According to a research, the Reserve Bank of India's recent clarification on non-performing advances (NPA) may increase non-banking financial companies' (NBFC) bad loans by one-third.
The Reserve Bank of India (RBI) clarified Income Recognition Asset Classification (IRAC) criteria for banks, NBFCs, and All-India Financial Institutions (AIFIs) in November 2021.
The clarification included the classification of special mention accounts (SMA) and nonperforming assets (NPA) on a day-end position basis, as well as the ability to upgrade from an NPA to a regular category only when all outstanding overdues were cleared.
However, considering that NBFCs use Indian Accounting Standards (IND-AS) and that provision policies for higher-rated NBFCs are often more cautious than IRAC norms, the impact on provisioning could be minor.
The RBI circular also calls for daily stamping of accounts to tally the number of days they are past due, rather than monthly or quarterly stamping which would result in a faster rate of NPA identification for accounts.
Borrowers of NBFCs frequently pay their overdues with some delay, especially where cash is collected. Accounts can be classified as non-performing assets (NPAs) for as little as a day's delay in making instalments, and once classified as such, they will not be able to return to standard status unless all arrears are paid, said the research.
"In other words, accounts would be classified as nonperforming assets (NPAs) at a quicker rate and would stay in that category for a longer period of time. Both of these accounting procedures would result in NBFCs reporting larger headline figures .’’