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Borrowers to skip NPA tag even as banks set aside more provisions

Updated: 17 Apr 2020, 04:48 PM IST

• The non-performing asset classification norm would exclude the three-month
moratorium period, the RBI governor said
• Banks classify accounts as standard, substandard and doubtful, based on the
number of days their payments are delayed
MUMBAI : The Reserve Bank of India (RBI) on Friday made temporary changes
to its asset classification norms in a balancing act between offering reprieve to
borrowers and ensuring adequate risk buffers for banks.
Addressing media over a video-conference, RBI governor Shaktikanta Das said
that the non-performing asset (NPA) classification norm would exclude the three-
month moratorium period, for those borrowers who have availed of it. This
effectively changes the NPA recognition period for such loans to 180 days from
due date, instead of the extant norm of 90 days.
“There will be an asset classification standstill for all such accounts from 1 March
to 31 May 2020," Das said. On 27 March, the RBI had permitted lenders to give a
3-month moratorium beginning 1 March to borrowers owing to difficulties faced
during the coronavirus pandemic.
Banks classify accounts as standard, substandard and doubtful, based on the
number of days their payments are delayed. Borrowers turn non-performing only
after 90 days of overdue and are classified as standard prior to that,
notwithstanding any delay in repayments.
“It is recognized that the onset of covid-19 has also exacerbated the challenges for
such borrowers even to honour their commitments fallen due on or before 29
February, 2020 in standard accounts," said Das.
According to a senior banker from State Bank of India (SBI), the mention of 29
February in the speech has created some speculation whether the moratorium or
the standstill clause could be applicable to borrowers stressed even before 1 March.
The central bank had earlier rejected bankers’ request to allow some leeway to
borrowers stressed before the cut-off date of 1 March.
Moreover, to ensure that the banking system has sufficient buffers against future
asset quality woes, the central bank has mandated additional provisions on all these
moratorium accounts.
“With the objectives that banks maintain sufficient buffers and remain adequately
provisioned to meet future challenges they will have to maintain a higher provision
of 10% on all such accounts under the standstill spread over two quarters, March
2020 and June 2020. These provisions can be adjusted later on against the
provisioning requirements for actual slippage in such accounts," said Das.
Under RBI’s guidelines, banks have to set aside funds as provisions for each loan
they disburse and the amount increases with deteriorating asset quality. The
provision for standard loans ranges between 0.25-1% of the loan and bad loan
provisions start at 15% and can reach up to 100% as it progressively deteriorates.
Das said that NBFCs also have the flexibility to use this dispensation but should
have board-approved guidelines and adhere to advisories of the Institute of
Chartered Accountants of India (ICAI).
Industry experts believe that the proposal for 10% additional provisions on the
accounts under the standstill agreement will significantly increase the credit
provisions for the banks.
“With an estimate of 3-4% of the bank credit being in overdue category of special
mention account 1 (SMA 1) and SMA2, which currently requires provision of only
0.4%, the provisioning requirements of banks can increase by ₹30,000-40,000
crore because of the proposed regulations," said Karthik Srinivasan, group head of
financial sector ratings at ratings agency ICRA.
RBI’s decision to extend the deadline for resolution of stressed assets under its 7
June, 2019,circular has also come as a sigh of relief to bankers staring at huge
provisions in the March quarter. Under RBI’s prudential framework for resolution
of stressed assets -- dated June 7, 2019 -- unresolved stressed assets will attract
extra provision of 20% if not resolved with 210 days of the circular. This meant
that banks need to set aside more provisions in the March quarter for unresolved
stressed assets.
“Recognizing the challenges to resolution of stressed assets in the current volatile
environment, it has been decided that the period for resolution plan shall be
extended by 90 days," it said, which should provide banks with some extra
breathing space.