How RBI's NPA Recognition Norm Extension Will Help Non-Banking Finance Companies

The Reserve Bank of India on Tuesday relaxed the guidelines for the prudential norms for non-banking finance companies, including that of income recognition, asset classification and provisioning of advances. The duration to apply these guidelines have been extended to September 2022. Notably, the earlier deadline was December 31, 2021. 

In the circular dated November 12, 2021, the central bank had said, “The exact due dates for repayment of a loan, frequency of repayment, the breakup between principal and interest, examples of SMA/NPA classification dates, etc. shall be clearly specified in the loan agreement and the borrower shall be apprised of the same at the time of loan sanction and also at the time of subsequent changes, if any, to the sanction terms/loan agreement till full repayment of the loan. In cases of loan facilities with a moratorium on payment of principal and/or interest, the exact date of commencement of repayment shall also be specified in the loan agreements.”

Moreover, the apex bank had said last year, "To avoid any ambiguity in this regard, it is clarified that loan accounts classified as NPAs may be upgraded as a standard account only if the entire arrears of interest and principal are paid by the borrower.”

The November 2021 order was an improvement of an October 21, 2021 order. The revised order dated February 15, 2022 states, “The ‘previous 90 days period’ for determination of ‘out of order’ status of a CC/OD account shall be inclusive of the day for which the day-end process is being run. In case of borrowers having more than one credit facility from a lending institution, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities.”

It also said that loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower. NBFCs shall have time till September 30, 2022, to put in place the necessary systems to implement this provision. 

The move comes days after RBI observed that several lenders were upgrading the NPAs accounts to standard on payment of only interest overdues, partial overdues, etc.  

YS Chakravarti, Managing Director (MD) and Chief Executive Officer (CEO) of Shriram City said, “The RBIs NPA recognition norm extension to Sep-22 will give some breather to NBFCs bottom line in Q4FY22. We believe it could have been helpful if the measures extending the revised asset classification and provisioning norms had come along with the RBI Circular issued on 12th November 2021. Most NBFCs have already absorbed the impact in their third-quarter FY22 results."

 "The clarification by RBI only defers the adoption of the new norms. Reversing of provisions already made, although now permitted is unlikely to be the route that NBFCs may follow due to accounting complexities. For Shriram City Union Finance there will be no impact since our loan book is already well provided for. Further, given the strength of our collection efficiency, we expect our delinquencies to progressively reduce in 2022," he added.

Welcoming the move by RBI, Umesh Revankar, Vice Chairman & MD, Shriram Transport Finance said, "NBFCs play a crucial role in the economy by providing credit to the underserved segment. Post the challenges posed by the pandemic the overall economic recovery is still uneven with demand conditions yet to fully recover. The Government and the RBI have taken several measures towards economic revival and supporting most impacted sectors, however, given the economic recovery is still in a nascent stage, several sectors do need continued regulatory support. In a welcome move, the RBI has given NBFCs more time to adhere to new norms for the upgradation of NPAs to standard assets."

 "The new NPA upgradation guidelines would have led to a spike in NPAs for NBFCs and hence there would have been a need for higher provisioning. We are glad for the extension given by the RBI as it will give more time to NBFCs and also it will put less pressure on the overall borrowers credit profile. RBI in a November 2021 circular stated that loan accounts classified as NPAs may be upgraded as ‘standard’ assets only if entire arrears of interest and principal are paid by the borrower. NBFCs were earlier expected to comply with these norms by March 31, 2022, and the RBI has now given an extension till September 30. 2022 to put systems in place. We still wish that the individual entrepreneurs and MSME’s below a certain outstanding amount should get total exemption as their cash flow mismatches continue to remain for the long term. We are also hopeful and optimistic that the government focus on capital spending along with the RBI’s accommodative stance will go a long way in supporting broad-based economic revival and aid revival in CV sales," he added. 

(With inputs from PTI)