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RBI extends timelines for NBFCs to comply with strict bad loan norms

The Reserve Bank of India gave non-bank lenders extended time to adhere to the new rules for upgradation of non-performing loans to standard assets. The RBI circular issued in November 2021 had asked NBFCs to upgrade NPAs only after all interest arrears and principal dues are repaid across credit facilities. Earlier NBFCs were required to put systems for this in place by 31 March, 2021. The Reserve Bank has now extended this timeline for NBFCs by six months till Sept. 30, 2022. The Reserve Bank also clarified that loan accounts that are classified as NPAs can be upgraded as standard assets provided entire arrears of interest and principal are paid by the borrower. The RBI in its circular, asked to refer to the RBI circular issued on November 12, 2021 in respect of new prudential norms on Income Recognition, Asset Classification, and Provisioning.

Circular issued on November 12, 2021

The Reserve Bank^[1] had issued a circular on November 12, 2021 which was issued as an improvement to its October 1 circular last year on the prudential norms on income recognition, asset classification and provisioning pertaining to advances. The Reserve Bank, through this circular, had prevented all types of lenders from upgrading an NPA account after getting only interest dues cleared. The RBI had to issue this circular after it had observed that some lenders were seen upgrading NPA accounts to standard after the payment of only interest overdues, partial overdues etc.

Hence the RBI, while issuing the circular in November, said that to avoid any ambiguity in this regard, loan accounts classified as NPAs can be upgraded as a standard account only when the entire arrears of the interest & principal is paid by the borrower.

Clarification issued vide circular dated 15, Feb 2021 specifying new timelines for NBFCs

The revised circular stated that the out of order definition as specified under the November circular will be applicable to all loans extended as an overdraft facility, including those not meant for business purposes and/or which entail interest repayments as the only credits.

If a borrower has more than one credit facility from a lending institution, then in such case the loan accounts will be upgraded from NPAs to standard asset category once entire arrears of interest and principal pertaining to all credit facilities are repaid.

Further, the circular stated that there isn’t any change to the requirements pertaining to the reporting of information of CRLIC, and it will continue to be governed in terms of extant instructions for respective entities.

Apart from this, the new circular makes it necessary for all lenders to categorically mention in the loan agreements about the exact due date of the loan and also specify about the breakup of the principal and interest, among others, rather than giving a description of the due dates, which opens up scope for interpretation. The Reserve Bank stated that all lenders must clearly mention the exact date of repayment, frequency of repayment, principal and interest breakup, examples of SMA/NPA classification date etc. It further added that all other instructions in the past circulars will apply in accordance to the timelines specified therein.

Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA)

On NPA classification, the RBI had said that lenders should recognise incipient stress in a borrower account, instantly on default by classifying it as Special Mention Account. It clarified that the intervals are aimed to be continuous therefore, loans apart from revolving facilities such as cash credit/overdraft will become special mention account in case where the principal or interest payment or any other amount partly or wholly becomes overdue or in case where the outstanding balance remains more than the sanctioned limit or drawing power, whichever is lower, continuously for 0-30 days as special mention account, for 30-60 days as SMA-1 and more than 60-90 days as SMA2/NPAs.

In other words, the SMA/NPA date will reflect the asset classification status of an account at the end of the day of that calendar date. For example, in case where the due date is March 31 and the full dues are not obtained before the day-end process, the overdue date would be 31 March. If it stays overdue, then this account shall be tagged as SMA-1 on running the day—end process on 30^th April, on completing 30 days of being overdue continuously.

Conclusion

The circular dated 15 Feb clarifying on new prudential norms was issued by RBI in view of various queries received seeking certain clarifications. In a statement issued on January 20, rating agency ICRA Ltd. had said that the new upgradation norms will result in higher divergence in NPA numbers, however, it will not affect the risk profile of NBFCs.

Read our Article:RBI issues Master Circular on Bank Finance to NBFCs