RBI Updates the Deadline for NBFCs to Comply with New NPA Upgradations Norms

The Reserve Bank of India (RBI) extended the deadline for non-banking financial companies (NBFCs) to comply with new asset classification norms published on November 12 by two weeks on Tuesday. Non-bank lenders will now be able to shift to the new regulations for recognizing bad loans by September 30, 2022, as against March 31, 2022. NBFCs had previously requested an extension to comply with the November 12 circular’s terms as they pertained to micro, small, and medium-sized enterprises (MSME) accounts.

The regulator had previously set a deadline of March 31 for non-bank lenders to upgrade non-performing assets (NPAs) only if all arrears and principal dues had been paid. The regulator stated that “NBFCs will have until September 30, 2022 to put in place the required processes to implement this requirement.” The RBI further stressed that NPA loans will only be moved to regular status if all outstanding debts are settled.

“Paragraph 10 of the Circular stipulates 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. All other instructions of the Circular shall continue to be applicable as per the timelines specified therein.” The notification on the official website of the Reserve Bank of India says.

The guidelines aim to harmonize bank and NBFC income recognition and asset classification standards. Analysts projected that the restriction on bad loan upgradation would result in a spike in nonperforming assets (NPAs) recorded by some NBFCs. Most NBFCs have long maintained a practice of upgrading gross stage-3 loans, or NPAs, to gross stage-2 loans, or special mention account (SMA)-2, upon payment of a single installment, according to industry analysts.

According to the new RBI rules, NBFCs must treat such accounts as non-performing assets (NPAs) until the borrower updates the account by paying all outstanding EMIs.

The banking industry uses an automated method for labeling accounts as nonperforming assets (NPAs), in which accounts are labeled as NPAs on the day they go past due for more than 90 days. In many NBFCs, however, this classification is made after 90 or 180 days have passed.

The circular does not make any changes to the requirements related to reporting of information to CRILC, which will continue to be governed in terms of extant instructions for respective entities, the central bank said. It also does not interfere with the extant guidelines on implementation of Ind-AS by NBFCs.

Many non-bank lenders upgrade non-performing assets (NPAs) when account overdues are reduced to less than 90 days, whereas banks do not upgrade an NPA until all overdue amounts are collected. NBFCs, unlike banks, 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 overdue for 31 to 89 days), and gross stage-3 (loans overdue for more than 89 days) (loans overdue for over 90 days). Under this system, there is no distinction between good and bad loans for NBFCs.

The norms between banks and NBFCs have largely been aligned as a result of these changes.

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