Mumbai: The Reserve Bank of India (RBI) on Monday said it would allow lenders more time to classify defaults as sub-standard owing to the government’s decision to scrap high-value banknotes.
Scheduled commercial banks, state cooperative banks, district central cooperative banks, non-banking financial companies (NBFCs) and microfinance companies will get an additional 60-day window for classifying stressed standard accounts as non-performing assets (NPAs), if the payments are due between 1 November and 31 December, according to a statement on RBI’s website.
“The additional time given shall only apply to defer the classification of an existing standard asset as substandard and not for delaying the migration of an account across sub-categories of NPA," the statement said.
At banks, a loan is typically classified as an NPA if principal and interest hasn’t been paid within 90 days of falling due. For NBFCs, the time ranges anywhere between 90 and 180 days.
In its statement, RBI said the exemptions will be available to any running working capital limits available with banks where the sanctioned limit is Rs1 crore or less. Term loans of up to Rs. 1 crore, whether business or personal, secured or otherwise, on the books of any bank or any NBFC, including microfinance companies, would be covered under by this one-time scheme. This would also be applicable on home loans and agriculture loans up to that limit.
The move by RBI is likely to help over a third of the banking system loans. According to RBI data, 35% of the banking system’s loans were given to customers where the individual outstanding loan is Rs1 crore or below.
Loans extended by banks to micro-finance companies, NBFCs, housing finance companies and those extended by state cooperative banks to district cooperative banks, would also be covered under this rule.
In its guidelines, the regulator said that this is a short-term deferment and will not count as restructuring. Typically, when an account goes from standard to NPA in a bank’s book, the lender has to set aside up to 15% of the outstanding amount as a provision.
With the government having announced that Rs500 and Rs1,000 notes will lose their status as legal tender, many small repayments to lenders had been stopped as they did not accept them. Lenders such as micro-finance companies had written to the regulator seeking clarity on how to proceed with the repayment schedule, even giving extensions to their borrowers till the time that the situation normalises.
“We feel happy with the central bank move but we are concerned about day-to-day delinquencies. The immediate task will be to manage cash flow," said K Paul Thomas, chairman and managing director of Esaf Microfinance.
The micro-finance industry has been requesting the government to allow it to accept old Rs500 and Rs1,000 notes towards loan repayments.
“It is a good move but it is not our first priority. Our immediate requirement is that for limited period of time we should be allowed like banks to accept Rs500 and Rs1,000 notes which will ease up lot of tension which is building up," said Samit Ghosh, managing director and chief executive of Ujjivan Financial Services Ltd.
NBFCs, which have already started seeing delays in their repayments, are still trying to determine the final impact of these norms.
“It is a good move since some people will get respite. The whole system will go through re-arrangement. It is difficult to say what will happen after 60 days since things take time to stabilize," said Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance Ltd.
Housing finance companies, which are governed by the National Housing Board (NHB), are hopeful that their regulator will allow a similar dispensation, said Harshil Mehta, chief executive officer, Dewan Housing Finance Ltd.
Analysts point out that NBFCs and microfinance companies have suspended cash disbursements to a large extent, while working with borrowers to improve collections by using their own field staff to get demonetised currency notes exchanged.
“NBFCs operating in developer finance and loan against property (LAP) are the most vulnerable, if the disruption prolongs beyond two months. And given the profile of their borrowers, overdues are likely to increase in the early buckets," rating agency Crisil said in a note on Monday.