If a borrower loses a mortgaged property after defaulting on a loan, banks will have to follow a stricter and more transparent process for valuing, holding and selling the asset under new Reserve Bank of India (RBI) rules. Effective from October 1, the framework seeks to prevent banks from holding seized properties indefinitely and bars them from selling such assets back to the defaulting borrower or related parties.
The norms apply to immovable properties acquired by banks during the recovery of bad loans and are aimed at ensuring faster disposal, transparent sales and prudent accounting.
The RBI said banks are not expected to own non-financial assets as part of their regular lending business. The new framework aims to:
Bring uniformity in the treatment of immovable assets acquired during loan recovery
Ensure transparent valuation and disposal
Prevent banks from holding such assets for long periods
Strengthen credit discipline and improve recovery practices
The directions apply only after a bank has legally acquired ownership of a mortgaged property through recovery proceedings.
Banks can no longer retain seized properties indefinitely.
Every bank must have an internal policy on disposal of such assets.
The property must be sold within the timeline prescribed by the bank, subject to a maximum period of seven years.
The RBI has asked banks to make every effort to dispose of these assets much earlier wherever possible.
To ensure transparency and fair price discovery, banks are expected to sell acquired properties through public auctions.
This is intended to:
Improve transparency
Maximise sale value
Reduce the possibility of preferential or opaque transactions
One of the most significant provisions is the prohibition on selling the acquired property back to:
The defaulting borrower
Related parties connected to the borrower
The RBI rejected suggestions to allow borrowers to repurchase such properties, saying it could create moral hazard and weaken credit discipline by giving defaulters an unfair advantage.
Banks must follow conservative valuation principles after taking possession of a property.
The asset must be recorded 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 rule is designed to prevent overvaluation and ensure prudent accounting.
The framework applies only after:
A loan has become a non-performing asset (NPA)
The bank has invoked legal or contractual recovery mechanisms
Ownership of the mortgaged property has been transferred to the bank
The RBI clarified that the new directions do not change the legal rights available to borrowers before ownership is transferred under laws such as the SARFAESI Act.
The new RBI framework will come into force on October 1, 2026. It is expected to make the disposal of seized properties faster, more transparent and more accountable while ensuring banks do not accumulate non-financial assets on their balance sheets.
