RBI Tightens NBFC Provisioning: Cash-Only Income on Stressed Assets from October 2026
The RBI's third amendment to NBFC IRAC Directions (effective 1 October 2026) ends accrual-basis income recognition on acquired stressed assets and mandates cash-basis income only. NBFCs holding Specified Non-Financial Assets must reverse previously recognised unrealised income by 30 September 2027.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Non-Banking Financial Companies – Income Recognition, Asset Classification and Provisioning (IRAC) Third Amendment Directions, 2026 (RBI Circular No. RBI-ecb-filings))/2026-27/197; DOR.STR.REC.162/21-04-048/2026-27) — Effective: 1 October 2026. Source: https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=13575. Last reviewed by CA Harun Raaj: August 2026.
Key point: From 1 October 2026, NBFCs cannot recognise accrued interest or unrealised income when acquiring stressed assets; only cash receipts qualify as income going forward, and existing accrued amounts must be reversed by 30 September 2027.
The Reserve Bank of India issued the Non-Banking Financial Companies – Income Recognition, Asset Classification and Provisioning (IRAC) Third Amendment Directions, 2026 on 16 July 2026 (Circular No. RBI/2026-27/197), effective 1 October 2026. The amendment introduces new prudential norms for Specified Non-Financial Assets (SNFAs) — assets acquired by NBFCs in settlement of defaulted loans — and clarifies how Default Loss Guarantee arrangements interact with Expected Credit Loss provisioning under Ind AS 109.
This circular directly affects NBFCs under the RBI Scale-Based Regulation framework that hold, or are likely to acquire, non-financial assets as part of stressed-asset resolution.
What Is a Specified Non-Financial Asset (SNFA)?
When a borrower defaults and an NBFC enforces its security interest under the SARFAESI Act, 2002 or a court decree, the NBFC may acquire the mortgaged or pledged asset — land, building, machinery, vehicle — in settlement of the outstanding loan. This acquired asset, now held on the NBFC's balance sheet as a non-financial asset, is a Specified Non-Financial Asset (SNFA).
NBFCs most likely to hold SNFAs include those with significant portfolios in:
- Loan Against Property (LAP)
- MSME term loans secured by plant and machinery
- Construction finance
- Commercial vehicle and equipment finance
What Changed: New Sections 40C and 40D
Section 40C — No Accrued Income at Acquisition
Under prior practice, an NBFC could carry forward accrued interest receivable on a defaulted loan and recognise it as income upon acquiring the underlying security as an SNFA. Section 40C ends this practice.
From 1 October 2026: accrued but unrealised interest, fees, and charges from the prior loan exposure cannot be recognised as income when the SNFA is acquired. The logic aligns with Ind AS 109 (IFRS 9 equivalent): unrealised income on a credit-impaired asset does not meet the recognition criteria under effective interest rate methodology.
Transitional rule for existing SNFAs: Any NBFC that has already recognised such income on SNFAs held as on 30 September 2026 must reverse this amount through the Profit and Loss account by 30 September 2027 at the latest. This is a hard compliance deadline.
Section 40D — Cash-Basis Income Going Forward
Section 40D establishes that any income generated by an SNFA going forward — rent from a repossessed property, proceeds from an auctioned machine — is recognised as non-interest income only when actually received. Pure cash basis for income. Expenses for SNFA upkeep (maintenance, security, property tax) continue to be recognised when incurred (accrual basis for costs, cash basis for income).
This separation reflects the principle that sunk costs on the prior loan are distinct from future economic returns on the acquired asset.
The DLG Clarification
A second change addresses Default Loss Guarantee (DLG) arrangements — common in NBFC-fintech co-lending partnerships. The amendment clarifies: NBFCs may consider DLG coverage when computing Expected Credit Loss (ECL) provisions under Ind AS 109 across all stages (Stage 1, 2, and 3), provided:
- The DLG is integral to the original loan contract — not added post-sanction or as a side arrangement
- The DLG qualifies as a financial guarantee under Ind AS 107 (disclosures) and Ind AS 109 (recognition)
For NBFCs with structured fintech partnerships where an FLDG (First Loss Default Guarantee) is built into the origination agreement, this clarification permits provision reduction — subject to documentation being watertight and compliant with Ind AS standards.
Key Compliance Milestones
Illustrative Example
Ratan Finance Pvt Ltd (Illustrative Example), an NBFC-ICC based in Pune with a portfolio of SME-secured loans, holds three repossessed commercial properties (SNFAs) acquired in FY 2023-24 through SARFAESI proceedings. Prior to this amendment, accrued interest from the defaulted loans — approximately ₹38 lakh — was carried in Ratan's books as income receivable.
Under Section 40C, Ratan must: (1) review all three SNFA files by 30 September 2026; (2) reverse ₹38 lakh through P&L no later than 30 September 2027; (3) going forward, recognise only actual rent received from the properties (currently ₹6 lakh per year from two tenanted properties) as income. The third property, vacant, generates zero income until disposed.
Action Items for NBFC Compliance Teams
- Audit the SNFA register. Pull a list of all SNFAs as of 30 September 2026, with the date of acquisition and any accrued income recorded at acquisition.
- Calculate the reversal quantum. Identify the total accrued interest, fees, and charges recognised upon SNFA acquisition. This figure must be reversed by 30 September 2027.
- Update cash-basis accounting policies. Amend the accounting manual to document that SNFA income is recognised only on actual receipt, effective 1 October 2026.
- Review DLG documentation. If your NBFC uses Default Loss Guarantees in co-lending, verify that DLG clauses are embedded in the original loan sanction letter and meet Ind AS 109 criteria for financial guarantees.
- Engage your auditor early. The reversal of accrued income will impact profit and loss and requires audit sign-off; coordinate with your statutory auditor before 30 September 2027.
I'm CA Harun Raaj, Visakhapatnam. If your NBFC holds SNFAs or uses DLG structures, reach out — I can help you map the compliance roadmap and ensure the 30 September 2027 reversal is completed without audit friction.
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See Also
Frequently Asked Questions
Which NBFCs are in scope for the SNFA income recognition rules?+
The NBFC IRAC Directions apply to NBFCs in the Middle Layer and Upper Layer under the RBI Scale-Based Regulation framework. Base Layer NBFCs (NBFC-BL with asset size below ₹500 crore) should verify applicability from the SBR Master Direction. Deposit-Taking NBFCs are fully in scope. Consult your auditor if you are unsure of your NBFC's regulatory classification.
What is a Specified Non-Financial Asset (SNFA)?+
An SNFA is a non-financial asset (land, building, machinery, vehicle) acquired by an NBFC in settlement of a defaulted loan through enforcement under SARFAESI Act, 2002 or court decree. Once acquired, the asset is reclassified from the loan portfolio to the non-financial assets schedule of the balance sheet and is subject to the new income recognition rules from 1 October 2026.
Can I recognise accrued interest as income when I acquire an SNFA from 1 October 2026?+
No. Section 40C of the amended IRAC Directions prohibits recognition of accrued interest, fees, and charges from the prior loan exposure when the SNFA is acquired. If you have already recognised such income on SNFAs held as of 30 September 2026, you must reverse it through the Profit and Loss account by 30 September 2027.
Is a Default Loss Guarantee (DLG) added after loan origination eligible for ECL offset?+
No. The amendment clarifies that only DLGs integral to the original loan contract — embedded in the sanction letter and qualifying as a financial guarantee under Ind AS 107 and Ind AS 109 — are eligible for Expected Credit Loss offset. Post-hoc DLG additions do not qualify.
What is the deadline for reversing accrued income on SNFAs already on my books?+
The hard deadline is 30 September 2027. Any NBFC that recognised accrued income on SNFAs held as of 30 September 2026 must reverse this amount through the Profit and Loss account by this date. This is not aspirational; non-compliance may attract RBI enforcement action.
How do I recognise income from a rented SNFA (repossessed property) under the new rules?+
Under Section 40D, SNFA income is recognised only when actually received (cash basis). Rent from a rented property is recognised as non-interest income only when the cash rent payment is received. Expenses for upkeep (maintenance, property tax, security) are recognised when incurred (accrual basis).
When do the new SNFA rules apply — to SNFAs acquired on or after 1 October 2026, or to all SNFAs on my balance sheet?+
Sections 40C and 40D apply to all SNFA transactions from 1 October 2026 onwards. SNFAs already held as of 30 September 2026 are subject to the transitional reversal rule: any accrued income recognised at acquisition must be reversed by 30 September 2027. Future acquisitions follow the cash-basis rule immediately.
What happens if I miss the 30 September 2027 reversal deadline?+
Non-compliance with RBI prudential directions can attract enforcement action under the Reserve Bank of India Act, 1934 and the NBFC Master Direction framework. RBI has discretion on compounding and penalty quantum based on materiality and intent. Proactive compliance is strongly recommended.
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