Guidelines on Sale of Financial Assets to Securitisation Company (SC)/Reconstruction Company (RC) and Related Issues: RBI

RBI/2014–15/634 DBR.No.FID.5/01.02.00/2014–15

June 11, 2015

Guide­lines on Sale of Finan­cial Assets to Secu­ri­ti­sa­tion Com­pa­ny (SC)/Reconstruction Com­pa­ny (RC) and Relat­ed Issues

Please refer to para­graph 3.4 of cir­cu­lar DBOD.BP.BC.No.98/21.04.132/2013–14 dat­ed Feb­ru­ary 26, 2014 and our sub­se­quent mail­box clar­i­fi­ca­tion dat­ed April 9, 2014 on the cap­tioned sub­ject. These guide­lines stip­u­lat­ed that, for non-per­form­ing assets (NPAs) sold on or after Feb­ru­ary 26, 2014 to SCs/RCs, banks can reverse the excess pro­vi­sion on sale of NPAs, if the sale val­ue is for a val­ue high­er than the net book val­ue (NBV).

2. In this con­nec­tion, atten­tion is invit­ed to para­graph 28 (extract enclosed) of the Sixth Bi-Month­ly Mon­e­tary Pol­i­cy State­ment, 2014–15 announced on Feb­ru­ary 03, 2015. As indi­cat­ed there­in, it has now been decid­ed to per­mit All-India Term Lend­ing and Refi­nanc­ing Institutions(AIFIs) to reverse the excess pro­vi­sion (when the sale is for a val­ue high­er than the NBV) on sale of NPAs (sold pri­or to Feb­ru­ary 26, 2014 to SCs/RCs) to their prof­it and loss account. We re-iter­ate that All India Finan­cial Insti­tu­tions can reverse excess pro­vi­sion aris­ing out of sale of NPAs only when the cash received (by way of ini­tial con­sid­er­a­tion and/or redemp­tion of secu­ri­ty receipts/pass through cer­tifi­cates) is high­er than the NBV of the NPAs sold to SCs/RCs. Fur­ther, the quan­tum of excess pro­vi­sion reversed to prof­it and loss account will be lim­it­ed to the extent to which cash received exceeds the NBV of the NPAs sold.

3. The quan­tum of excess pro­vi­sion reversed to the prof­it and loss account on account of sale of NPAs shall be dis­closed in the finan­cial state­ments of the bank under ‘Notes to Accounts’.

4. To enhance trans­paren­cy, it has been decid­ed that in addi­tion to the dis­clo­sure require­ments quot­ed in the above para­graph, All India Finan­cial Insti­tu­tions shall make the fol­low­ing dis­clo­sures in the Notes to Accounts in their Annu­al Finan­cial Statements:

(In Rs. Crore)
Par­tic­u­lars	Backed by NPAs sold by the AIFI as underlying		Backed by NPAs sold by banks / oth­er finan­cial insti­tu­tions / non-bank­ing finan­cial com­pa­nies as underlying		Total
	Pre­vi­ous Year	Cur­rent Year	Pre­vi­ous Year	Cur­rent Year	Pre­vi­ous Year	Cur­rent Year
Book val­ue of invest­ments in secu­ri­ty receipts

Yours faith­ful­ly,

(Rajin­der Kumar)
Chief Gen­er­al Manager

Encl: as above

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Extracts from Sixth Bi-month­ly mon­e­tary pol­i­cy State­ment, 2014–15

28. Under the Frame­work for Revi­tal­is­ing Dis­tressed Assets in the econ­o­my, banks were allowed in Feb­ru­ary 2014 to reverse the excess pro­vi­sion on sale of non-per­form­ing assets (NPAs) to secu­ri­ti­sa­tion companies/reconstruction com­pa­nies when the cash received (by way of ini­tial sale con­sid­er­a­tion and/or redemp­tion of secu­ri­ty receipt­s/­pass-through cer­tifi­cates) is high­er than the net book val­ue (NBV) of the asset, with a view to incen­tivis­ing banks to recov­er appro­pri­ate val­ue in respect of their NPAs, sub­ject to cer­tain con­di­tions. This dis­pen­sa­tion was, how­ev­er, avail­able on a prospec­tive basis, i.e., only with regard to NPAs sold on or after Feb­ru­ary 26, 2014. On a review and based on banks’ rep­re­sen­ta­tions in this regard, it has now been decid­ed to extend the above dis­pen­sa­tion to NPAs sold pri­or to Feb­ru­ary 26, 2014 also. Detailed guide­lines to this effect will be issued shortly.