Introduction
The Reserve Bank of India (RBI) issued a notification on Prudential norms on Income Recognition, Asset Classification, and Provisioning pertaining to Advances on November 12, 2021. This circular is seen as a significant move towards harmonizing and clarifying the extant regulatory guidelines across all lending institutions. The intent behind the RBI’s circular is to ensure that the banking sector in India adheres to stringent and uniform norms for classifying Non-Performing Assets (NPA), thereby promoting financial stability and transparency.
Key Highlights of the RBI Circular on NPA
The RBI circular introduced several clarifications and modifications related to loan repayment dates, SMA/NPA classifications, and income recognition.
Specification of Due Date/Repayment Date
The circular mandates the specification of exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest, and examples of SMA/NPA classification dates in the loan agreement. This requirement aims to eliminate ambiguity and ensure that both the lender and borrower have a clear understanding of the repayment schedule and the consequences of non-payment.
Classification as SMA and NPA
The timelines for SMA categorization have been modified to ensure continuity. The classification of borrower accounts as SMA as well as NPA is now part of the day-end process for the relevant date. This change is expected to streamline the process of asset classification and make it more consistent across different lending institutions.
Impact of Revised Norms on Banking Operations
The new NPA classification norms pose operational challenges and potential impacts on banks’ profit and loss.
Counting of DPD Based on Due Date
The circular introduces the concept of counting DPD based on the oldest payment due date. This change is expected to encourage borrowers to prioritize their oldest dues and prevent the accumulation of overdue payments.
Receipt of Payment Instrument
The receipt and collection of the payment instrument now have a direct impact on NPA classification. This change is expected to encourage banks to expedite their collection processes and ensure timely recognition of NPAs.
NBFCs, NPA Upgradation, and Charges
The circular’s applicability extends to various categories of NBFCs, including Housing Finance Companies and NBFC-NSIs.
Upgradation of NPA Accounts
The revised approach for upgrading NPA accounts to the ‘standard’ asset category requires the entire arrears of interest and principal to be paid by the borrower. This change is expected to ensure that only genuinely reformed accounts are upgraded, thereby improving the quality of the asset portfolio.
Considering Penal Interest and Other Charges
The treatment of penal interest and other charges in NPA classification has been clarified. This clarification is expected to provide a more accurate reflection of the borrower’s repayment capacity and the quality of the bank’s assets.
Impact on Ind AS Accounting and NPA Recognition
The relationship between NPA recognition as per RBI norms and credit-impaired status under Ind AS is noteworthy. The revised norms are expected to bring greater alignment between regulatory and accounting standards, thereby enhancing the comparability and reliability of financial statements.
Consumer Education and Awareness
The circular emphasizes the need for consumer education on the concepts of overdue, SMA, NPA classification, and upgradation. This emphasis is expected to promote responsible borrowing behavior and improve the overall credit culture in the country.
Conclusion
The RBI’s revised norms signify a major stride towards strengthening the asset quality and risk management practices in the Indian banking sector. By promoting transparency, consistency, and prudence in NPA classification, these norms are expected to enhance the resilience of the banking sector and contribute to the stability of the Indian financial system.
