RBI exempts accounts with moratorium benefits from asset recognition norms for 90 days

Virtually doubling the timeframe for recognising a loan as a non-performing asset (NPA), the Reserve Bank announced an "asset classification standstill" for March-May, giving one more benefit to borrowers hurt by the impact of the COVID-19 pandemic.

However, lenders will have to set aside 10 per cent of the loan amount as provisions in cases where there have been deferments of payments, the central bank said.

The RBI had on March 27 announced a 90-day moratorium on loan repayments for all loans because of the economic impact of the pandemic, as part of a slew of announcements to help protect different sections from the reverses due to the pandemic.

"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 to May 31," Governor Shaktikanta Das said in a televised video message.

In other words, it will be 90 days after May 31 that an asset will be recognised as an NPA, giving the borrower much needed time to regularise an account which will be very helpful if she is hit by the economic hardships.

In the case of non-bank lenders, they have also been given the flexibility under the prescribed accounting standards to consider such relief to their borrowers, Das said.

Domestic credit rating agency Acuite Ratings and Research said that this measure effectively is an extension of the NPA period from 90 days to 180 days, but comes at a cost of banks' profitability as they will have to set aside 10 per cent as provision.

"The banks and NBFCs also need to take higher provisioning charges for March and the June quarter, which will obviously hit their profitability further," it said.

Das suggested that the move to set aside more money is driven by systemic safety considerations.

"We are cognizant of the risk build-up in banks' balance sheets on account of firm-level stress and delays in recoveries. With the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, they will have to maintain higher provision of 10 per cent on all such accounts under the standstill," he said.

Economic activity has come to a standstill during the period of the lockdown, with consequential lingering effects which have unambiguously affected the cash flows of households and businesses, he said.

In a late evening circular, RBI said banks will have to make the provision on such assets at 5 per cent for the March quarter and the remaining 5 per cent for the June quarter.

The provisions shall not be reckoned for arriving at net NPAs till they are adjusted against the actual provisioning requirements, it said.