The road to being classified a bad loan just got longer with RBI’s relaxation

• The Reserve Bank of India (RBI) has announced a set of measures to pump more liquidity into the economy, especially for small and medium businesses.
  
• In addition to extending ₹50,000 crore to government institutions, RBI also changed the rules of classifying assets.
  
• This means that even if a small company can’t meet its payments, it won’t be degraded.
  
• However, there’s a catch.
  

The lockdown has been tough on the economy, and the problems of big corporations have taken the spotlight. However, according to the Reserve Bank of India (RBI), the disruption has had a more severe impact on small and medium-sized businesses.

While these businesses need more lending, those who generally lend to them - non-banking financial companies (NBFCs) and microfinance institutions (MFIs) - have been stressed for over a year. Apart from extending ₹50,000 crore to government institutions that will pass it on to shadow banks, RBI also changed the rules of classifying assets.

It extended the period for the resolution plan of stressed assets by 90 days from 60 days currently. It means shadow banks or NBFCs will get a breather, as they have been facing a credit crunch of their own as fewer banks were lending to them ever since IL&FS went into a crisis of bad loans.

Asset classification standstill
During its first set of relief measures announced on March 27, the central bank said that payment on loans will be deferred for the next 90 days — from 1 March to 31 May. That meant that they would not turn into non-performing assets (NPAs). But that didn’t necessarily mean that they wouldn’t be ‘reclassified’ for missing their payments.

Today, April 17, RBI governor Shaktikanta Das clarified that the 90-day NPA norm shall exclude the moratorium period. This means that asset classification will be halted for all such accounts from 1 March 2020 to 31 May 2020. Even if a small company can’t meet its payments, it won’t be degraded.

“The market should consider this favourably as this will ease liquidity and credit classifications issues,” said Rajosik Banerjee, a partner and head of financial risk management at KPMG India.

But there’s a catch
Just because a bank does not call it a bad loan does not mean that it isn’t heightened risk. In order to balance that out, banks are now required to maintain sufficient buffers. This means that they have to maintain a higher provision of 10% on all such accounts under the standstill, which will be spread out over the coming two quarters.

“NBFCs that are now required to report under Ind AS, will have to take this into account while performing their expected credit loss calculations, together with the positive effect of all other governmental support measures targeted directly at the borrowers, whether, retail or corporate,” said Sai Venkateshwaran, partner and head of CFO advisory at KPMG India.

“This will remain an area of key judgement for NBFCs, and will have a direct impact both on their earnings as well as their lending ability,” he explained.

To further address the problems faced by small and medium businesses, the RBI announced a slew of measures to ease their liquidity crunch — like targeted long-term repo operations (TLTRO), refinancing facilities for All India Financial Institutions (AIFIs), and a reduction of the reverse repo rate.

A welcome immediate relief not only to these institutions but also to their borrower base,” said Sanjay Doshi, head of Financial Services Advisory at KPMG India.

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