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RBI gives NBFCs more time to meet tighter bad loans norms

What is the news:

The Reserve Bank of India on Tuesday gave non-bank lenders more time to adhere to new rules for upgradation of non-performing loans to standard assets.
The guidelines issued in November 2021 asked NBFCs to upgrade NPAs only after all interest arrears and principal dues are repaid across credit facilities.
NBFCs were earlier expected to put systems for this in place by March 31, 2021.
The regulator has extended this by six months till Sept. 30, 2022.

Overview:

The new NPA upgradation guidelines were expected to lead to a spike in bad loans across non-bank lenders. For instance, housing financier Housing Development Finance Corp., which implemented the new rules ahead of the deadline in the October-December quarter, reported an increase in its gross NPA ratio to 2.32% as of Dec. 31, compared to 2% earlier.
“Earlier what we used to do is that if three installments were outstanding and it became NPA, if the customer pays two, we could upgrade to a standard asset. Now we can’t do that. It has added about 30 basis points to our NPA,” Keki Mistry, vice chairman and managing director had told BloombergQuint in an interview.
In a statement on Jan. 20, rating agency ICRA Ltd. had said that the new upgradation norms will lead to higher divergence in NPA numbers, however it won’t affect the risk profile of NBFCs.
“In view of the tightened NPA recognition and upgradation norms notified by the Reserve Bank of India (RBI), the gross stage 3 (GS3) reporting vis-à-vis NPA reporting to the RBI could see increased divergence; it is believed that the same would not affect the risk profile of NBFCs in the near term,” ICRA had said.

WHAT ARE THE GUIDELINES

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

The on ‘Prudential Framework for Resolution of Stressed Assets’ requires the lenders to recognize incipient stress in borrower accounts, immediately on default, by classifying them as special mention accounts (SMA). In order to remove any ambiguity, it is clarified that the intervals are intended to be continuous and accordingly, the basis for classification of SMA categories shall be as follows:

Loans other than revolving facilities		Loans in the nature of revolving facilities like cash credit/overdraft
SMA Sub-categories	Basis for classification – Principal or interest payment or any other amount wholly or partly overdue	SMA Sub-categories	Basis for classification – Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of:
SMA-0	Upto 30 days
SMA-1	More than 30 days and upto 60 days	SMA-1	More than 30 days and upto 60 days
SMA-2	More than 60 days and upto 90 days	SMA-2	More than 60 days and upto 90 days

In the above context, it is further clarified that 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. Similarly, classification of borrower accounts as SMA as well as NPA shall be done as part of day-end process for the relevant date and the SMA or NPA classification date shall be the calendar date for which the day end process is run. In other words, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date.
Example: If due date of a loan account is March 31, 2021, and full dues are not received before the lending institution runs the day-end process for this date, the date of overdue shall be March 31, 2021. If it continues to remain overdue, then this account shall get tagged as SMA-1 upon running day-end process on April 30, 2021 i.e. upon completion of 30 days of being continuously overdue. Accordingly, the date of SMA-1 classification for that account shall be April 30, 2021.
Similarly, if the account continues to remain overdue, it shall get tagged as SMA-2 upon running day-end process on May 30, 2021 and if continues to remain overdue further, it shall get classified as NPA upon running day-end process on June 29, 2021.
It is further clarified that the instructions on SMA classification of borrower accounts are applicable to all loans, including retail loans, irrespective of size of exposure of the lending institution.

Clarification regarding definition of ‘out of order’

Cash credit/Overdraft (CC/OD) account is classified as NPA if it is ‘out of order’. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, the extant instructions, inter alia, stipulate that the account should be treated as ‘out of order’ if there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period. In order to avoid any ambiguity regarding determination of ‘out of order’ status of CC/OD accounts on a continuous basis, it is clarified that an account shall be treated as ‘out of order’ if:

the outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period.

Accordingly, treatment of CC/OD accounts as ‘out of order’ on or after the date of this circular shall be based on the above instructions.

Upgradation of accounts classified as NPAs

It has been observed that some lending institutions upgrade accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc.
In order to avoid any ambiguity in this regard, it is clarified 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.
With regard to upgradation of accounts classified as NPA due to restructuring, non-achievement of date of commencement of commercial operations (DCCO), etc., the instructions as specified for such cases shall continue to be applicable.

Income recognition policy for loans with moratorium on payment of interest

In cases of loans where moratorium has been granted for repayment of interest, lending institutions may recognize interest income on accrual basis for accounts which continue to be classified as ‘standard’.
This shall be evaluated against the definition of ‘restructuring’ provided in paragraph 1 of the Annex-1 to the above-mentioned ‘Prudential Framework for Resolution of Stressed Assets’ dated June 7, 2019. However, income recognition norms for loans towards projects under implementation involving deferment of DCCO³and gold loans for non-agricultural purposes⁴ shall continue to be governed as per the existing instructions.
The extant instructions require that once an account is classified as NPA, the entire interest accrued and credited to income account in the past periods, must be reversed to the extent it remains unrealised.
It is clarified that if loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the interest accrued during such moratorium period need not be reversed.