The Reserve Bank of India (RBI) on Monday allowed banks, non-banking financial companies (NBFCs) and district central co-operative banks to retain the ‘standard’ asset classification on loans of up to R1 crore for another 60 days from the date it would have turned non-performing. This relaxation will be applicable to home loans, farm loans and working capital loans, among others.
At present, banks have to classify a loan as non-performing one after following 90 days of repayment overdue. In case of NBFCs, the NPA classification sets in at 120 days of overdue.
The forbearance is only for repayments due between November 1 and December 31, and therefore, the short-term deferment of classification will not result in restructuring of loans. Dues payable before November 1 and after December 31 will be covered by the existing guidelines.
Bank of America Merrill Lynch in a report on Monday said almost all of vehicle finance and a lot of the home finance businesses, which sit with non-banks, will see a major relief. “Hence, this is a timely action by the RBI. Micro-small loans, which make up for close to 15% of the system bank loans, have an average ticket size of Rs 5 lakh,” it said.
According to the RBI, the additional time will only apply to defer classification of an existing standard asset as substandard, and not for delaying slippage of a loan across sub-categories of NPA.
“Small businesses can use this time to re-align their business model and move away from a more cash-dependent model to one where money flows through the banking channel,” said Karthik Srinivasan, senior vice-president at ICRA. He added that this means borrowers have time before the cash flow in the economy stabilises and the money supply is back on track.
Last week, FE had reported that following shortage of cash, banks may be allowed to classify loans as standard assets even if interest payments are overdue by more than 90 days. On November 8, the government said notes with denominations of R1,000 and R500 would no longer be legal tender.
The RBI said owing to withdrawal of the legal tender status of the existing R500 and R1,000 notes, small borrowers may need some more time to repay loan dues. “Taking these representations into consideration, it has been decided to provide an additional 60 days beyond what is applicable for the concerned regulated entity (RE) for recognition of a loan account as substandard,” it said.
Although defaults during the 60-day period will not turn a loan non-performing, there is no clarity on how this will affect the credit scores – a key measure of creditworthiness – of home loan borrowers. “We will accept and report information that is submitted to us by our member credit institutions. The credit information report will capture the data that banks and financial institutions will be submitting to us and the credit score will be calculated based on the submitted data,” Harshala Chandorkar, COO of CIBIL, said.
The RBI also said term loans, whether business or personal, secured or un-secured, of up to Rs 1 crore on the books of any bank or any NBFC, including NBFC (MFI), can avail of the forbearance.