60-day repayment relief is for lenders, not a payment holiday for borrowers

The RBI on Monday provided lenders — banks, non-banking finance companies and microfinance companies — a breather, by relaxing NPA recognition norms by 60 days, for payments due between November 1 and December 31. While this will offer some leeway to lenders on the provisioning front, it does not imply a 60-day holiday for borrowers to pay their dues. Borrowers may still incur additional interest and penalty on account of delay in payment of their EMIs.

What the RBI says Currently loans (in case of banks) where borrowers have defaulted in their payments for 90 days or more, are classified as NPAs.

The RBI’s notification on Monday implies that the cut-off norm for NPA recognition has been extended to 150 days, for payments due between November 1 and December 31. The current norm practised across NBFCs varies from 90 days to 150 days (though all are mandated to adopt a 120-day norm by March 2017).

The relaxation on loan classification will offer respite to lenders on the provisioning front.

The RBI’s exemption is aptly applicable in the case of small borrowings — working capital limits with banks where the sanctioned limit is ₹1 crore or less and term loans of up to ₹1 crore.

At the system level, of the total outstanding loans of banks as of March 2016, loans with credit limit of upto ₹1 crore constituted about 35 per cent (in value). In terms of accounts, the RBI’s leeway covers 99 per cent of the total number of bank loan accounts. In case of NBFCs and HFCs, as the average loan ticket size is low, the RBI’s relaxation will apply to most borrower accounts.

Does this mean that nearly all borrowers can delay their payments by 60 days?

The provisioning relaxation for lenders has been misinterpreted as a payment holiday for borrowers.

“The RBI has not stated that lenders have to defer collections. All that the RBI is stating is that in case of overdue accounts in this period, we need not set aside additional provisions for the short term. In case of borrower difficulty to make the payment, MFIs are voluntarily deferring the payment without any fees or additional charges,” explains Rajeev Yadav, Chief Executive Officer, Disha Microfin.

TT Srinivasaraghavan, Managing Director, Sundaram Finance, reiterates the same point stating that the circular is intended for lenders and not for borrowers.

Not a waiver “Only some sections of borrowers have been impacted by the cash crunch and may not be able to service their payments. So, the RBI has given lenders a little leeway for recognising such delinquencies. It is not a loan waiver scheme,” says Srinivasaraghavan.

According to the contractual arrangement, lenders can continue to charge interest on the delayed payment.

According to a clarification note put out by Microfinance Institutions Network (MFIN) — a self-regulatory organisation that regulates NBFC-MFIs — the RBI’s circular is a relaxation for loan classification and has been misunderstood as deferment of payment of loan repayment instalments. The note clarified that the normal rate of interest as per the original loan agreement, will apply to all delayed payments.

Accepting old notes Small borrowers who repay their dues through cash have been impacted the most and the leeway is required more from the point of view of ease of repayment. Banks are allowed to collect old ₹500 and ₹1,000 notes from borrowers, but NBFCs and MFIs have not been allowed to do so.

“We have made representations to the RBI to allow us also to accept these notes. This would have resolved some of the operational issues which are being faced by our customers. All our customers are KYC-compliant in any case,” says Yadav.

“Borrowers are allowed to repay bank loans with old notes. This option should also be made available to NBFCs as the money would be going into the loan account with requisite PAN details in any case. Ultimately, the money will come into the system,” adds Srinivasaraghavan.

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