The Reserve Bank of India has issued updated directions on local area bank stressed assets, introducing clear prudential norms for non-financial assets acquired from borrowers. These Second Amendment Directions, 2026, take effect from October 1, 2026. They add important rules that local area banks must now follow when dealing with immovable properties seized in lieu of unpaid loans.
Key Details of the Local Area Bank Stressed Assets Rules
The RBI has formally defined a new term: Specified Non-Financial Asset (SNFA). An SNFA is any immovable property a bank acquires to recover dues from a non-performing borrower. Additionally, banks must now build a board-approved policy covering acquisition limits, eligibility criteria, and a disposal timeline. Importantly, disposal must happen within seven years.
Valuation rules are now strictly defined. A bank must record an SNFA at the lower of the net book value of the extinguished loan or the distress sale value assessed by at least two independent valuers. Therefore, banks cannot overstate the value of seized assets on their balance sheets. This approach protects both the bank and its depositors.
For partial loan extinguishment, the RBI has provided a step-by-step example. For instance, if a bank extinguishes 75% of a ₹2 lakh loan through an SNFA worth ₹1.4 lakh, it records the SNFA at ₹1.275 lakh. Meanwhile, the residual loan balance stays on the books with proportionate provisions.
What This Means for Customers and Banks
Banks must sell SNFAs through public auctions, following SARFAESI Act principles. However, they cannot sell the asset back to the original borrower or related parties — even after the asset exits SNFA classification. This restriction prevents potential misuse or circular transactions.
As a result, banks gain a cleaner framework for managing distressed property assets. Legacy SNFAs already on books as of September 30, 2026, must comply with these new norms by September 30, 2027. Additionally, SNFAs converted to the bank’s own use shift to the ‘Fixed Assets’ accounting head and exit SNFA classification.
For disclosure, SNFAs must appear separately in the balance sheet as non-banking assets acquired in satisfaction of claims. They must not be clubbed with Gross NPA or Net NPA figures. Banks must also report SNFA details on the RBI’s CIMS portal using prescribed formats.
These amendments bring much-needed regulatory clarity to how local area banks handle stressed immovable assets.
Source: RBI Notifications
