Reserve Bank Turns Down NBFC Plea For Relaxing Asset Quality Norms

The RBI, in its circular, directed all lenders, including NBFCs, to recognise bad loans if overdue for more than 90 days and upgrade such accounts only after the full overdue amount is cleared

Total NPAs in the NBFC sector were at 6.4 per cent of their exposure at the end of March this year which put the NBFC sector’s total loans and advances at Rs 17.3 lakh crore, according to RBI report. Image: AFP

New Delhi: The Reserve Bank of India has rejected a plea by the non-banking finance companies (NBFCs) to relax asset classification and provisioning norms.

According to some people in the know, Finance Industry Development Council (FIDC), the NBFC lobby group, had approached the RBI to offer relaxation in the NPA norms, however, the central bank has declined to comply with the request.

In a November 12 circular, the RBI directed all lenders, including NBFCs, to recognise bad loans if overdue for more than 90 days and upgrade such accounts only after the full overdue amount is cleared. Banks have been following this rule.

NBFCs, especially the smaller ones, often deviate from this and upgrade NPA accounts to standard even if they get partial payments.

The large NBFCs already follow this practice, but smaller NBFCs make an account standardised only if one monthly instalment is paid after the borrower defaults on three monthly instalments. This is because of the nature of the credit profile the NBFCs lend money.

The NBFCs mainly borrow money from banks to lend it further. Therefore, the lending rates of the NBFCs are always higher for borrowers who do not get funds from banks because of their low credit profile.

Given the element of risk in these customers, the NBFCs follow a delayed NPA recognition and generally classify an account as an NPA only when it is due for 180 days.

Earlier, NBFCs were officially allowed by the RBI to let bad debts be recognised only when they were not serviced for 180 days.

According to a RBI report, total non-performing assets (NPAs) in the NBFC sector were at 6.4 per cent of their exposure at the end of March this year which put the NBFC sector’s total loans and advances at Rs 17.3 lakh crore.