Key takeaways from the RBI notification dated 12^th Nov 2021

The Reserve Bank of India vide its notification dated 12^th Nov 2021 regarding Prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) pertaining to Advances have provided clarifications which is likely to have a significant impact on the provisioning for all financial institutions including Banks and NBFCs.

The notification applies to all lending institutions and issued to clarify and harmonise certain aspects of the extant regulatory guidelines.

The financial institutions covered by the above notification are as follows:

All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks) excluding Payments Banks
All Primary (Urban) Co-operative Banks/State Co-operative Banks/District Central Co-operative Banks
All-India Financial Institutions (Exim Bank, NABARD, NHB and SIDBI)
All Non-Banking Financial Companies (including Housing Finance Companies)

The key takeaways from this notification are as follows:

Compliance date: Not later than 31-Dec-2021

A. Specification of due date/repayment date

Compliance date: At the earliest but not later than 31-Dec-2021

The exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest, examples of SMA/NPA classification dates, etc. shall be clearly specified in the loan agreement
The borrower shall be apprised of the same at the time of loan sanction and also at the time of subsequent changes to the sanction terms/loan agreement till full repayment of the loan.
Loan facilities with moratorium on payment of principal and/or interest, the exact date of commencement of repayment shall also be specified in the loan agreements.

B. Classification of Special Mention Account (SMA) and Non-Performing Asset (NPA)

Compliance date: Immediately with effect from 12-Nov-2021

Framework for Resolution of Stressed Assets’ requires the lenders to recognize incipient stress in borrower accounts, immediately on default, by classifying them as special mention accounts (SMA).
The intervals are intended to be continuous and accordingly, the basis for classification of SMA categories shall be as follows:

In case of NBFCs, the references to 90 days for SMA-2/NPA classification may be read as per the applicable norms and also subject to the provisions of the circular DOR.CRE.REC.No.60/03.10.001/2021-22 dated October 22, 2021 on ‘Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs’.

The borrower accounts to be flagged as overdue by the lending institutions as part of their day-end processes for the due date, irrespective of the time of running such processes.
Classification of borrower accounts as SMA as well as NPA to be done as part of day-end process for the relevant date.
SMA or NPA classification date to be the calendar date for which the day end process is run.
Effectively the date of SMA/NPA to reflect the asset classification status of an account at the day-end of that calendar date.

Example: If due date of a loan account is March 31, 2021, and full dues are not received before the lending institution runs the day-end process for this date, the date of overdue shall be March 31, 2021. If it continues to remain overdue, then this account shall get tagged as SMA-1 upon running day-end process on April 30, 2021 i.e. upon completion of 30 days of being continuously overdue. Accordingly, the date of SMA-1 classification for that account shall be April 30, 2021.

Similarly, if the account continues to remain overdue, it shall get tagged as SMA- 2 upon running day-end process on May 30, 2021 and if continues to remain overdue further, it shall get classified as NPA upon running day-end process on June 29, 2021.

The instructions on SMA classification of borrower accounts are applicable to all loans2, including retail loans, irrespective of size of exposure of the lending institution.

C. Clarification regarding definition of ‘out of order’

Compliance date: Immediately with effect from 12-Nov-2021

Cash credit/Overdraft (CC/OD) account is classified as NPA if it is ‘out of order’.
Where the outstanding balance is less than the sanctioned limit/drawing power, the account should be treated as ‘out of order’ if there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period.
An account shall be treated as ‘out of order’ if:
the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
the outstanding balance is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or the outstanding balance is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period.

D. NPA classification in case of interest payments

Compliance date: 31-Mar-2022

In case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days.
These instructions shall be effective from March 31, 2022. Accordingly, in respect of any borrower account which becomes overdue on or after March 31, 2022, its classification as NPA shall be based on the account being overdue for more than 90 days.

E. Upgradation of accounts classified as NPAs

Compliance date: Immediately with effect from 12-Nov-2021

Some lending institutions upgrade accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc.
Loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower.
With regard to upgradation of accounts classified as NPA due to restructuring, non-achievement of date of commencement of commercial operations (DCCO), etc., the instructions as specified for such cases shall continue to be applicable.

F. Income recognition policy for loans with moratorium on payment of interest

Compliance date: Immediately with effect from 12-Nov-2021

For loans where moratorium has been granted for repayment of interest, lending institutions may recognize interest income on accrual basis for accounts which continue to be classified as ‘standard’.
Once an account is classified as NPA, the entire interest accrued and credited to income account in the past periods, must be reversed to the extent it remains unrealised.
If loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the interest accrued during such moratorium period need not be reversed.

Ind AS Accounting Standards