RBI Issues Second Amendment to Income Recognition, Asset Classification and Provisioning Directions for Small Finance Banks, 2026

Introduction

The Reserve Bank of India has notified the Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Second Amendment Directions, 2026 vide circular RBI/2026-27/196, DOR.STR.REC.161/21-04-048/2026-27, dated July 16, 2026. The amendment introduces a new framework for income recognition in respect of Specified Non-Financial Assets (SNFA) acquired by Small Finance Banks.

Background

The amendment has been issued consequent to the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Second Amendment Directions, 2026, also dated July 16, 2026. In exercise of the powers conferred by Sections 21 and 35A of the Banking Regulation Act, 1949, and all other enabling laws, the Reserve Bank, being satisfied that it is necessary and expedient in the public interest to do so, has issued these Amendment Directions.

Key Amendment

A new provision, "E1. Income Recognition in case of acquisition of Specified Non-Financial Assets (SNFA)," has been inserted in Chapter V – Income Recognition of the principal Directions, comprising two new paragraphs:

Paragraph 133C

Any accrued but unrealised interest and/or charges from the extinguished exposure, pertaining to periods prior to acquisition of a Specified Non-Financial Asset, shall not be recognised as income upon acquisition of the SNFA. Where such income has been recognised in respect of any SNFA outstanding in the books of a bank as on September 30, 2026, it shall be reversed through the Profit and Loss account, latest by September 30, 2027, to the extent it remains unrealised as on that date.

Paragraph 133D

Any income received from an SNFA shall be recognised in the income statement as "non-interest / other income," in the financial year in which it is realised. Similarly, any expense incurred towards upkeep of an SNFA shall be accounted for in the income statement in the financial year in which it is incurred.

Effective Date

The amendment shall come into force with effect from October 1, 2026.

Analysis

The amendment addresses a specific accounting concern arising in the context of stressed asset resolution, where a Small Finance Bank acquires a non-financial asset in extinguishment of a loan exposure. Under the revised framework:

Aspect	Treatment
Unrealised interest/charges accrued prior to SNFA acquisition	Not to be recognised as income on acquisition
Previously recognised such income (on SNFAs outstanding as on September 30, 2026)	To be reversed through P&L, latest by September 30, 2027, to the extent unrealised
Income realised from SNFA post-acquisition	Recognised as non-interest/other income in the year of realisation
Expenses on upkeep of SNFA	Recognised in the year incurred

The effect of this framework is to delink income recognition from the accrual basis in respect of stale, unrealised amounts carried over from an extinguished exposure, and to align recognition strictly with actual realisation. This is consistent with the broader prudential objective of ensuring that reported income of Small Finance Banks reflects genuine cash-backed realisation rather than notional or unrealised accruals inherited through asset acquisition in stressed asset resolution.

Conclusion

Small Finance Banks engaging in resolution of stressed assets through acquisition of non-financial assets should review their income recognition policies to ensure compliance with the newly inserted paragraphs 133C and 133D with effect from October 1, 2026. Banks carrying unrealised income recognised in respect of SNFAs outstanding as on September 30, 2026 should specifically account for the mandated reversal by September 30, 2027.