MUMBAI: In a move that could result in more non-banking finance companies’ loans being categorised as NPAs and raise provisioning requirements, the RBI has tightened NBFC asset classification norms. The guidelines, which come into effect on March 30 next year, bring the NBFC classification norms on a par with that of banks. The guidelines were notified by the central bank in the form of clarification on its prudential norms on income recognition, asset classification and provisions (IRACP) pertaining to advances. “To ensure uniformity in the implementation of IRACP norms across all lending institutions, certain aspects of the extant regulatory guidelines are being clarified and/or harmonised, which will be applicable to all lending institutions,” the RBI said in its circular. Two classifications will directly affect NBFC norms. The first one pertains to when a delinquent borrower, who has been classified as an NPA, can be upgraded. In a bank, if borrowers default long enough to be classified as an NPA, they will have to repay all due principle and interest that has remained unpaid to shake off the NPA label. In case of NBFCs, some of them have been upgrading accounts if the borrower gets back on the repayment schedule and pays past interest. “The NPA upgradation criteria has been tightened for NBFCs. This could lead to a spike in NPAs as loans that were upgraded from NPA to SMA (special mention account) 2 can no longer be classified as standard,” said ICRA VP Anil Gupta. He added that banks were in any case upgrading NPAs to SMA only after all the overdue amounts with respect to principal and interest were received. This difference in asset classification is also the reason why banks that acquire NBFC portfolios end up reporting a small spike in NPAs. The other change — that lenders will have to classify borrower accounts as overdue according to their day-end process — forces for the due date irrespective of when the process is done. Many banks have been following a process where they classified a loan as default only if money was not received at the month-end. This would mean that a borrower who does not meet their payment obligation on say15th of the month would be immediately classified as delinquent but if there is a payment on the 17th it would be upgraded. This would mean more work for banks in terms of reporting but overall the delinquency may not rise. Bankers say that if the same day default rule is applied there would be a lot of defaults as almost a third of borrowers don’t have enough balance on the due date. This is seen in the 31% bounce rates in auto-debit payments.