Jhe Reserve Bank of India (RBI) has gradually aligned the regulations applicable to banks and non-banking financial companies (NBFCs). In addition to implicitly recognizing that NBFCs are rapidly closing the gap with banks in terms of their systemic importance in extending credit, such alignment also aims to minimize regulatory arbitrage. In October 2021, the RBI issued a main circular consolidating its guidance on revenue recognition, asset classification and bank provisioning. In November 2021, the RBI issued a circular clarifying certain provisions of the main circular with the aim of “ensuring uniformity in…the implementation…across all credit institutions” of revenue recognition, classification assets and provisioning.
Unlike the main circular, the November circular was also aimed at NBFCs and housing finance companies. The November circular prescribed certain provisions to come into force on March 31, 2022. In February, based on feedback from industry stakeholders, particularly on their perceived difficulties in implementation, the RBI clarified the November.
The November circular is an example of insightful rulemaking by the RBI, in that it looked at certain industry-wide practices that were not specifically covered by the regulations and sought to address possible shortcomings. The November circular noted that some lending institutions tended to upgrade the classification of accounts from non-performing to standard if the borrower was able to pay the pending interest, rather than all of the pending amounts. The November circular specifies that “for the avoidance of doubt”, accounts classified as non-performing can only be classified as standard if “all arrears of interest and principal are paid by the borrower”. The February circular postponed the implementation of this provision to September 30, 2022 to allow the NBFCs to put in place the necessary arrangements.
The February circular also provides details on the implementation of the November circular. The February circular states that where borrowers have more than one credit facility with different lenders, a loan account can only be upgraded if borrowers pay all interest and principal due under all facilities. credit.
In another example of insightful rulemaking, the November circular noted that some lending institutions’ loan agreements did not mention payment due dates, but instead prescribed general descriptions that could “give rise to different interpretations. The November circular provides that loan agreements must, from December 31, 2021, set specific dates and amounts, including the breakdown of interest and principal, and give examples of the classification of a loan account on the basis of the amounts due.
This tied in with another requirement of the November circular, that lenders count loans as overdue based on receipt of amounts due by the time the lender performed its end-of-day processes. Reports in the public domain suggest that this requirement removes the flexible approach some lenders may have taken by allowing borrowers to make payments during the interest period rather than on a due date.
To meaningfully comply with the requirements of the November circular, credit institutions must publish consumer education materials on their websites explaining concepts such as due dates, overdue amounts, classification as non-performing or special mention accounts based on overdue amounts and day-to-end process. To further enhance consumer awareness, the November circular also stipulates that credit institutions may display this educational material in their branches in the form of posters and other appropriate materials.
Based on reported stakeholder reactions, it may well be that, while the November and February 15 circulars are well-intentioned in that they aim to improve asset classification discipline and remove regulatory arbitrage, their publication and implementation could have been better timed. For example, these circulars could have provided that their provisions would be implemented at a later date, say 30 September 2022 or 31 March 2023, to allow credit institutions sufficient time to prepare.
Sawant Singh and Aditya Bhargava are partners at Phoenix Legal. Sristi Yadav, a senior associate, also contributed to the article.