RBI Update: RBI warns NBFCs against lending to defaulters..
The Reserve Bank of India (RBI) has now tightened its grip on a specific lending practice of non-banking finance companies (NBFCs). The RBI has questioned at least three NBFCs about why they are granting new loans to customers who have defaulted on their previous loans. During annual inspections, RBI officials found that in some cases, customers defaulted on vehicle loans, but were granted new loans against property or home loans.
The RBI says it is not advocating against granting new loans altogether. This could be a company's business decision. However, a clear board-approved policy should be in place, outlining the circumstances under which new loans will be granted and how to ensure they are not used for evergreening.
What is evergreening?
Evergreening is a practice in which a troubled borrower is granted a new loan to repay an old loan. This conceals the true status of the bad loan on the company's balance sheet. According to regulations, if a loan installment remains overdue for 90 days, it is declared an NPA (Non-Performing Asset).
After the first default, the account is SMA-0
SMA-1 for a delay of 3160 days
SMA-2 for a delay of 6190 days
The RBI's stance is that if an NBFC's internal loan policy does not specify this, it does not mean that it can do so. According to sources, similar restrictions may apply to NBFCs with a net worth of more than ₹250 crore that comply with IndAS (Indian Accounting Standards).
Why is IndAS considered strict?
IndAS requires prior risk identification and provisioning. This means that after a 30-day delay, the potential loss on the entire loan must be assessed, assuming a significant increase in credit risk. This is called the ECL (Expected Credit Loss) model, which doesn't wait for a default to occur, but rather accounts for potential losses from the outset. The RBI's goal is to ensure that NBFCs adopt better governance, risk management, and transparency, so that future situations like concealing bad loans don't arise.
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