The Reserve Bank of India has issued new local area bank income rules through its Second Amendment Directions, 2026, effective October 1, 2026. These changes directly affect how Local Area Banks (LABs) recognise income from Specified Non-Financial Assets (SNFAs). The notification was released on July 16, 2026, under RBI reference DOR.STR.REC.167/21-04-048/2026-27.
Key Changes to Income Recognition for Local Area Banks
Under the new local area bank income rules, banks can no longer recognise accrued but unrealised interest or charges from exposures that existed before an SNFA was acquired. This means any such income recorded before the asset acquisition date must not appear as income upon acquisition. Additionally, the RBI has set a clear deadline for correcting past entries.
Where such income has already been recognised for any SNFA still on a bank’s books as of September 30, 2026, the bank must reverse it through the Profit and Loss account. This reversal must happen no later than September 30, 2027. Therefore, banks have a one-year window to clean up their income statements accordingly.
Furthermore, any income actually received from an SNFA must be classified strictly as non-interest or other income. Banks must record this only in the financial year in which they realise the income. Similarly, any expenses incurred for maintaining an SNFA must be accounted for in the same year those expenses arise.
What This Means for Customers and Stakeholders
These updated local area bank income rules aim to improve transparency in financial reporting. As a result, stakeholders can expect cleaner balance sheets and more accurate profitability figures from LABs. However, banks will need to act quickly to audit existing SNFA-related income entries before the September 2026 cutoff.
The RBI introduced these directions under Sections 21 and 35A of the Banking Regulation Act, 1949. The central bank stated it considers these changes necessary and expedient in the public interest. Meanwhile, these amendments align with the broader RBI stress asset resolution framework updated on the same date.
Local Area Banks operating in semi-urban and rural regions should review their current income recognition practices immediately. For example, any unrealised interest booked against an SNFA exposure needs urgent assessment. Overall, compliance with these directions will strengthen the credibility of LABs’ financial disclosures going forward.
Read the official RBI notification here.
Source: RBI Notifications
