The Reserve Bank of India (RBI), on Thursday, advised banks not to sell non-performing assets (NPAs) much lesser than the value of available securities.

The banking regulator said each banks’ boards are required to lay down policies and guidelines covering among other things, valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated, based on assessed cash flows arising out of repayments and recovery prospects.

No justification given

However, it has come to notice that in some cases NPAs have been sold for much less than the value of available securities and no justification has been given, the central bank added.

While selling NPAs, RBI said banks should 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. Simply put, the sale price should generally not be lower than net present value arrived at in the manner described above.

Same principle should be used in compromise settlements. As payment of the compromise amount may be in installments, the net present value of settlement amount should be calculated and this amount should generally not be less than the net present value of the realisable value of securities.

RBI had issued guidelines on trading of NPAs, in order to increase the options available to banks for resolving their NPAs and to develop a healthy secondary market for non-performing assets.

Where securitisation companies and reconstruction companies are not involved, it has been decided to issue guidelines to banks on purchase or sale of NPAs.  Since sale or purchase of non-performing financial assets under this option would be conducted within the financial system.

The whole process of resolving NPAs and matters related thereto has to be initiated with due diligence and care, warranting the existence of a set of clear guidelines, which shall be complied with by all entities, the RBI said.