DBOD.NO.BP. BC. 16 / 21.04.048/ 2005-06
13 July 2005
All Commercial Banks (excluding RRBs)
All India Term Lending and Refinancing Institutions
All Non Banking Financial Companies (including RNBCs)
Guidelines on purchase/sale
of Non Performing Assets
In order to increase the options
available to banks for resolving their non performing assets and to develop
a healthy secondary market for non-performing assets, where securitisation companies
and reconstruction companies are not involved, it has been decided to issue
guidelines to banks on purchase / sale of Non-Performing Assets. Since the sale/purchase
of non-performing financial assets under this option would be conducted within
the financial system the whole process of resolving the non performing assets
and matters related thereto has to be initiated with due diligence and care
warranting the existence of a set of clear guidelines which shall be complied
with by all entities so that the process of resolving non-performing assets
by sale and purchase of NPAs proceeds on smooth and sound lines. Accordingly
guidelines on sale/purchase of non-performing assets have been formulated and
furnished in the Annexure. The guidelines may be placed before
the bank's/FI's /NBFC's Board at the next meeting and appropriate steps may
be taken for their implementation.
2. Please acknowledge receipt.
Chief General Manager
Guidelines on purchase/
sale of Non Performing Financial Assets
1. These guidelines would be applicable
to banks, FIs and NBFCs purchasing/ selling non performing financial assets,
from/ to other banks/FIs/NBFCs (excluding securitisation companies/ reconstruction
2. A financial asset, including assets under multiple/consortium
banking arrangements, would be eligible for purchase/sale in terms of these
guidelines if it is a non-performing asset/non performing investment in the
books of the selling bank.
3. The reference to ‘bank’ in the guidelines
would include financial institutions and NBFCs.
4. The guidelines to be followed
by banks purchasing/ selling non-performing financial assets from / to other
banks are given below. The guidelines have been grouped under the following
i. Procedure for purchase/ sale
of non performing financial assets by banks, including valuation and pricing
ii. Prudential norms, in the following areas,
for banks for purchase/ sale of non performing financial assets:
a. Asset classification norms
b. Provisioning norms
c. Accounting of recoveries
d. Capital adequacy norms
e. Exposure norms
iii. Disclosure requirements
5. Procedure for purchase/ sale
of non performing financial assets, including valuation and pricing aspects
i. A bank which is purchasing/
selling non-performing financial assets should ensure that the purchase/ sale
is conducted in accordance with a policy approved by the Board. The Board shall
lay down policies and guidelines covering, inter alia,
a. Non performing financial assets that may be
b. Norms and procedure for purchase/ sale
of such financial assets;
c. Valuation procedure to be followed to
ensure that the economic value of financial assets is reasonably estimated
based on the estimated cash flows arising out of repayments and recovery prospects;
d. Delegation of powers of various functionaries
for taking decision on the purchase/ sale of the financial assets; etc.
e. Accounting policy
ii. While laying down the policy,
the Board shall satisfy itself that the bank has adequate skills to purchase
non performing financial assets and deal with them in an efficient manner which
will result in value addition to the bank. The Board should also ensure that
appropriate systems and procedures are in place to effectively address the risks
that a purchasing bank would assume while engaging in this activity.
iii) The estimated cash flows
are normally expected to be realised within a period of three years and not
less than 5% of the estimated cash flows should be realized in each half year.
iv) A bank may purchase/sell non-performing
financial assets from/to other banks only on ‘without recourse’ basis, i.e.,
the entire credit risk associated with the non-performing financial assets should
be transferred to the purchasing bank. Selling bank shall ensure that the effect
of the sale of the financial assets should be such that the asset is taken off
the books of the bank and after the sale there should not be any known liability
devolving on the selling bank.
v) Banks should ensure that subsequent
to sale of the non performing financial assets to other banks, they do not have
any involvement with reference to assets sold and do not assume operational,
legal or any other type of risks relating to the financial assets sold. Consequently,
the specific financial asset should not enjoy the support of credit enhancements
/ liquidity facilities in any form or manner.
vi) Each bank will make its own
assessment of the value offered by the purchasing bank for the financial asset
and decide whether to accept or reject the offer.
vii) Under no circumstances can
a sale to other banks be made at a contingent price whereby in the event of
shortfall in the realization by the purchasing banks, the selling banks would
have to bear a part of the shortfall.
viii) A non-performing asset in
the books of a bank shall be eligible for sale to other banks only if it has
remained a non-performing asset for at least two years in the books of the selling
ix) Banks shall sell non-performing
financial assets to other banks only on cash basis. The entire sale consideration
should be received upfront and the asset can be taken out of the books of the
selling bank only on receipt of the entire sale consideration.
x) A non-performing financial asset
should be held by the purchasing bank in its books at least for a period of
15 months before it is sold to other banks. Banks should not sell such assets
back to the bank, which had sold the NPFA.
(xi) Banks are also permitted to
sell/buy homogeneous pool within retail non-performing financial assets, on
a portfolio basis provided each of the non-performing financial assets of the
pool has remained as non-performing financial asset for at least 2 years in
the books of the selling bank. The pool of assets would be treated as a single
asset in the books of the purchasing bank.
xii) The selling bank shall pursue
the staff accountability aspects as per the existing instructions in respect
of the non-performing assets sold to other banks.
6. Prudential norms for banks
for the purchase/ sale transactions
(A) Asset classification norms
(i). The non-performing financial
asset purchased, may be classified as ‘standard’ in the books of the
purchasing bank for a period of 90 days from the date of purchase. Thereafter,
the asset classification status of the financial asset purchased, shall
be determined by the record of recovery in the books of the purchasing bank
with reference to cash flows estimated while purchasing the asset which should
be in compliance with requirements in Para 5 (iii).
(ii). The asset classification
status of an existing exposure (other than purchased financial asset)
to the same obligor in the books of the purchasing bank will continue to be
governed by the record of recovery of that exposure and hence may be different.
(iii) Where the purchase/sale
does not satisfy any of the prudential requirements prescribed in these guidelines
the asset classification status of the financial asset in the books of the purchasing
bank at the time of purchase shall be the same as in the books of the selling
bank. Thereafter, the asset classification status will continue to be determined
with reference to the date of NPA in the selling bank.
(iv) Any restructure/reschedule/rephrase
of the repayment schedule or the estimated cash flow of the non-performing financial
asset by the purchasing bank shall render the account as a non-performing
(B) Provisioning norms
Books of selling bank
i. When a bank sells its non-performing
financial assets to other banks, the same will be removed from its books on
ii. If the sale is at a price below
the net book value (NBV) (i.e., book value less provisions held), the shortfall
should be debited to the profit and loss account of that year.
iii. If the sale is for a value
higher than the NBV, the excess provision shall not be reversed but will be
utilised to meet the shortfall/ loss on account of sale of other non performing
Books of purchasing bank
The asset shall attract provisioning
requirement appropriate to its asset classification status in the books of the
(C) Accounting of recoveries
Any recovery in respect of a non-performing
asset purchased from other banks should first be adjusted against its acquisition
cost. Recoveries in excess of the acquisition cost can be recognised as profit.
(D) Capital Adequacy
For the purpose of capital adequacy,
banks should assign 100% risk weights to the non-performing financial assets
purchased from other banks. In case the non-performing asset purchased is an
investment, then it would attract capital charge for market risks also. For
NBFCs the relevant instructions on capital adequacy would be applicable.
(E) Exposure Norms
The purchasing bank will reckon
exposure on the obligor of the specific financial asset. Hence these
banks should ensure compliance with the prudential credit exposure ceilings
(both single and group) after reckoning the exposures to the obligors arising
on account of the purchase. For NBFCs the relevant instructions on exposure
norms would be applicable.
7. Disclosure Requirements
Banks which purchase non-performing
financial assets from other banks shall be required to make the following disclosures
in the Notes on Accounts to their Balance sheets:
A. Details of non-performing
financial assets purchased:
(Amounts in Rupees crore)
1. (a) No. of accounts purchased
during the year
(b) Aggregate outstanding
2. (a) Of these, number of accounts
restructured during the year
(b) Aggregate outstanding
B. Details of non-performing
financial assets sold:
(Amounts in Rupees crore)
1. No. of accounts sold
2. Aggregate outstanding
3. Aggregate consideration received
C. The purchasing bank shall
furnish all relevant reports to RBI, CIBIL etc. in respect of the non-performing
financial assets purchased by it.