New prudential standards: NBFCs get some leeway on classification of bad debts
In a circular dated November 12, 2021, the monetary authority had given until December 31, 2021 to implement all the stricter prudential standards.
Following the representation of NBFCs, in a revised circular issued on Tuesday, the central bank said that “the new circular does not interfere in any way with existing guidance on the implementation of Ind-AS by NBFCs. Loan accounts classified as NPA can only be reclassified as a “standard” asset if all arrears of interest and principal are paid by the borrower in full.(In addition, NBFCs will have until 30 September 2022 to put in place the necessary systems to implement this provision.”
The November 12, 2021 circular was an improvement on its October 1, 2021 circular on prudential standards for revenue recognition, asset classification and provisioning relating to advances, in which the RBI had barred all types of lenders from upgrade an NPA account after earning interest only. contributions released.
This was issued after the central bank observed that some lenders were upgrading NPA accounts to standard on paying interest only overdues, partial overdues etc.
“To avoid any ambiguity in this regard, it is clarified that loan accounts classified as NPA can only be converted into a standard account if all arrears of interest and principal are paid by the borrower in full,” it said. the apex bank last November.
The revised circular also indicates that the definition of “out of order”, as clarified in the November 2021 circular, will apply to all loans offered as an overdraft facility, including those not intended for commercial transactions and/or which result in interest repayments as credits only.
In the case of borrowers with more than one credit facility with a lending institution, loan accounts will only be reclassified from NPA to the standard asset class after all arrears have been paid. interest and principal on all credit facilities, he said.
The circular emphasized that there is no change in the requirements for reporting information to the CRILC (Central Large Credit Information Repository), which will continue to be governed in terms of existing instructions. for the respective entities.
The new circular also obliges all lenders to specifically mention in loan agreements the exact maturity of a loan and the distribution of principal and interest, among other things, instead of giving a description of the maturities, which leaves the possibility to interpretation.
“Now all lenders must clearly state exact repayment due dates, repayment frequency, break between principal and interest, examples of SMA/NPA classification dates, etc.” he stated, adding that all other instructions in past circulars shall continue to apply within the time limits specified therein.
Regarding the NPA classification, the November circular said that lenders must recognize incipient stress in a borrower’s account, immediately upon default, by classifying it as SMA (Special Mention Account).
Unambiguously, he clarified that the intervals are meant to be continuous and therefore loans other than revolving facilities like credit/cash overdraft will become SMA if payment of principal or interest or any other amount becomes fully or partially past due or if the outstanding balance remains continuously above the sanctioned limit or drawing power, whichever is lower, for 0 to 30 days as SMA, for 30 to 60 days as SMA-1 and over 60-90 days as SMA2/NPA.
In other words, the SMA/NPA date should reflect the status of an account’s asset classification at the end of the day on that calendar date.
For example, if the due date is March 31 and all dues are not received by the end of day process, the late date will be March 31.
If it continues to be late, this account will be marked as SMA-1 when running the end-of-day process on April 30, after 30 days of continuous lateness.