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Tighter NPA accounting could increase NBFC bad loans by one-third: India Ratings

RBI clarification says it would allow stage three assets to become standard only when all dues, including interest, are cleared. (Photo: iStock)Premium
RBI clarification says it would allow stage three assets to become standard only when all dues, including interest, are cleared. (Photo: iStock)

  • NBFCs generally classify an account as stage 3 when there is a payment overdue for more than 90 days and typically for monthly payments, this would be when there are three or more instalments overdue on any account

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MUMBAI: The Reserve Bank of India’s (RBI) clarification on non-performing assets (NPA) accounting is likely to increase bad loans by around one-third for non-banking financial companies (NBFCs), India Ratings and Research said in a note on Friday.

However, the impact on provisioning could be modest, given NBFCs are using IND-As and generally for higher-rated NBFCs, provision policy is more conservative than IRAC requirements, it said. Additionally, NBFCs would have to invest in systems and processes to comply with daily stamping requirements.

According to the note, NBFCs generally classify an account as stage 3 when there is a payment overdue for more than 90 days and typically for monthly payments, this would be when there are three or more instalments overdue on any account.

But when the borrower makes part payment such that the total overdue is less than three instalments, the account is removed from NPA classification and classified as a standard asset, although it remains in the overdue category in case not all dues are cleared. 

The RBI clarification, however, would allow stage three assets to become standard only when all dues, including interest, are cleared.

NBFC borrowers are generally a weak class of borrowers and have volatile cash flows which could mean that once an account has been classified as NPA, it could remain there for a considerable period as the ability to clear all dues may be constrained, it said.

Meanwhile, the RBI circular also calls for daily stamping of accounts to count the number of days they are overdues instead of a monthly or quarterly stamping.

“This again would result in an accelerated pace of NPA recognition for accounts. NBFC borrowers, typically where there is cash collection, pay their overdues generally with some delays. Accounts can get into NPA category just for a day’s delay in paying the instalments and once it gets categorized as NPA it will not be able to become standard unless all the arrears are cleared. So, in other words, accounts would get categorized as NPAs at a faster pace and would remain sticky in that category for a longer period of time," it said.

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