Mumbai: The Reserve Bank of India (RBI) has introduced a new prudential framework governing how banks should manage, value and dispose of immovable properties acquired while recovering defaulted loans. Under the new rules, banks will no longer be allowed to retain such properties indefinitely and will generally have to dispose of them within a maximum period of seven years.
The directions will come into effect from October 1, 2026, and apply to houses, commercial buildings and other immovable assets that come into a bank’s ownership through the recovery of stressed loans.
New framework for seized properties
The RBI said banks are primarily financial institutions and are not expected to hold non-financial assets such as immovable property as part of their regular business.
Accordingly, the central bank has prescribed a uniform framework for the acquisition, valuation, management and disposal of properties that banks obtain while recovering loan dues.
Every bank will be required to formulate a Board-approved policy covering the entire process, including internal approval mechanisms, valuation procedures and timelines for disposing of such assets.
Maximum holding period of seven years
One of the key provisions of the framework is the time limit for retaining acquired properties.
Banks must dispose of immovable properties within the period specified in their Board-approved policy, subject to a maximum limit of seven years from the date of acquisition.
The RBI has also directed lenders to make genuine efforts to sell these assets at the earliest instead of keeping them on their balance sheets for prolonged periods.
The move is aimed at ensuring that banks focus on their core lending activities rather than accumulating real estate assets.
Public auction to be the preferred method
To improve transparency in the sale process, the RBI has stated that banks should ordinarily dispose of acquired immovable properties through public auctions.
The regulator believes that public auctions promote fair price discovery, reduce disputes and ensure greater transparency in the disposal of assets.
Banks may adopt other legally permissible methods where appropriate, subject to the provisions of their Board-approved policies.
Defaulting borrowers cannot repurchase properties
A significant feature of the new framework is the restriction on selling the property back to the original borrower.
The RBI has categorically stated that banks cannot sell an acquired immovable property to the defaulting borrower or any related party.
The central bank said it had examined suggestions received during the consultation process seeking permission for borrowers to repurchase such properties.
However, it rejected the proposal, stating that allowing borrowers to regain ownership of assets after default could create a moral hazard and weaken credit discipline.
According to the RBI, such a practice could encourage strategic defaults by creating an expectation that borrowers might eventually recover the same property through preferential treatment.
Uniform valuation process introduced
The framework also prescribes a standard methodology for valuing acquired properties.
When ownership is transferred to a bank, the property must be recognised at the lower of:
- The net book value of the extinguished loan, or
- The distress sale value determined by at least two independent external valuers.
The RBI said the valuation requirement is intended to promote prudent accounting practices and ensure realistic recognition of assets in banks’ financial statements.
Legal rights of borrowers unchanged
The RBI clarified that the new framework applies only after legal ownership of the property has passed to the bank under the applicable loan recovery mechanism.
The directions do not alter the legal rights, remedies or protections available to borrowers before ownership is transferred.
Existing recovery laws, including the SARFAESI Act, will continue to govern the recovery process until the property legally vests with the lending institution.
Objective of the new rules
The RBI said the framework is intended to bring greater consistency, transparency and prudence in the handling of immovable properties acquired through loan recovery.
By prescribing timelines, valuation standards and disposal procedures, the central bank aims to reduce prolonged ownership of non-financial assets by banks while strengthening governance and improving the management of stressed assets.
The new directions are expected to streamline the recovery process, improve balance sheet management for banks and reinforce credit discipline among borrowers.