RBI eases disaster loan recast norms, mandates 5% provisioning by banks, NBFCs

Mumbai: The Reserve Bank of India has allowed banks and non-bank lenders to restructure loans of borrowers hit by natural calamities without waiting for their requests, a move that gives lenders greater flexibility but comes with a 5% provisioning requirement.

The central bank on Wednesday issued final guidelines for resolution of exposures in disaster-hit areas, shifting to a principle-based framework that gives lenders discretion in designing and implementing resolution plans.

The revised rules will come into effect from 1 July 2026 and will apply prospectively, with existing restructured accounts continuing under the current framework unless a fresh plan is invoked. The RBI had issued draft directions on 27 January and sought feedback till 17 February.

Under the new norms, banks and non-banking financial companies (NBFCs) can extend relief measures to eligible borrowers suo motu, with borrowers given an opt-out window of 135 days from the date of declaration of the calamity.

Crucially, the RBI has clarified that lenders can factor in insurance payouts while restructuring loans and adjust these proceeds against restructured accounts, including where fresh loans are extended. “However, a bank may consider restructuring and sanctioning fresh loans without waiting for the actual receipt of the claim,” it said.

The framework applies to events recognized under the National Disaster Response Fund (NDRF) and State Disaster Response Fund (SDRF) mechanisms.

The RBI has also laid down strict timelines: resolution must be invoked within 45 days of the calamity declaration and implemented within 90 days thereafter. Lenders will also be required to make alternate arrangements to ensure continuity of banking services in affected areas.

Importantly, the central bank retained tight eligibility criteria, allowing restructuring only for ‘standard’ accounts that were not overdue by more than 30 days at the time of the calamity. It rejected industry requests to extend this to accounts overdue up to 89 days, stating that the intent is to support borrowers affected by external shocks rather than those already under stress.

“In any case, the revised framework is more relaxed than the extant norms. Interest income recognition in respect of such borrower accounts shall be on accrual basis,” RBI said, adding that lenders will need to make an additional specific provision of 5% of the outstanding debt against such borrower accounts, over and above the applicable prudential provisions.

The RBI also turned down requests to lower this to 2%, saying that a 5% provisioning requirement balances the heightened risk in such accounts “while not subjecting them to higher provisioning applicable to a regular restructured account”.

If a borrower undergoes repeated restructuring before provisions are reversed, the account will continue to be classified as ‘standard’, but interest income will be recognised on a cash basis from the second restructuring onwards, with fresh provisioning of 5% required each time.