Industry leaders have spoken of stricter rules for the NBFC sector in light of recent incidents such as the IL&FS outage and the DHFL fiasco. It should be noted that RBI regulations require NBFCs to follow certain rules for the identification and disclosure of non-performing assets (NPAs) in accordance with asset classification standards. The rules for banks are slightly different. Under the new standards, NBFS must mark non-performing loans on a daily basis rather than monthly. NPAs can only be settled regularly when borrowers have paid all arrears. The Reserve Bank of India (RBI) on Tuesday extended the deadline for non-bank financial corporations (NBFCs) to comply with new asset classification standards released on November 12. Non-bank lenders will now be allowed to switch to the new NPL recognition rules until 30 September 2022, up from 31 March 2022. On Tuesday, the RBI said a non-bank financial company`s (NBFC) exposure to a single company must not exceed 20 percent of its available capital base and an additional 5 percent exposure will be allowed, subject to board approval. For a group of related enterprises, the overall exposure is limited to 25 % of the capital base of non-bank enterprises.
However, the rules provide more flexibility for infrastructure finance companies. The Reserve Bank of India (RBI) recently said it would not exempt non-bank financial corporations (NBFCs) from stricter rules on bad loans, which are expected to be adopted soon. Many NBFCs have asked the RBI to exempt small loans from the rules, as this could pose a challenge for the NBFC sector. The rules apply to new loans by December 31, 2021 and to existing loans in case of modification. The rules will help avoid risk concentrations and protect lenders from shocks due to the failure of a large borrower account. In October 2021, the RBI published a set of rules to rank NBFCs based on their size and perceived risks. The RBI had said the upper layer of NBFCs could have group exposure of up to 40% of the capital base. Although it has now reduced the risk for Group companies, the limit on the risk of the individual borrower has been maintained. The provision for loans relates to the early recognition of losses on a loan by NBFC. By making arrangements in advance, NBS can consider outages and potential expenses to determine their financial situation.
The new standard asset provision standards will come into effect on October 1, 2022. Currently, large NBFS offer standard asset savings at a fixed rate of 0.4%. The “previous 90-day period” to determine the “out of service” status of a credit/cash overdraft (CC/OD) account includes the day for which the end-of-day process is executed. Where borrowers have more than one credit facility with a lending institution, loan accounts are not reclassified to a standard category until all interest and principal arrears related to all APN credit facilities have been repaid. However, this is only subject if the property is owned by the NBFC for its own use and it can sell it voluntarily without legal impediment; the revaluation reserves are disclosed separately in the financial statements and the value is realistic and in accordance with applicable accounting standards and is obtained, inter alia, by two independent experts. In addition, the decision to put NBFCs on an equal footing with highly exposed banks and a number of other actions taken by the central bank have also led to speculation that the sector may enter a period of consolidation, particularly after the announcement of HDFC Bank`s merger with Housing Development Finance Corp. Earlier this month. As set out in prudential standards for restructuring advances Additional disclosure requirements are consistent with the scale-based regulatory framework and complement disclosure requirements set out in other laws, regulations or accounting standards.
Earlier, NBFCs had requested an extension to comply with the terms of the November 12 circular for micro, small and medium-sized enterprise (MSME) accounts. Next Article Profiling India`s EdTech Industry: A Multi Billion Dollar Opportunity » All of this can be considered CET1 capital with a 55% discount, rather than Tier 2 capital under existing regulations. The guidelines are intended to harmonize revenue recognition and asset classification practices in banks and NBFCs. Analysts had predicted that the NPL assessment rule could lead to an increase in NPAs reported by some NBFCs. According to industry experts, most NBS have a long history of converting Phase 3 gross loans (NPAs) to Phase 2 gross loans – or Special Mention Account (ADM)-2 – for a single payment.
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