Reserve Bank of India (the "RBI") vide its Circular No. RBI 2016-17/56 DBR.No. BP.BC.9/21.04.048/2016-17 dated September 1, 2016 on "Guidelines on Sale of Stressed Assets by Banks" (the "Circular") amended the existing guidelines relating to sale of non- performing assets ("NPAs") by banks to securitization companies ("SCs")/ reconstruction companies ("RCs") notified vide RBI's circular dated February 26, 2014 (the "Earlier Circular") and issued revised framework governing sale of NPAs by banks to SCs/RCs/non-banking financial companies (NBFCs)/financial institutions ("FIs")/etc.

The salient features of the revised Circular are as follows:

  1. At least once a year (preferably at the beginning of the year) banks with the approval of its board are required to identify the stressed assets of a specified value, which could be determined as NPAs as per the banks policy (including special mention account), and need to be offered for sale to other banks/ NBFCs/FIs/SCs/RCs/etc.;

Under the Earlier Circular, sale of stressed assets was restricted to SCs and RCs only, however under the Circular, now banks may also offer the assets to other banks/NBFCs/FIs/etc.

  1. At a minimum, all assets classified as 'doubtful assets' above a threshold amount need to be reviewed by the board/board committee of banks on a periodic basis and take a view on them with the documented rationale;
  2. Invitation for bids for sale of NPAs need to be preferably publicly solicited and banks may use e-auction platforms;
  3. Banks are required to set in place clear policies pertaining to :
    1. valuation of the stressed assets that are proposed to be sold;
    2. external or internal valuation of stressed assets, provided however where asset size is beyond Rs. 50 crores, then two external valuation reports are required;
  4. To ensure sale of stressed assets as 'true sale' and vibrant assets market, banks need to have progressive reduction in its investment in the security receipts backed by their own assets.
  5. To aggregate the debt faster and bring down the vintage of NPAs sold by banks :
    1. Bank offering the stressed asset for sale need to offer first right of refusal to a SCs/RCs which have already acquired the highest and significant share (25%-30%) of the asset for acquiring the asset by matching the highest bid;
    2. The banks to put in place a board approved policy for adoption of the Swiss Challenge Method for sale of their stressed assets to SCs/RCs/non-banking financial companies (NBFCs)/financial institutions (FIs) etc. The broad contours of the Swiss Challenge Method is provided in the Circular.
  6. Although the Earlier Circular do not prohibit banks from taking over standard accounts from SCs/RCs, banks may, at their discretion take over the assets from SCs/RCs (which have been successfully implemented/restructured by SCs/RCs) after the 'specified period' (as defined under the extant restructuring guidelines of RBI) provided the account performed satisfactorily during the 'specified period'.

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