Guidelines on Sale/Purchase of NPAs
The Master Circular on Advances require the Board of Directors of the banks to lay down policy in respect of the aspects relating to sale/ purchase of NPAs, including:
(a) Non-performing financial assets that may be purchased/ sold;
(b) Norms and procedure for purchase/ sale of such financial assets;
(c) Valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated based on the estimated cash flows arising out of repayments and recovery prospects;
(d) Delegation of powers of various functionaries for taking decision on the purchase/ sale of the financial assets etc.; and
(e) Accounting policy.
RBI also casts a responsibility on the Board to satisfy itself that the bank vhas adequate skills to purchase non-performing financial assets and deal with them in an efficient manner which will result in value addition to the bank.
Banks should, while selling NPAs, work out the net present value of the estimated cash flows associated with the realisable value of the available
securities net of the cost of realisation. The sale price should generally not be
lower than the net present value so arrived.
The estimated cash flows are normally expected to be realised within a period of three years and at least 10% of the estimated cash flows should be realised in the first year and at least 5% in each half year thereafter, subject to full recovery within three years.
A bank may purchase/sell nonperforming financial assets from/to other banks only on ‘without recourse’ basis, i.e., the entire credit risk associated with the nonperforming financial assets should be transferred to the purchasing bank. Selling bank shall ensure that the effect of the sale of the financial assets should be such that the asset is taken off the books of the bank and after the sale there should not be any known liability devolving on the selling bank.
Banks should ensure that subsequent to sale of the non-performing financial assets to other banks. They do not have any involvement with reference to assets sold and do not assume operational, legal or any other type of risks relating to the financial assets sold. Consequently, the specific financial asset should not enjoy the support of credit enhancements / liquidity facilities in any form or manner.
Under no circumstances can a sale to other banks be made at a contingent price whereby in the event of shortfall in the realisation by the purchasing banks, the selling banks would have to bear a part of the shortfall.
Further, NPAs can be sold to other banks only on cash basis. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration.
A non-performing financial asset should be held by the purchasing bank in its books at least for a period of 15 months before it is sold to other banks.Banks should not sell such assets back to the bank, which had sold the NPFA.
Banks are also permitted to sell/buy homogeneous pool within retail non-performing financial assets, on a portfolio basis provided each of the nonperforming financial assets of the pool has remained as non-performing financial asset for at least 2 years in the books of the selling bank. The pool of assets would be treated as a single asset in the books of the purchasing bank.
The selling bank should pursue the staff accountability aspects as per the existing instructions in respect of the non-performing assets sold to other banks. Prudential norms for banks for the purchase/sale transactions issued by RBI, from time to time, should be adhered to.
As per the Master Circular on Prudential Norms on Advances dated July 1, 2015, if the sale is in respect of Standard Asset and the sale consideration is higher than the book value, the excess provisions may be credited to Profit and Loss Account. Excess provisions which arise on sale of NPAs can be admitted as Tier II capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets. Accordingly, these excess provisions that arise on sale of NPAs would be eligible for Tier II status.