NBFC

Guidelines for Relief Measures in the Areas Affected by Natural Calamities by NBFCs 

The Reserve Bank has issued guidelines to banks regarding matters relating to relief measures to be provided in areas affected by natural calamities. It has been determined to apply the Master Direction on Relief Measures in the Areas Affected by Natural Calamities by NBFCs, mutatis mutandis, to NBFCs in disaster-affected areas that have been selected by the institutional framework of the District Consultative Committee/State Level Bankers’ Committee for the implementation of appropriate relief measures.

Natural calamities strike periodically but frequently, taking a tremendous toll on human life and seriously harming economic endeavours in various regions of the nation. Natural disaster devastation necessitates a large restoration effort from all organizations. Programmes for economic rehabilitation of those impacted by natural calamities are developed by the Central, State, and local authorities. The Regional Rural Banks’ (RRBs’) developmental mission justifies their active help in restoring the economic activity of persons impacted by natural calamities.

Recognized Categories of Natural Disasters

According to the National Disaster Management Framework, two funds have been established:

• The State Disaster Response Fund (SDRF) and
• The National Disaster Response Fund (NDRF)

They both used to provide aid to afflicted communities. Currently, the NDRF framework recognizes twelve different categories of natural disasters, including cyclones, droughts, earthquakes, fires, floods, tsunamis, hailstorms, avalanches, cloud bursts, pest attacks, landslides and cold waves/frost.

For four of the calamities, drought, hailstorms, pest attacks, and cold wave/frost, the Ministry of Agriculture is the nodal ministry, and for the remaining eight, the Ministry of Home Affairs is the nodal ministry to make the appropriate administrative arrangements. The Sovereign (Central/State Government) periodically takes several actions to help the afflicted people and provides input subsidies and financial aid to farmers, including small and marginal farmers.

As members of the State Level Bankers Committee (SLBC)¹, the Regional Rural Banks play a crucial part in providing relief measures by rescheduling existing loans and authorizing new loans in accordance with the changing needs of the borrowers.

Creating Policies and Procedures to Deal with Natural Disasters

The location, timing, and severity of natural calamities cannot be predicted. Therefore, NBFCS must have a plan of action for such situations that has been duly approved by the Board of Directors, ensuring that the necessary relief and assistance are delivered as quickly as possible and without any unnecessary delays. Additionally, these standing instructions must be understood by all their branches and regional offices.

The district/state authorities must first make the necessary statement before the standing instructions can go into effect. To ensure that everyone involved is aware with the action that will be taken by the concerned authorities in the impacted area, these instructions must be made available to the State Government authorities as well as all of the District Collectors.

Discretionary Powers to Branch/Regional Office 

The District Consultative Committee/State Level Bankers’ Committee may grant the Branch/Regional Office Managers specific discretionary powers to eliminate the requirement to request new approval from their Head Office regarding the course of action.

The use of the scale of finance, need-based restructuring of loans, an extension of loan terms, margin, security, and approval of new loans while taking into account the total liability of the borrower arising out of the old loans in cases where the financed asset was destroyed or lost due to natural calamities and the new loan was used to create or repair such assets are some examples of areas where such discretionary powers are crucial.

Scope

Farmers and borrowers who have been impacted by natural calamities as determined by the State Government or Authorities and who wish to take advantage of the benefits described in the instructions are subject to the RBI’s Master Direction.

Natural Disaster Proclamation

It is acknowledged that the Central / State Government is responsible for declaring a natural calamity. According to the information provided by the State Governments, no standard method is followed for the declaration of natural calamities and the issuance of declarations and certifications.

In various States, these declarations or certificates are referred to as Annewari, Paisewari, Girdawari, etc. The need for the crop loss estimate to be 33% or higher is the common thread for extending relief measures for agricultural loans, including the rescheduling of loans. While some States perform crop-cutting trials to ascertain the loss in crop production, others rely on eye estimations or visual perceptions to measure this loss.

The matter will be discussed by the State and District Government Authorities in a meeting where the concerned Government functionary/District Collector will explain the reasons for not estimating the percentage of crop loss by whatever name in cases of extreme circumstances, such as wide-spread floods when it is largely evident that most of the standing crops have been damaged or land and other assets have suffered wide-spread damage. However, in both instances, SLBC/DCC must be completely satisfied that the crop loss was 33% or greater before acting on these announcements.

Restructuring of Current Loans 

Due to the disruption of their economic activity and the destruction of their economic assets, people’s ability to repay debts is significantly hampered in the event of natural calamities. As a result, it can be required to ease debt repayment by restructuring the current loan.

Classification of Assets 

The restructured loans’ asset classification status is as follows: 

Both the short-term and long-term loans’ restructured portions may be recognized as current dues and are not necessarily NPAs. The amended terms and conditions would then apply to the asset classification of these term loans.

However, banks are occasionally required to make larger reserves for these restructured regular advances as per the Department of Banking Regulation. Additionally, interest income from these reorganized accounts that are designated as “standard assets” will be recognized in accordance with the standards outlined in the DBR rules.

The original terms and conditions of its sanction shall continue to apply to the asset classification of the outstanding debts that are not included in the restructured component. As a result, the lending bank must categorize the borrower’s outstanding debts into four separate asset categorization categories: standard, sub-standard, dubious, and loss.

If there is any additional financing, it will be classified as a “standard asset”, and its classification as an asset in the future will be determined by the terms and conditions of its sanction.

The benefit of asset classification of the restructured accounts as of the date of the natural calamity will only be available if the restructuring is finished within a period of three months from the date of the natural calamity to ensure that banks and NBFCs are proactive in providing relief to the affected persons.

If an extraordinary disaster occurs and the SLBC/DCC believes that this time frame won’t be long enough for the branches to reschedule all of the affected loans, it should contact NABARD and explain why an extension is needed. The merit of each request will be taken into account when evaluating these requests.

Accounts that undergo restructuring for the second time or more due to the recurrence of natural calamities must keep their original asset classification category. As a result, for a standard asset that has already been restructured, the following restructuring required by natural calamities will not be considered a second restructuring, and the standard asset classification will be kept. All other restructuring guidelines, however, must be followed.

Utilisation of Insurance Proceeds

While the aforementioned loan rescheduling methods are meant to help farmers, the insurance proceeds should, ideally, make up for the losses. The National Agricultural Insurance Scheme (NAIS) and Modified National Agricultural Insurance Scheme (MNAIS) have been replaced by the Pradhan Mantri Fasal Bima Yojana (PMFBY) with effect from Kharif 2016. 

This is in accordance with orders from the Ministry of Agriculture, Department of Agriculture, Cooperation, and Farmers Welfare. All Seasonal Agricultural Operations (SAO) loans for notified commodities in notified areas are required to provide insurance coverage for all phases of the agricultural cycle, including post-harvest risks in certain circumstances, under the Prime Minister Fasal Bima Yojana (PMFBY). 

The bank must also consider any insurance proceeds that may be due from the Insurance Company when restructuring loans in areas hit by natural calamities. When a new loan has been given to the borrower, the insurance proceeds must be adjusted to the “restructured accounts”. However, in situations where there is a fair likelihood that the insurance claim will be received, banks must act sympathetically and explore restructuring and giving new loans before waiting for the claim to be received.

Sanctioning of Fresh Loans

Following the SLBC/DCC’s decision to reschedule loans, banks must issue new crop loans to impacted farmers depending on the size of the crop and the area under cultivation in accordance with the current regulations.

Long-term loans may also be required for purposes like the repair of the current economic assets and the purchase of new assets. Similarly, rural craftsmen, independent contractors, micro and small industrial units, etc., in disaster-affected areas could need new finance to support their livelihood. Banks must determine the need and the amount of loans to be given to the affected borrowers, taking into account factors like the need for credit and the proper procedure for sanctioning new loans, among others.

Banks must also offer existing borrowers a consumption loan of up to 10,000 without any form of security. The bank may, however, decide to increase the cap beyond Rs. 10,000.

Norms for “Know Your Customer” (KYC) are relaxed

Recognizing that many people who are uprooted or negatively impacted by a big disaster might not have access to their personal information is important. In these situations, a basic savings bank deposit account will be opened based on a photo and either a thumbprint or signature provided in front of a bank representative.

The aforementioned instruction is only applicable in situations where the account balance is less than $50,000 or the amount of relief granted and the account’s total credit is less than $100,000 or the amount of relief granted annually.

Making Financial Services Available

NBFCs may operate in areas impacted by natural calamities from temporary locations with the permission of the relevant RBI/NABARD regional office. Banks may request particular clearance from the relevant authorities to extend the temporary premise for an additional 30 days. Banks may additionally build up satellite offices, extension counters, mobile banking facilities, etc., with RBI/NABARD’s notification to provide banking services in the impacted areas.

Rate of Interest

The interest rate must adhere to the Reserve Bank of India’s Master Directions regarding interest rates on loans and advances. However, banks must, to the extent of their discretion, show sympathy for the borrowers’ problems and grant favourable treatment to those who have been impacted by calamities.

There will be no penal interest assessed for current dues in default. Additionally, the banks must appropriately postpone the compounding of interest costs. In regards to the loans that have been converted or rescheduled, banks are not allowed to impose any criminal interest and may even consider waiving any that have already been assessed.

The SLBC/DCC must determine the type and extent of the potential interest rate discount for borrowers based on the nature and severity of the natural disaster to ensure consistency in how banks offer assistance.

Conclusion

For individuals and businesses to recover from natural calamities, the Non-Banking Financial Companies’ actions are crucial. By acting appropriately and adhering to the necessary guidelines, NBFCs can ensure that all recovery efforts comply with the regulations set forth by the Reserve Bank of India and other pertinent authorities. 

1. https://slbcne.nic.in/