The Reserve Bank on Tuesday allowed some relaxation in the stricter prudential norms announced for all lenders, including shadow banks, last November by extending the time till September 2022 to implement the guidelines regarding upgrading an NPA account as standard but upon clearing all dues. In a circular issued on November 12, 2021, the monetary authority had given time till December 31, 2021 to implement all the stricter prudential norms.
Following representation from NBFCs, in a revised circular issued on Tuesday, the central bank said "the new circular does not, in any way, interfere with the extant guidelines on the implementation of Ind-AS by NBFCs… loan accounts classified as NPAs may be upgraded as 'standard' asset only if the entire arrears of interest and principal are paid by the borrower. (Also), NBFCs shall have time till September 30, 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 the prudential norms on income recognition, asset classification and provisioning pertaining to advances, wherein the RBI had prevented all types of lenders from upgrading an NPA account after getting only interest dues cleared.
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This was issued after the central bank observed that some lenders were upgrading NPA accounts to standard on payment of only interest overdues, partial overdues, etc. "To avoid any ambiguity in this regard, it is clarified that loan accounts classified as NPAs may be upgraded as a standard account only if the entire arrears of interest and principal are paid by the borrower," the apex bank had said last November.
The revised circular also said the definition of 'out of order', as clarified in the November 2021 circular, shall be applicable to all loans offered as an overdraft facility, including those not meant for business purposes and/or which entail interest repayments as the only credits. In case of borrowers having more than one credit facility from a lending institution, loan accounts shall be upgraded from NPAs to standard asset category only after repayment of entire arrears of interest and principal pertaining to all the credit facilities, it said.
The circular underlined that there is no change to the requirements related to reporting of information to CRILC (Central Repository of Information on Large Credits), which will continue to be governed in terms of extant instructions for respective entities. The new circular also makes it mandatory on all lenders to specifically mention in the loan agreements the exact due date of a loan and the breakup of the principal and interest, among others, instead of giving a description of the due dates, which leaves scope for interpretation.
"Henceforth, all lenders have to clearly mention the exact due dates for repayment, frequency of repayment, break up between the principal and interest, examples of SMA/NPA classification dates etc," it said, adding all other instructions of the past circulars shall continue to be applicable as per the timelines specified therein. On NPA classification, the November circular has said lenders must recognise incipient stress in a borrower account, immediately on default, by classifying it as SMA (Special Mention Account).
Without any ambiguity, it clarified that the intervals are intended to be continuous and accordingly, loans other than revolving facilities like cash credit/overdraft will become SMA if the principal or interest payment or any other amount wholly or partly become overdue or if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for 0-30 days as SMA, for 30-60 days as SMA-1 and over 60-90 days as SMA2/NPAs. Stated differently, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date.
For instance, if the due date is March 31, and full dues are not received before the day-end process, the date of overdue shall be March 31. If it continues to remain overdue, then this account shall get tagged as SMA-1 on running the day-end process on April 30, on completion of 30 days of being continuously overdue.
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