Non-banking finance companies (NBFCs) are planning to write to the Reserve Bank of India (RBI) seeking clarification on what constitutes a default, as the regulator has mandated additional provision for accounts that are in default.
For such accounts, a 10% provision was mandated, equally spread over to two quarters — January-March and April-June.
“The term default is not defined in the circular and is open to multiple interpretations,” said an official of a large NBFC. A loan can be termed ‘default’ if repayment is due for even one day. According to RBI norms, if repayment is overdue for 0 to 30 days, it is classified under SMA 0 (special mention account), if overdue by 31 to 60 days, it is SMA 1 and if overdue from 61 to 90 days, the account is classified as SMA 2.
“The word ‘default’ can be construed to mean even a single-day default. The customers of NBFCs generally do not have fixed-day income like salaried employees and hence they tend to delay paying their monthly EMIs over the course of the month,” the official said.
If repayment overdue of one day is also seen as default, then the lenders have to make the additional provisioning, which could hurt the profitability of these entities. NBFCs are planning to request RBI to clarify that the term ‘default’ should read as loans which are more than 30 days overdue.
The other issue on which NBFCs are looking for clarification is on the central bank advisory on adjusting such provisions.
RBI had said the above provisions may be adjusted against the actual provisioning requirements for slippages from the accounts reckoned for such provisions. “The residual provisions at the end of the financial year can be written back or adjusted against the provisions required for all other accounts,” the norms said.
NBFCs are required to carry impairment provision as per ‘Expected Credit Loss Model’ which are approved by their boards. However, if such value is less than the provisions required to be made under Income Recognition and Asset Classification [IRAC] norms of RBI, an impairment reserve is created for the residual provision amount and which can be utilised only with prior approval of RBI.
NBFCs now want that they be allowed to adjust the excess provisioning kept in impairment reserve arising out of provision for moratorium accounts which are in default, but standard, without prior approval of the RBI.
