-0) are those where the maturity is between one and 30 days, SMA-1 (from 31 to 60 days) and SMA-2 (61-90 days).

In addition, the central bank also suppressed the requirement that lenders can sell these assets back to the borrower or its related parties. It said it could create moral hazard and weaken credit discipline by giving defaulters a preferential opportunity to recover assets. The regulator’s position here is in line with what is prohibited under Section 29A of the Insolvency and Bankruptcy Code, which prohibits promoters from buying back assets in default.

Lenders also sought to include movable assets under this framework but did not get RBI’s approval. The RBI said it had received feedback that a separate framework could safeguard assets acquired under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI) where there are legal disputes; and for rural and industrial assets where transfer restrictions exist.

“Given the highly depreciated nature of movable assets (other than gold and investments) and shorter economic lives, there may be little incentive to take ownership of such assets unless the same can be immediately used for the regulated entity’s own use,” he said.

In addition, the RBI said there is already a separate regulatory framework for gold and securities to govern the prudential aspects of these assets. “Assets that are subject to legal dispute or where there are transfer restrictions would not meet the SNFA criteria, which requires a clear transfer of ownership to a regulated entity.

According to the RBI, the bank will have to divest these assets within seven years and should make every effort to do so as soon as possible through public auction.