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NBFC Seek Relaxation from RBI on Asset Classification Provisioning Norms

By Ameena Ameena - Feb 12 2022

Non-banking finance companies (NBFC) are still hopeful of some relaxation by the Reserve Bank of India (RBI) on the norms of income recognition, asset classification, and provisioning for advances.
“Industry associations have requested the RBI to have a re-look at the requirements and give us a little more time to make this alignment. The reason is that we have to communicate to customers across the country, and they will have to align their payments. We are hopeful that something should come from the RBI in terms of direction this month,” said the head of an NBFC.
The RBI has however, not acceded to such requests till now.

We have been following up with the RBI on this issue for some time.
The impact of the circular is evident on the NPAs of a number of NBFCs.
NBFCs hope that there is some extension given so that NBFCs have some more time to comply with the norms.
Otherwise, even the fourth quarter results will be impacted,” said another industry player.
Industry bodies including Finance Industry Development Council, Confederation of Indian Industries and Assocham are understood to have requested the RBI for some relief on the issue.
In a representation in January, FIDC had asked the RBI to consider a one year extension, until April 1, 2023 to implement the norm and to exempt small retail loans upto Rs 2 crore from the guidelines until the situation returns to normal.
Highlighting the disruption from the pandemic, the FIDC in its representation had said that most of the borrowers of NBFCs are self employed or belong to the MSME segments and are economically vulnerable and would require more time to stabilise their operations.

“At the present moment, it would be rather onerous for them to adhere to the revised norms for reclassification as a standard account, after being marked NPA,” it had said.
Borrower accounts shall be flagged as overdue by the lending institutions as part of their day-end processes for the due date, irrespective of the time of running such processes, the RBI had said, adding that classification of borrower accounts as SMA as well as NPA shall be done as part of day-end process.

In its move to upgrade regulations of NBFCs, RBI through a note on November 12, 2021 provided clarification on the income recognition, asset classification and provisioning rules for banks, NBFCs and all-India financial institutions.
The key points include classification of special mention accounts (SMA) and NPAs on a day-end position basis and upgrade from the NPA to standard category only after clearance of all outstanding overdues.
In other words, lenders can upgrade NPAs to standard category only after the entire arrears are cleared.
According to ICRA, while banks will not be impacted by the new norms as they have been following this rule already, NBFCs normally have been upgrading NPA accounts even with partial payments of the overdues, as long as the total overdues on the reporting date were for less than 90 days.
Going forward, movement to the standard asset category would be impacted as borrowers from NBFCs are in general under stress and thereby may not be able to clear all dues.

Asset classification is a process for systematic segregation of the assets into various groups, based on the nature of the assets, by application of the accounting rules so as to make proper accounting under each group.
The groups are later consolidated at the financial statement level for the purpose of reporting.

A non-banking financial institution(NBFI) or non-bank financial company (NBFC) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.
NBFC facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering.
The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.
They cannot accept deposits repayable on demand.
NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum.

Base Layer– Shall comprise of (a) non-deposit taking NBFCs below the asset size of Rs 1000 crore and (b) NBFCs undertaking the following activities: (i) NBFC-Peer-to-Peer Lending Platform (NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface.
Middle Layer – Shall consist of (a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of Rs 1000 crore and above and (c) NBFCs undertaking the following activities: (i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs).
Upper Layerof NBFCs is specifically identified as warranting enhanced regulatory requirement based on certain set of parameters and scoring methodology. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.
Top Layerwill ideally remain empty now. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer.

It will also be necessary to mention that RBI has recently accepted some key recommendations of ‘Report of the Internal Working Group (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’ submitted on November 20, 2020.
It prescribes certain standards/norms for NBFCs to convert into universal banks and or small finance banks (SFBs) as they commensurate with the fit and proper and capital base criteria specified therein.
With the diminishing difference between role of banks and NBFCs, RBI is fast moving to scale up regulation, more importantly the risk management practices of NBFCs to move towards bank-like norms.
The underlying reason is the increasing propensity of newly empowered NBFCs to play a bank-like role or they can opt to apply for bank license available on tap.

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