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finance | IST

RBI tightens asset classification rules for NBFCs on par with banks

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The Reserve Bank has tightened asset classification norms for NBFCs which now brings NBFCs on par with banks. Two rule changes have been rolled out -- one, the NPA classification should be as of end-of-day and not the month, and two, if an account has to be upgraded from NPA to standard, then all the arrears should be paid, and not just a part of it.

The Reserve Bank has tightened asset classification norms for NBFCs which now brings NBFCs on par with banks.
The aim of the Reserve Bank circular is that the same set of rules should apply to both banks and NBFCs. That's harmonisation.
Now, two rules will change for NBFCs. One, that the NPA classification should be as of end-of-day and not the month. And second, if an account has to be upgraded from NPA to standard, then all the arrears should be paid, and not just a part of it.
Currently, some of the NBFC's upgrade accounts to standard even if part of the dues are paid; they don't wait for all the dues to be paid. But under the new rules, they have to follow IND-AS accounting system, wherein all expected credit losses, that is, stressed accounts, have to be provided for. So now, if they start upgrading, maybe if they cannot upgrade unless all the arrears are paid, their gross NPAs will go up, but the provisions won't go up because under IND-AS they are anyway providing for the unpaid loans and for the expected credit losses. So you won't see a net profit problem, but there could be a one-time jump in gross NPAs for some of the NBFCs.
The second issue is the due date plus 30 days or 90 days for NPAs, 30 days for special mention account (SMA-I) now. At some of the NBFCs, if interest is due say, today, they, would consider it as November, and then if you don't pay by December you go into SMA-I, and if you don't pay in three months, that is, December, January and February, then the account turns NPA.
Now it is the due date. So, if it is November 15th then by December 15 the overdue interest will go into SMA-I and in 90 days it will go into NPA. So that also may slightly increase the gross NPAs for NBFCs. This is more an optical GNPA issue, and that to a one-time issue, it may not really hurt their provisions and their net profit.