Reserve Bank tries to reduce NPA burden for lenders in coronavirus crisis

From being classified as NPAs after 90 days of overdue, the central bank raised the period to 180 days

The regulatory measures announced by the Reserve Bank of India (RBI) on Friday will help keep a check on a possible surge in non-performing assets (NPAs) in the books of lenders and assist companies in borrowing more from the banking system at a time when economic activities are about to restart in a phased manner.

“It has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e. there would be an asset classification standstill for all such accounts from March 1, 2020, to May 31, 2020,” RBI Governor Shaktikanta Das said while addressing the media.

In other words, the NPA recognition period for such loans will now be 180 days from the due date, instead of the present norm of 90 days.

This means that if a borrower whose account was supposed to turn into NPA in March could now be classified as such in June. Right now, accounts are classified as standard, sub-standard or doubtful, based on the delays in the repayment. Special Mention Account (SMA)-1 are those in which loan repayments have been overdue for a period between 31 and 60 days, while SMA-2 are the ones with a delay of 61-90 days. If interest or principal amount of the loan is overdue 90 days, it is classified as an NPA, prior to that, all accounts are classified as standard.

“Generally, most borrowers clear their dues in 75-90 days of their due date and this is truer in the case of micro, small and medium enterprises (MSMEs), as they clear their instalments towards the end of a quarter. This move will help such borrowers,” Mrutyunjay Mahapatra, officer on special duty at Canara Bank said.

Indian Banks’ Association Chief Executive Sunil Mehta explained this: “If an account is classified as SMA-1 or SMA-2 with no moratorium facility for it and there is little scope of recovery in March, it will slip into NPA. Now, an additional window of 90 days will be given to prevent loans turning bad,” Mehta said.

This move follows up the earlier measure announced by the RBI on March 27 when it had permitted lending institutions in India to grant a moratorium of three months on payment of dues falling between March 1 and May 31, 2020.

“It is recognised that the onset of Covid-19 has also exacerbated the challenges for such borrowers even to honour their commitments fallen due on or before February 29, 2020 in standard accounts,” Das said.

The RBI has met a key demand of banks, which had raised concerns about Rs 50,000 crore worth stressed accounts turning into NPAs in March 2020 because of repayment issues, mostly by MSMEs.

The RBI had allowed a three-month moratorium on all term loans, including agriculture, retail and crop loans, along with credit cards and working capital payments. But the benefit of the moratorium was available for payment falling due during March 1-May 31, 2020. Now, as long as the account didn’t turn into an NPA before March 1, this benefit could be availed by borrowers.

“If borrowers had been tagged as NPAs, fresh lending to them would have been an issue at a time when economic activities are going to restart. Banks can now consider their case for additional funding and restructuring of loans,” Mehta said.

But banks will have to make additional provisioning of “10 per cent on all such accounts under the standstill, spread over two quarters, i.e. March 2020 and June 2020.” 

“These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts,” the RBI said.

Mahapatra said this will also come as a relief for banks as they had to make provisioning of at least 15 per cent in normal cases if such accounts would have slipped into an NPA.

The RBI will further issue a detailed circular revising its framework on the resolution of stressed assets dated June 7, 2019. The RBI has decided to grant an additional 90 days for banks to come up with a resolution plan, thereby reducing the financial burden on banks to make additional provisioning. Under the existing guidelines, all lenders are required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default.