NBFC NPA characterisation: A reprieve a day too late?

– Vinod Kothari, Director (Vinod Kothari Consultants P. Ltd.) | finserv@vinodkothari.com

The RBI, vide a so-called “clarification” dated February 15, 2022^[1], relating to what itself was termed as a “clarification”, dated November 12, 2021^[2], has effectively provided a reprieve to NBFCs for treating those assets as NPAs, which have historically had a default of 90 days or more, but are currently trailing by less than 90 days. Unfortunately however, the clarification comes on the 45th day of the end of 3rd quarter, by which all listed NBFCs, and debt-listed entities, would have already prepared and published their financial results for the quarter, which would have implemented the November 12 Clarification.

As is common knowledge, the November 12 Clarification had brought in a lot of chaos and confusion in the NBFC sector. Among the several “clarifications” that it entailed, it required the NPA recognition to be a day-end process rather than one on monthly or quarterly intervals. Most importantly, it required that income recognition and provisioning norms for NBFCs to be aligned with those of banks. As such, it entailed a major change for NBFCs. The previous practice of NBFCs was to treat a loan as an NPA only based on the existing default status of the loan. That is to say, if a loan had a default of more than 90 days, say during the quarter or the previous one, but on the quarter-end, it was at 60 days, it would be treated as standard, even though it might have been treated as NPA in the past. The November 12 Clarification stopped this practice, and that too, with immediate effect. Accordingly, any loan which, in the past would have been treated as an NPA, would improvise as standard, only if the borrower would have paid all his dues. Practically, for a borrower who had accumulated 3 or 4 months of arrears, clearing all the past dues would be quite difficult. Therefore, while the number of days past due would hover between 30 to 90 or more days, the borrower would still carry the tag of being an NPA borrower.

The impact of November 12 Clarification, on leading NBFCs, was clearly visible in the 3rd quarter results. Gross NPA ratios of leading NBFCs shot up by 3 percentage points to 6 or 7 percentage points. While the impact on provisioning was negligible (as most NBFCs were following Ind AS, which required provisioning based on separate norms under Ind AS), the GNPA ratios surged.

The NBFC sector was awaiting some sort of relaxation from meeting the prescribed timelines- in this regard, several representations were also made by the industry participants. 

At the juncture of this February 15 Clarification, there could be three situations:

1. NBFCs that have already amended their policy and implemented the provisions for upgradation of NPA
2. NBFCs that have not amended their policy, but would have followed the November 12 Clarification for the 3rd quarter financial statements, during which any loan, based on the customer being at more than 90 days on or after November 12, but being at less than number of days past due on December 31, 2021, the borrower’s account would have been taken as NPA.
3. NBFCs which have not yet implemented the November 12 Clarification for the 3rd quarter, or which are not required to prepare and report quarterly financial results.

For the first set of NBFCs, reverting back to the old regime would mean amending the policy again to avail the benefit of the relaxation. A question that may arise would be the justification for the Company to move from stricter to liberal approach for upgradation to avail the benefit. 

For the second set of NBFCs, while the NBFC may treat the loans as standard based on the current days-past-due status from the current quarter, the 3rd quarter numbers of GNPAs will become incomparable with those of the 4th quarter.

It is possibly on the 3rd set of NBFCs which will find it easy to avail of the benefit of the February 15 clarification. Unfortunately, the share of such NBFCs in the sector is miniscule, as most of the NBFCs are either equity listed, or debt listed.

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12230&Mode=0

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12194&Mode=0

Our write-up on the topic:

1. NPA classification norms significantly tightened – https://vinodkothari.com/2021/11/npa-classification-norms-2/
2. Discussion meeting on change in NPA-SMA recognition – https://www.youtube.com/watch?v=QKc8a2XCCGU
3. Presentation on changes in NPA-SMA Recognition – https://vinodkothari.com/2021/11/presentation-npa-sma/