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RBI clarification on NPA recognition and deadline extension provide relief to NBFCs

ICICI Securities 16 Feb 2022

In order to bring banks and NBFC on par with regards to NPA recognition, RBI had issued asset classification guidelines wherein any lender, whether bank or NBFC, is required to tag an account as NPA on the day the account becomes overdue for more than 90 days. Banks followed an automated system under which accounts of borrowers are tagged as NPAs on the day it becomes overdue for more than 90 days. However, many NBFCs used to recognise NPA only after the end of 90 or 180 days. Further, many NBFCs upgraded NPAs, as overdue, in the accounts reduced to less than 90 days, while banks do not upgrade an NPA until all the overdue amounts are collected.

RBI has now issued clarification with respect to queries raised on the implementation of revised asset classification and provisioning norms. Firstly, it clearly states that circular issued does not, in any way, interfere with the extant guidelines on implementation of Ind-AS by NBFCs. It means the provisioning need not necessarily hit P&L and stage-3 assets can be disclosed distinctly from GNPAs.

 

Also, RBI has extended deadline for NBFCs till September 30, 2022 to implement the provision on upgradation of NPA to standard assets (only after entire arrears of interest and principal are paid). 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.

Views

Implementation of new guidelines, though deferred by three quarters now, has already been affected for most of the lenders (as announced in Q3FY22 earnings announcement). There would be an option to reverse the provision towards the same but we do not expect entities to prefer that. Many entities indicated that they would intensify collection intensity from 61-90 days past due (dpd) bucket to 31-60 dpd bucket. New collection rhythm would, however, take three to four quarters to normalise and convergence of GNPA and stage-3 would be possible post that. Housing finance companies have indicated that new guidelines impacting earnings was to the tune of ~40-100 bps over and above stage-3 assets. Most HFCs had taken the knock in P&L, classifying the incremental pool under stage-3 itself and increasing coverage on the same. Given higher stage-2 pool, vehicle financiers had a maximum impact of revised asset classification norms to the tune of 270-570 bps. Positively, additional provisioning that was expected in Q4FY22 for some entities will not be required now with the clarification being issued by the RBI.