Provisions of the revised framework and the Guidelines on Restructuring of Advances by NBFCs, have left ambiguity in the provisioning of assets that may be considered standard, after change in repayment schedule and/or restructuring

Non-Banking Financial Companies (NBFC) have been an important segment of the financial services sector, progressively contributing to the financial inclusion agenda and bringing about credit growth. The ever growing significance of NBFCs also demanded revision in the regulatory framework. The Usha Thorat Committee’s report on growing significance of NBFCs and the recommendations to streamline the regulations applicable to NBFCs with that of banks was largely adopted in the revised regulatory framework (“Regulations”) that RBI released on 10th November, 2014.

While the fine prints of the revised framework are yet to be released, what has intrigued the NBFC sector already is a small insertion in Para 8.13 of the revised framework. The Para reads as –

8.13 For the existing loans, a one-time adjustment of the repayment schedule, which shall not amount to restructuring will, however, be permitted.

The sluggish economic environment has posed several challenges to doing business ability of the corporate sector and has also impacted financial institutions with credit recoveries remaining extremely strained.

Before the revised framework was released, RBI had issued Guidelines on Restructuring of Advances by NBFCs (“Guidelines”) which provided breather in some cases on restructuring of standard assets by allowing the NBFCs to retain them as standard in their books even after restructuring, subject to the compliance of the provisions relating to special regulatory treatment.

While the revised framework does not have any reference to the restructuring guidelines, one may have to look at the restructuring guidelines issued in January, 2014.

What creates ambiguity is that, Para 8.13 of the Regulations says, one-time adjustment of the repayment schedule, which does not tantamount to restructuring, shall be permitted, which means, if the repayment schedule of a standard asset is adjusted for one time, subject to the fact that this adjustment is not amounting to restructuring, standard asset will remain standard and normal provisioning will have to be done at the rate of 0.25%.

On the other hand, the Guidelines allow the NBFCs to retain standard assets as standard even after restructuring, subject to the conditions mentioned in Clause 7.2.1 of the Guidelines. The text of the law has been laid down below:

7.2.1 Incentive for quick implementation of the restructuring package

As stated in para 4.1.2, during the pendency of the application for restructuring of the advance with the NBFC, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. However, as an incentive for quick implementation of the package, if the approved package is implemented by the NBFC as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell in respect of cases covered under the CDR Mechanism or when the restructuring application was received by the NBFC in non-CDR cases:

(i) Within 120 days from the date of approval under the CDR Mechanism.

(ii) Within 120 days from the date of receipt of application by the NBFC in cases other than those restructured under the CDR Mechanism.

Thus, if the approved package of restructuring is implemented within 120 days from the date of approval or from the date of receipt of application, as the case may be, an NBFC will be allowed to retain a standard asset in its books as a restructured standard asset.

However, such assets will be subject to a higher provisioning at the rate of 5%, pursuant to the provisions of Clause 4.4.1, and provision for diminution in fair value, pursuant to the provisions of Clause 4.4.2.

If the NBFCs intend to choose the provisions of Clause 8.13 of the Regulations over the Guidelines, following will be its limitations and benefits –

• If the NBFCs choose Clause 8.13 of the Regulations over the Guidelines, the standard asset will be retained as standard; it will be able to escape the dual provisioning requirements under the Guidelines.

• It will be difficult to adjust the repayment schedule without restructuring the asset.

Adjustment of repayment schedule is nothing else than re-scheduling and in the Guidelines, the words “Reschedule”, “Restructure” and “Renewal” have been used as de-facto alternatives. Thus, in most of cases, adjustment of repayment schedule will tantamount to restructuring and thus, will fall under the purview of the Guidelines.

However, there is an instance mentioned in the Guidelines, which will not tantamount to restructuring. Referring Clauses 3.3 (v) and 3.4 (iv), mere extension of DCCO for a period less than 2 years and 1 year in cases of infrastructure project loans and non-infrastructure project loans, respectively, will not be considered as restructuring.

As on date, the Regulations have not been notified. Thus, unless the Regulations are getting notified on or before 31st December, 2014, there is no question of availing the benefit of Para 8.13 of the Regulations and NBFCs will have to follow the Guidelines for retaining the assets as standard in their books. Thus, any adjustment in the repayment schedule will be subject to a higher provisioning of 5% and provision diminution in fair value.

However, even if the Regulations get notified on or before 31st December, 2014, benefits under Clause 8.13 will not be available without its set of troubles as mentioned above.