The Reserve Bank of India (“RBI”) had, on November 12, 2021, issued clarifications with respect to the master circular on ‘Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated October 1, 2021 (“Existing Clarifications”) to the following entities:

1. All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks) excluding Payments Banks;
2. All Primary (Urban) Co-operative Banks/State Co-operative Banks/District Central Co-operative Banks;
3. All-India Financial Institutions (Exim Bank, NABARD, NHB and SIDBI); and
4. All Non-Banking Financial Companies (including Housing Finance Companies) (“NBFC(s)”).

(Hereinafter collectively referred to as “Entities”)

In view of the several queries received in relation to the Existing Clarifications, RBI has issued further clarifications on February 15, 2021 to the Entities. (“New Clarifications”).

By way of the New Clarifications, RBI has advised/ clarified as below:

1. Paragraph 6 of the Existing Clarifications stated that if a cash credit account/ overdraft (“CC/ OD”) account is ‘out of order’, the same shall be classified as a non-performing asset (“NPA”). While expanding on the phrase ‘out of order’, paragraph 6 inter-alia stated that a CC/ OD account shall be treated as ‘out of order’ if the outstanding balance in the CC/ OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 (ninety) days, or the outstanding balance in the CC/ OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the ‘previous 90 (ninety) days period’. In this regard, the New Clarifications further clarified as below:  

i) The definition of ‘out of order’ shall be applicable to all loan products being offered as an overdraft facility, including those not meant for business purposes and/or which entail interest repayments as the only credits; and

ii) The ‘previous 90 days period’, as referred to under paragraph 6 of the Existing Clarifications, for determination of ‘out of order’ status of a CC/ OD account shall be inclusive of the day for which the day-end process is being run;

2. If a borrower has more than one credit facility from a lending institution, then the loan accounts of such a borrower shall be upgraded from NPA to standard asset category only upon repayment of the entire arrears of interest and principal pertaining to all the credit facilities. Further, NBFCs shall have time till September 30, 2022 to put in place the necessary mechanism to implement paragraph 10 of the Existing Clarifications, which states that the loan accounts classified as NPA may be upgraded as ‘standard’ asset only if the entire arrears of interest and principal are paid by the borrower;
3. The requirements related to reporting of information to the Central Repository of Information on Large Credits, shall continue to be governed in terms of the extant instructions that have been issued over time for respective Entities; and
4. The New Clarifications shall not interfere with the extant guidelines on implementation of Ind-AS by NBFCs.

Please find a copy of the Existing Clarifications here, and New Clarifications here.

This update has been contributed by Nidhi Arya (Partner) and Arjun Gopalakrishnan (Senior Associate, Designate).

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