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The Reserve Bank of India made temporary changes to its asset classification norms to offer relief to borrowers during the coronavirus pandemic. It said the non-performing asset classification period would exclude the three-month loan moratorium period, effectively changing the NPA recognition period to 180 days from 90 days. Additionally, banks will have to maintain higher provisioning of 10% on all accounts under the moratorium, spread over two quarters, to ensure adequate buffers against future asset quality issues. The RBI also extended the deadline for resolution of stressed assets by 90 days to give banks extra time amid current volatility.
The Reserve Bank of India made temporary changes to its asset classification norms to offer relief to borrowers during the coronavirus pandemic. It said the non-performing asset classification period would exclude the three-month loan moratorium period, effectively changing the NPA recognition period to 180 days from 90 days. Additionally, banks will have to maintain higher provisioning of 10% on all accounts under the moratorium, spread over two quarters, to ensure adequate buffers against future asset quality issues. The RBI also extended the deadline for resolution of stressed assets by 90 days to give banks extra time amid current volatility.
The Reserve Bank of India made temporary changes to its asset classification norms to offer relief to borrowers during the coronavirus pandemic. It said the non-performing asset classification period would exclude the three-month loan moratorium period, effectively changing the NPA recognition period to 180 days from 90 days. Additionally, banks will have to maintain higher provisioning of 10% on all accounts under the moratorium, spread over two quarters, to ensure adequate buffers against future asset quality issues. The RBI also extended the deadline for resolution of stressed assets by 90 days to give banks extra time amid current volatility.
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.