Introduction
Key aspects of 2021 and 2022 circulars
Comment
The Reserve Bank of India (RBI) has been gradually aligning regulations applicable to banks with those applicable to non-banking financial companies (NBFCs). Apart from implicitly recognising that NBFCs are quickly narrowing the gap with NBFCs on systemic importance in credit delivery, the RBI's alignment also seeks to minimise regulatory arbitrage. In October 2021, the RBI prescribed a master circular that consolidated instructions on income recognition, asset classification and provisioning for banks. On 12 November 2021, the RBI issued a circular clarifying certain provisions of the master circular with the intent of "ensuring uniformity in the implementation… across all lending institutions" on income recognition, asset classification and provisioning. Unlike the master circular, the 12 November 2021 circular was also addressed to NBFCs and housing finance companies. The 12 November 2021 circular prescribed some provisions to be effective from 31 March 2022. On 15 February 2022, based on the feedback provided by industry stakeholders, particularly on the purported difficulties on implementation, the RBI clarified some portions of the 12 November 2021 circular.
Key aspects of 2021 and 2022 circulars
The 12 November 2021 circular is an instance of perceptive rule-making by the RBI, in that it looks at certain industry-wide practices (which were not specifically covered by a regulation) and seeks to plug possible loopholes. The 12 November 2021 circular notes that certain lending institutions tend to upgrade the classification of accounts from "non-performing" to "standard" if the borrower is able to pay pending interest dues, rather than all pending amounts. The 12 November 2021 circular clarifies that, "to avoid any ambiguity", accounts that are classified as "non-performing" can only be classified as "standard" if the "entire arrears of interest and principal are paid by the borrower". The 15 February 2022 circular has moved forward the implementation of this provision to 30 September 2022 to enable NBFCs to "put in place the necessary systems to implement this provision".
Based on stakeholder feedback, the 15 February 2022 circular also provides some clarifications on the implementation of the 12 November 2021 circular. The 15 February 2022 circular prescribes that, where borrowers have more than one credit facility from different lenders, a loan account can be upgraded only if the borrower pays all interest and principal amounts due in respect of all credit facilities.
In another example of perceptive rule-making, the 12 November 2021 circular notes that loans agreements of some lending institutions do not mention due dates for payment, and instead prescribe general descriptions that have "scope for different interpretations". The 12 November 2021 circular prescribed that loan agreements must, with effect from 31 December 2021, prescribe precise dates and amounts (including break-up of interest and principal) and also contain examples of classification of a loan account on the basis of overdue amounts. This also corresponds with another prescription of the 12 November 2021 circular, which requires lenders to recognise loans as overdue on the basis of the status of receipt of due amounts at the time of a lender running its "day-end" processes. Reports in the public domain suggest that this prescription removes the flexible approach some lenders may have followed in allowing borrowers to make payments during the interest period rather than on a due date.
In order to meaningfully implement the requirements of the 12 November 2021 circular, lending institutions would also need to, from 31 March 2022, "place consumer education literature on their websites" explaining concepts such as:
- date dates;
- overdues;
- classification as "non-performing" or "special mention account" on the basis of overdues; and
- the "day-end" process.
In order to further improve awareness, the 12 November 2021 circular also prescribes that lending institutions can display such consumer education literature at their branches by way of posters and other appropriate media.
Based on reported stakeholder reaction, it can be surmised that, while the 12 November 2021 circular and the 15 February 2022 circulars are well-intended in seeking to improve asset classification discipline and remove regulatory arbitrage, their issuance or implementation could have been better timed. For instance, these circulars could prescribe that their provisions would need to be implemented from 30 September 2022 or 31 March 2023 to allow lending institutions adequate time to prepare.
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