In the background of COVID-19 pandemic and a nation-wide lockdown, there are chances of an increased percentage of bad loans in the country. Therefore, the Reserve Bank of India (RBI) has decided to provide relief to lenders. That is RBI has instructed banks to keep enough funds aside so that the banks must be ready to face stressed assets due to the depleting economy.
This announcement was made as part of the second contingency plan of RBI that deals with the COVID-19 consequences on economic and financial sectors.
Usually, a loan is categorised as a non-performing asset (NPA) if the payments are overdue for more than 90 days. However, RBI has declared a three-month moratorium for term loans on 27 March 2020. Therefore, customers who have chosen for the moratorium will not be marked as NPA.
Consider that a person chose to stop payments and avail the three-month moratorium for his loan. If he defaults on payments for another three months after the completion of the moratorium period, his loan can be marked as a bad loan. Essentially, in this case, banks have a period of 180 days to classify a loan as a bad one.
Banks benefit from this move in the sense that loans will not turn out to be bad loans immediately. There may be a deterioration in the asset quality in the second and third quarters of the financial year. However, the same may not be profitable for non-banking finance corporations (NBFCs) as though follow the ‘loss given default’ method.
RBI stated that the banks have to maintain a higher provision of 10% on all such accounts under the standstill over the two quarters—March 2020 and June 2020. In a detailed circular dated 17 April 2020, the banking regulator mentioned that the banks must make at least 5% provision for the March quarter and the rest by June 2020.
Banks can adjust the general provision against the statutory provisions one the slippages are labelled as NPAs. The provisions will not be considered to identify the net NPAs until they are adjusted against the actual provisioning requirements. Banks are also instructed to make necessary disclosures on such provisions in the quarterly result announcements.
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