RBI issues draft rules for acquiring immovable assets against loans: What they mean for lenders and borrowers

The Reserve Bank of India (RBI) on Tuesday issued draft guidelines for acquisition of immovable assets by regulated entities – such as banks NBFCs and other licensed lenders – in exceptional cases as part of loan recovery processes.

Usually, regulated entities (REs) don't take possession of non-financial assets such as houses, land, machinery, etc. in lieu of their regular lending operations. However, there are exceptions — when the assets become non-performing, or when the borrower has stopped making payments and the lenders have resorted to invoking legal remedies.

In such cases, REs can take possession of an immovable asset furnished as collateral security as part of the recovery strategy.

What RBI proposed

According to RBI's draft 'Prudential Norms on Specified Non-financial Assets Directions,' REs should dispose of such assets in a control and timely fashion, on an arm's length basis to ensure maximum net recovery. The process should be transparent and financially prudent.

"Only exposures classified as non-performing, in respect of which other recovery options have been explored and assessed to be unviable, shall be eligible for extinguishment in terms of these directions," the draft said. The draft guidelines are currently open to public view and suggestions.

RBI also laid ground rules for how these seized assets must be handled, including how long the lenders can keep them, and who is banned from buying them back.

An immovable asset acquired by an RE, in full or part satisfaction of what the borrower owes the lends, is called a Specified Non-financial asset or SNFA.

What it means for borrowers

Under the proposed framework, REs can acquire SNFAs in lieu of full or partial extinguishment of their claims against the borrower.

In simple words, this is what it means: Suppose a borrower took a loan of ₹1 crore from a bank, and was not able to pay it back. As a last resort, the bank can take possession of the borrower's non financial asset, say a house, as part of the recovery strategy. Now, if the house is worth ₹1 crore, the debt is fully extinguished. But if the house is worth less, the debt is partially extinguished and the borrower will still owe the bank the difference, which will again be treated as a restructured loan and subject to existing norms.

RBI's draft rules proposed a maximum holding period of seven years to ensure that REs dispose of SNFAs timely.

"To mitigate moral hazard, REs shall be prohibited from selling the SNFA back to the borrower or to any related party of the borrower," the draft added.

The draft norms have been issued to provide clarity on prudential treatment of such assets, the central bank said while inviting comments by May 26.

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