RBI gives leeway to NBFCs on NPAs

Breathing Time

- Time to reduce stress on borrowers' credit profile

- If part of interest, principal paid, then NPAs may be upgraded as 'standard' asset

- Economic recovery still in a nascent stage

- Several sectors need regulatory support

We still wish that the individual entrepreneurs and MSMEs, below a certain outstanding amount, should get total exemption as their cash flow mismatches are long-term, said Umesh Revankar, V-C and MD, Shriram Transport Finance

Mumbai: The Reserve Bank of India (RBI) has given finance companies extra time till September 30 to have systems ready to implement rules wherein bad loans can be upgraded as 'standard' asset only when entire arrears of interest and principal are paid. In November, RBI had given time till

March 31 to implement this rule.

Talking to Bizz Buzz on RBI extending implementation of NPA upgrade norms for NBFCs until September, Umesh Revankar, Vice Chairman and Managing Director, Shriram Transport Finance, says: "NBFCs play a crucial role in the economy by providing credit to the underserved segment. Given the challenges posed by the pandemic, overall economic recovery is still uneven with demand conditions yet to fully recover. The Government and the RBI have taken several measures towards economic revival and supporting most impacted sectors. However, given that economic recovery is still in a nascent stage, several sectors need continued regulatory support."

The new NPA upgrade guidelines would have led to a spike in NPAs for NBFCs. Hence, there would have been a need for higher provisioning.

"We are glad for the extension given by the RBI as it will give more time to NBFCs and also put less pressure on borrowers' credit profile," he said.

RBI in a November circular had stated 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 were earlier expected to comply with these norms by March 31, the deadline for which has now been extended till September 30 to put the systems in place. According to Revankar, "we still wish that the individual entrepreneurs and MSMEs, below a certain outstanding amount, should get total exemption as their cash flow mismatches are long-term. We are also hopeful and optimistic that the government's focus on capital spending along with the RBI's accommodative stance will go a long way in supporting broad-based economic revival and aid revival in CV sales."

The RBI's NPA recognition norm extension to September will give some breather to NBFCs' bottom line in Q4FY22.

The RBI had previously said that borrowers who have more than one credit facility with a lending institution would only be upgraded from NPA to standard asset status after repaying all interest and principal arrears on all credit facilities. According to the new RBI guidelines, NBFCs must consider such accounts as non-performing assets (NPAs) until the borrower updates the account by paying all outstanding EMIs.

NBFCs are the largest net borrowers of cash from the financial system, and banks contribute a significant portion of their funding, and any major NBFC's failure might pose a risk to its lenders, perhaps causing a contagion.

"I think the RBI's new NBFC standards will result in accounts being recognised as NPAs quicker and remaining in that category for a longer length of time. These accounting methods would result in NBFCs reporting more prominent headline figures. Also as a result of these new standards, NBFCs are expected to declare NPA numbers according to IRAC regulations and stage 3 numbers according to Ind-As separately in their disclosures," Manav Munjal, Director (Risk & Compliance), PayMe India, said.

As a result, I believe that this deadline extension will assist NBFCs in identifying NPAs more effectively and efficiently, he added.

YS Chakravarti, MD & CEO, Shriram City Union Finance, said: "We believe it could have been helpful if the measures extending the revised asset classification and provisioning norms had come along with the RBI Circular issued on November 12, 2021. Most NBFCs have already

absorbed the impact in their third-quarter FY22 results. The clarification by RBI only defers adoption of the new norms."

Reversing of provisions already made, although now permitted, is unlikely to be the route that NBFCs follow, due to accounting complexities.