Prudential norms for NBFC stringent bad loan guidelines

RBI allowed NBFCs more time to comply with stringent bad loan guidelines

• RBI Given more time to comply with the new standards for converting non-performing loans to standard assets to Non-bank lenders.
• NBFCs were advised to upgrade Non-Performing Assets (NPAs) only when all interest arrears and principal dues across loan facilities were paid, according to an RBI circular issued in Nov 2021.
• Earlier, NBFCs were obliged to put in place mechanisms for this by March 31, 2021.
• The deadline for Non-Banking Financial Companies has been extended by six months, to September 30, 2022. The Reserve Bank also stated that loan accounts designated as nonperforming assets (NPAs) might be converted to normal assets if the borrower pays all interest and principal arrears.
• Reserve Bank of India has released a circular on new prudential criteria on income recognition, asset classification, and provisioning, which was announced on November 12, 2021.

RBI Circular issued on Nov 12, 2021

• The RBI released a circular on Nov 12, 2021, as an update to its October 1 circular last year on the prudential norms for income recognition, asset categorization, and provisioning for advances. The RBI issued a circular prohibiting all sorts of lenders from upgrading a Non-Performing Asset (NPA) account after just clearing interest dues.
• After noticing that some lenders were upgrading NPA accounts to standard after simply paying interest overdues, partial overdues, and so on, the Reserve Bank of India had to issue this circular.
• As a result, the Reserve Bank of India issued a circular in November stating that, to avoid any ambiguity, loan accounts categorised as Non-Performing Asset (NPA) can only be upgraded to a regular account once the borrower has settled all interest and principal arrears.

New deadlines for NBFC’s outlined in a circular released on Feb 15, 2021.

• According to the revised circular, the out of order definition specified in the November circular will extend to all overdraft loans, including those not designed for commercial purposes and/or those with interest repayments as the only credits.
• If a borrower has multiple credit facilities with a lending institution, the loan accounts will be converted from Non-Performing Asset (NPA) to standard asset category once all interest and principal arrears for all credit facilities have been cleared.
• The circular furthermore stated that the criteria for the reporting of Information and Credit Rating Agency of India Limited have not modified, and that it will continue to be governed by the present directions for respective organisations.

Prudential norms for NBFC stringent bad loan guidelines

• Apart from that, the new circular requires all lenders to identify the exact due date of the loan in the loan agreements, as well as the breakup of the principal and interest, among other things, rather than giving a description of the due dates, which leaves room for interpretation.
• According to the Reserve Bank, all lenders must explicitly identify the actual date of payback, repayment frequency, principal and interest separation, and instances of Special Mention Account (SMA) and Non-Performing Asset (NPA) classification dates, among other things.
• All other directions in previous circulars will apply in accordance with the timelines provided therein, it added.
• For the purpose of determining the ‘out of order’ status of a cash credit/overdraft (CC/OD) account, the previous 90 days period must include the day for which the day-end process is being conducted.
• If a borrower has more than one credit facility with a lending institution, loan accounts will only be upgraded from NPA to standard asset category once all arrears of interest and principal for all credit facilities have been paid.

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

• The Reserve Bank of India had stated that lenders should recognise incipient stress in a borrower account by classifying it as a Special Mention Account as soon as it is defaulting.
• It was clarified that just because the intervals are intended to be continuous, loans other than revolving facilities such as cash credit/overdraft will become special mention accounts if the principal or interest payment or any other amount becomes partly or entirely overdue, or if the O/s balance remains Excessed than the given limit or drawing power, whichever is lower, continuously for 0-30 days as special mention account, for 30-60 days as SMA-1, and for 90 days as SMA-2 (NPA).
• In other words, the asset classification status of an account at the end of the calendar date will be recognized in the Special Mention Account (SMA) and Non-Performing Asset (NPA) date.
• For instance, if the due date is March 31 and the entire dues are not received by the day-end process, the overdue date is March 31. If it remains overdue, this account will be designated as SMA-1 when the day—end process is run on April 30th, after it has been overdue for 30 days in a row.

Conclusion

• Reserve Bank of India released a circular on February 15th outlining new prudential norms in response to different petitions seeking clarifications.
• The new upgradation norms will result in higher divergence in Non-Performing Asset numbers, but it will not affect the risk profile of Non-Banking Financial Companies, according to a statement released on January 20 by rating agency Investment Information and Credit Rating Agency of India Limited (ICRA Ltd).
• Unlike banks, NBFCs follow the Ind-AS rules, which classify late loans into three categories: gross stage-1 (loans overdue for up to 30 days), gross stage-2 (loans tardy for 31 to 89 days), and gross stage-3 (loans overdue for more than 89 days) (loans overdue for over 90 days).
• Under this structure, there is no distinction between conventional and bad loans for NBFCs.

 

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