Early Recognition of Financial Distress

Corrective Action Plan to Address Increasing Non-Performing Assets (NPAs)

Non-Banking Financial Companies (NBFCs) must quickly identify signs of stress in loan accounts. On detecting a default, these accounts should be categorized as special mention accounts (SMA) based on the duration of overdue payments. The categories are SMA-0 for up to 30 days overdue, SMA-1 for more than 30 days and up to 60 days, and SMA-2 for more than 60 days and up to 180 days.

The Reserve Bank has established a Central Repository of Information on Large Credits (CRILC) to gather and share credit data. NBFCs with significant assets are required to report credit information, including the SMA status of borrowers, to CRILC.

NBFCs should closely monitor accounts in SMA-0 and SMA-1 categories as they indicate early signs of financial stress. If an account reaches the SMA-2 category, it triggers the mandatory formation of a Joint Lenders’ Forum (JLF) and the development of a Corrective Action Plan (CAP).

Accelerated Provisioning

If NBFCs fail to report the SMA status or try to hide the actual status of accounts, they will face accelerated provisioning requirements and possible supervisory actions. The document details the current and revised provisioning requirements for various asset classifications.

Board Oversight

The Board of Directors of NBFCs is responsible for improving asset quality and credit risk management systems. They should ensure timely reporting to CRILC, prompt formation of JLFs, and regular policy reviews.

Credit Risk Management

NBFCs must conduct independent and objective credit appraisals. They should not rely solely on external consultants, especially those associated with the borrowing entity. Sensitivity tests and scenario analyses are crucial, particularly for infrastructure projects. NBFCs should verify the source and quality of equity capital and be cautious of multiple leveraging in projects.

Joint Lenders Forum (JLF) and Corrective Action Plan (CAP)

When an account is reported as SMA-2, NBFCs must form a JLF. The JLF explores options to resolve the account’s stress, focusing on preserving the economic value of assets and loans. Options include rectification, restructuring, or recovery. Decisions by the JLF should be based on agreement from a significant majority of creditors.

Restructuring Process

The restructuring process under JLF or Corporate Debt Restructuring (CDR) mechanism follows detailed guidelines. It involves evaluating the viability of the account, agreeing on restructuring terms, and ensuring fair terms for lenders. The process should be completed within specified time limits, and shareholders should bear the first loss rather than debt holders.

Prudential Norms on Asset Classification and Provisioning

While a restructuring proposal is under consideration, usual asset classification norms apply. Special asset classification benefits are available for accounts restructured under these guidelines, provided the restructuring is implemented within the specified timeframe.

Introduction to RBI – NBFC Scale Based Regulation

Regulations applicable for NBFC-BL

Regulations applicable for NBFC-ML

Regulatory Instructions for NBFC-UL

Directions for NBFC – Micro Finance MFIs

Specific Directions for NBFC-Factors and NBFC-ICCs

Specific Directions for Infrastructure Debt Funds IDFs-NBFC

Scoring Methodology for Identification of NBFC as NBFC-UL

Regulatory Guidance on Implementation of Ind AS by NBFCsv

Norms on Restructuring of Advances by NBFCs

Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries

Guidelines on Liquidity Risk Management Framework