Amendments to NBFC Regulations – Company Registration in Bangalore
There have been certain developments in the recent past in the prudential standards for the banking system pertaining to the period for which a non-performing asset remains a sub-standard asset or period after which a sub-standard asset would become a doubtful asset. Reserve Bank of India has also issued guidelines for financing of infrastructure projects by scheduled commercial banks and All-India Financial Institutions. In order to align the prudential norms applicable to NBFC with those applicable to the banks and FIs, particulars in relation to exposure to infrastructure projects; it has been decided to amend the prudential norms for NBFC. Accordingly, the following changes are effected:
Period of Non-Performing Assets (NPAs)
An Asset would be classified as sub-standard asset, if it remains non-performing for a period not exceeding 18 months, instead of the present norm of 24 months. Also, an asset would be classified as doubtful if it remains non-performing for a period exceeding 18 months instead of present norm of 24 months.
Accordingly, in super-session of the existing RBI norms, the following norms will be applicable to restructuring or rescheduling or renegotiation of the terms of agreement relating to infrastructure loans. These norms will apply to fully or partly secured standard and sub-standard assets. In case the asset is partly secured, a provision to the extent of shortfall in the security available should be made while restructuring or rescheduling or renegotiating the asset, apart from the provision required on present value basis and as per prudential norms. The revised norms would be applicable to the accounts which are subjected to restructuring, etc. of terms during current financial year and thereafter.
Restructuring or reschedulement or renegotiation
The NBFCs can restructure or reschedule or renegotiate the terms of infrastructure loan agreement as per broad policy framework laid down by their Board of Directors of the particular Company under the following stages:
- Before commencement of commercial production;
- After commencement of commercial production but before the asset has been classified as sub-standard.
- After commencement of commercial production and the asset has been classified as sub-standard.
In each of the above three stages, the restructuring, etc. of principal and or of interest could take place, with or without sacrifice, as part of the restructuring package evolved.
Treatment of restructured standard accounts
A restructuring of the installments of principal alone, at any of the aforesaid first two stages would not cause a standard asset to be re-classified in the sub-standard category, provided for restructuring, the project is re-examined and found to be viable either with the approval of the Board of Directors of the company or within the policy framework laid down by the Board by a factionary at least one step senior to the functionary who sanctioned initial loan for the project. A restructuring of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to sub-standard category subject to the condition that the amount of interest forgone, if any, on account of adjustment in the element of interest as specified later, is either written off or 100 percent provision is made there against.
Treatment of restructured sub-standard accounts
A sub-standard asset would continue to remain in the same category in case of restructuring of the installments of principal. A restructuring of interest element would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period of 12 months and will be subject to the condition that the amount of interest foregone, if any, on account of adjustment in the element of interest as specified later, is either written off or 100 percent provision is made there against. Even in cases where the adjustment is by way of write off the past interest dues, the asset should continue be treated as sub-standard.
Where restructuring involves a reduction in the rate of interest, the interest adjustment should be computed by taking the difference between the rate of interest as currently applicable to infrastructure loans (as adjusted for the risk rating applicable to the borrower) and the reduced rate and aggregating the present value (discounted at the rate currently applicable to infrastructure loans, adjusted for risk enhancement) of the future interest payable so stipulated in the restructuring proposal.
On funding of interest in respect of NPAs, if interest funded is recognized as income, should be fully provided for.
Income recognition norms
There will be no change in the existing instructions on income recognition. In other words, the NBFC may recognize income on accrual basis in respect of the accounts which are classified as a standard asset, in terms of the provisions herein above. It is also clarified that if the restructured asset was a sub-standard asset, and it becomes a standard asset after satisfactory performance of 12 months, the interest can be recognized on account basis. However, the interest income on sub-standard assets should be recognized on cash basis only.
While the change in the norms of provisioning for NPAs in respect of loans to infrastructure projects will be prospective, the NBFC which are already holding provisions against such accounts, which, may now be classified as ‘standard’, shall continue to hold the provisions and shall reverse the same till full recovery is made against the account.
Eligibility for up gradation of restructured sub-standard infrastructure loans
The sub-standard accounts subjected to restructuring, etc. whether in respect of principal installments or interest amount, by whether modality, would be eligible, subject to the satisfactory performance during the period, to be upgraded to the standard category only after the specified period. i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due.
Conversion of debt into equity
If the amount of interest due, is converted into equity or any other instrument, and income is recognized in consequences, full provision should be made for the amount of income so recognized to offset the effects of such income recognition. However, provision would not be required, if the conversion of interest is into equity which is quoted. In such cases, interest income can be recognized at market value of equity, as on the date of conversion, not exceeding the amount of interest converted to equity.
Conversion of debt into debentures
In case of conversion of principal and/or interest in respect of NPAs into debentures, such debentures should be treated as NPA, in the same assert classification as was applicable to loan just before conversion and provision made as per norms.
Applicability of restructuring, etc., norms to loans other than infrastructure loans and investments
The NBFCs may exceed the concentration of credit/investment norms for single party and group by 5 and 10 percent respectively if the additional exposure is on account of infrastructure related loans and investments . The person and received norms are as under:
|Present norms||Addl. Exposure For infrastructure||Present norms||Addl. Exposure for infrastructure|
|Credit and Investment Combined||25%||5%||40%||10%|
Asset liability management
The long-term financing of infrastructure projects may lead to asset-liability mismatches, particularly when such financing is not in conformity with the maturity profile of the NBFC liabilities. The NBFC would, therefore, need to exercise due vigil on their asset liability position to ensure that they do not run into liquidity mismatches on account of lending to such projects.
Time and adequate availability of credit pre-requisite for successful infrastructure projects. The NBFC should therefore, clearly delineate the procedure for approval of loan proposals and institute a suitable monitoring mechanism for reviewing applications pending beyond the specified period. Multiplicity of approvals by every institution involved in financing, leading to delays, has to be avoided and the NBFC should be prepared to broadly accept technical parameters lay down by leading public financial institutions. Also, setting up a mechanism for an ongoing monitoring of the project implementation will ensure that the credit disbursed is utilized for the purpose for which it was sanctioned.
Risk weights for investment in AAA rated securitized paper
Investment in AAA rated securitized paper pertaining to the infrastructure facility would attract risk weight of 50 percent for capital adequacy purposes subject to fulfillment of the following:
- The infrastructure facility should conform to the definition of lending given in the annexure.
- The infrastructure facility should be generating income / cash flows which would endure servicing or repayment of the securitized paper.
- The securitized paper should be rated at least “AAA” by the rating agencies and the rating should be current and valid. The rating relied upon will be deemed to be current and valid if the rating is not more than one month old on the date of opening of the issue, and the rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and the rating letter and the rating rationale is a part of the offer document;
- In case of the secondary market acquisition, the ‘AAA’ rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency;
- The securitized paper should be a performing asset on the books of the investing or lending institution.
The above instructions are operative with immediate effect. A copy of the amending notification No. 173 of the date is enclosed. You are requested to ensure meticulous compliance with the regulatory framework which is used for the Company registration in Bangalore. Please acknowledge receipt of this letter to the General Manager or Deputy General Manager of the Regional office of the Department of non-banking supervision under whose jurisdiction the registered office of your company is located.
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