Notifications

DBOD.NO.BP. 1598 / 21.04.048/ 2004-05

2. These guidelines are being issued as a draft for feedback from all concerned. The draft will be open for comments for a period of four weeks from the date of this letter. Comments on the draft guidelines may be addressed to the undersigned at the address given below. Comments can also be sent by email to bsivakumar@rbi.org.in and pjthomas@rbi.org.in.

Yours faithfully,

(Prashant Saran)
Chief General Manager

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 headings:

i. Procedure for purchase/ sale of non performing financial assets by banks, including valuation and pricing aspects.

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

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 purchased/ sold;

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. 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.

iv. 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.

v. 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.

vi. 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.

vii. 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 bank.

viii. Banks shall sell non performing financial assets to other banks only on cash basis.

ix. 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.

x. An asset may be deemed to have demonstrated its performing status with reference to cash flows estimated while purchasing the asset.

xi. 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.

i. The non performing financial asset may be classified as ‘standard’ in the books of the purchasing bank for a period of 90 days from the date of purchase. The asset classification status of an existing exposure 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.

ii. Thereafter, the asset classification status of the account 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.

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/ rephase of the repayment schedule of the non performing financial asset shall render the account as a non performing asset.

i. When a bank sells its non performing financial assets to other banks, the same will be removed from its books on transfer.

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 financial assets.