Why RBI wants Banks to sell Seized Properties within 7 years?

Key Takeaways 
 

1. The RBI has proposed that banks and NBFCs can hold non-financial assets, such as seized collateral, for a maximum of 7 years before selling them.
    
2. There was no clear regulatory limit earlier on how long lenders could keep such seized assets.

Why this rule could reshape how banks handle Bad Loans?

Banks often seize property kept as collateral when borrowers default on loans. But holding these assets for too long creates several risks. It locks up capital and reduces transparency in the banking system.

The RBI’s draft directions, released on May 6, 2026, aim to address this issue. However, banks in slow or illiquid real estate markets may still face challenges. Selling assets within seven years at fair prices may not always be easy.

What does this mean for Indian borrowers?

This rule directly affects how banks recover money from loan defaulters. Here are the key rules proposed: 
 

This move increases accountability for borrowers. Banks will now need to actively sell seized assets through public auctions. This prevents properties from remaining stuck for years without resolution.

It also means faster recovery cycles, which can ease the load of bad loans on the banking system. India’s gross NPA ratio of scheduled commercial banks had already fallen to a historic low of 2.15% as of September 2025, per PIB data. This rule can help sustain that trend. 

What experts are saying and what needs to change?

Amey Pathak, Partner and Head of Banking at Cyril Amarchand Mangaldas, called the seven-year limit “pragmatic and commercially sensible.” He said the rule gives banks enough flexibility in slow property markets. 

Rohit Jain, Managing Partner at Singhania and Co., compared the proposal with Section 29A of the Insolvency and Bankruptcy Code. This section prevents defaulting promoters from regaining assets. 

However, he also warned that a complete ban on selling assets back to borrowers may hurt price discovery. This can happen if the borrower is willing to pay the highest value.

Conclusion 

The RBI’s proposed 7-year limit on holding non-financial assets is an important reform. It introduces structure in an area that previously lacked clear rules. The proposal can help reduce long-term asset buildup in the banking system. It may also improve transparency for depositors and investors.

The deadline for feedback on the draft rules is May 26, 2026. If approved, the framework could improve stressed loan resolution outside the formal insolvency process.

FAQs

1. Should investors consider RBI floating rate bonds after the new RBI asset recovery proposals?

RBI floating rate bonds may suit conservative investors looking for stable and government-backed returns. However, investors should still compare interest rates, inflation, and liquidity before investing.

2. How can stressed companies qualify under RBI restructuring schemes for bad loans?

Stressed companies usually need to show financial viability, repayment capacity, and a credible revival plan to qualify. Banks also assess cash flows, management quality, and whether the restructuring can improve loan recovery.