The Reserve Bank of India (RBI) issued guidelines for loans restructured by non-banking finance companies (NBFCs) on 23 January 2014. The new guidelines are intended to create a level-playing field between NBFCs and other commercial banks.
The guidelines issued on loan restructuring for NBFCs were based upon the recommendations of Mahapatra Committee. Mahapatra Committee headed by B Mahapatra, Executive Director at RBI, was appointed by the RBI in October 2013.
The new guidelines issued are
• NBFCs to have more flexibility to deal with stressed loans but it is mandatory for them to set aside a substantial amount of provisions to cover restructured loans.
• NBFCs, like commercial banks, are required to set aside a 5% provision against restructured loans. For existing stock, the provisions will go up to 5% in a phased manner by March 2017.
• At present, a majority of the NBFCs are not allowed to accept public deposits and most of their funding needs are met by borrowing from commercial banks.
• An infrastructure loan given by an NBFC will become a non-performing asset (NPA) if the project fails to take off commercially within two years from the original date of commencement of commercial operations (DCCO), unless it is restructured and becomes eligible for classification as a standard asset.
• If the loan is given to a non-infra project, it will become an NPA if the borrower fails to commence commercial operations within one year from the original DCCO, even if it is regular as per record of recovery, unless the loan is restructured.
• NBFCs will have to make a provisioning of 0.25% of the loan amount for such loans.
• For commercial real estate loans, an extension of DCCO will not be considered as restructuring if the revised DCCO falls within a period of one year from the original date of commercial commencement. Hence, such loans will be treated as standard assets without attracting higher provisioning.
• A special classification benefit will be provided to corporate debt restructuring cases, including small and medium enterprises. The benefit will, however, be withdrawn with effect from 1 April 2014.
Non-Banking Financial Companies (NBFCs)
NBFCs are company registered under the Companies Act, 1956 engaged in the business of loans and advances.
The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the NBFCs by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934.
They are different from the commercial banks in the sense that they cannot accept demand deposits and do not form a part of any payment settlement.
Also, deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.