Important RBI Notifications for NBFC

i.a.Safety and security

When we are lending against collateral of gold jewellery, shall ensure that necessary infrastructure and facilities are put in place, including safe deposit vault and appropriate security measures for operating the vault, in each of its branches where gold jewellery is accepted as collateral. This is required to safeguard the gold jewellery accepted as collateral and to ensure convenience of borrowers.

i.b. Loan to value ratio (LTV)

While sanctioning loan against the security of gold jewellery it is mandatory to maintain a Loan-to-Value (LTV) Ratio not exceeding 75 per cent for loans. Standardization of Value of Gold accepted as collateral in arriving at LTV Ratio- The gold jewellery accepted as collateral  shall be valued by taking into account the preceding 30 days’ average of the closing price of 22 carat gold as per the rate as quoted by the India Bullion and Jewellers Association Ltd. (IBJA) or the historical spot gold price data publicly disseminated by a commodity exchange regulated by the Forward Markets Commission.

i.c.Restrictions

We shall not grant any advance against bullion / primary gold and gold coins. And shall not grant any advance for purchase of gold in any form including primary gold, gold bullion, gold jewellery, gold coins, units of Exchange Traded Funds (ETF) and units of gold mutual fund.

i.d.Verification of the Ownership of Gold

Where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams, we shall keep a record of the verification of the ownership of the jewellery. The ownership verification need not necessarily be through original receipts for the jewellery pledged but a suitable document shall be prepared to explain how the ownership of the jewellery has been determined, particularly in each and every case where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams.

i.e.Auctioning of overdue jewel loan jewels: Board has  approved policies on auction of gold jewellery that are transparent to the borrower and adequate prior notice has been issued to her/him. We must disclose in our annual reports the details of the auctions conducted during the financial year including the number of loan accounts, outstanding amounts, value fetched and whether any of its sister concerns participated in the auction.

i.f. Acknowledgement to the borrower: As a token of having pledged the jewels, issue a card to the borrower, which should contain, Name, account number, loan date, loan amount, details of jewels, due date of the loan. 

j.ASSET CLASSIFICATION AND PROVISIONING NORMS

Overdue loan account

In a loan account ,”Overdue” refers to the amount that has not been paid within the specified grace period.

Overdue loan amount

The loan amount which customers fail to repay on time is known as the Loan Overdue Amount. As it is clear from the name itself, the Loan Overdue Amount is the amount left unpaid even after the due date of payment. If a loan customer fails to pay the Monthly instalment/EMI amount until the due date, this amount will be the Loan Overdue Amount.

Non-Performing Asset (NPA) Classification –

An asset, in respect of which, interest has remained overdue for a period of six months or more*;

A term loan inclusive of unpaid interest, when the instalment is overdue for a period of six months or more or on which interest amount remained overdue for a period of six months or more*;

A demand or call loan, which remained overdue for a period of six months or more from the date of demand or call or on which interest amount remained overdue for period of six months or more*;

*The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs.

A glide path is provided to NBFCs in Base Layer to adhere to the 90 days NPA norm as under –

Classification as Special Mention Account (SMA) for loans other than revolving facilities.

Asset classification

We shall, classify our loans and advances into the following classes, namely:

(i) Standard assets;

(ii) Sub-standard assets;

(iii) Doubtful assets; and

(iv) Loss assets.

The class of assets referred to above shall not be upgraded merely as a result of rescheduling, unless it satisfies the conditions required for the upgradation.

Standard asset shall mean the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem or carry more than normal risk attached to the business.

Sub-standard asset shall mean an asset which has been classified as non-performing asset for a period not exceeding 18 months*. An asset where the terms of the agreement regarding interest and / or principal have been renegotiated or rescheduled or restructured after commencement of operations, until the expiry of one year of satisfactory performance under the renegotiated or rescheduled or restructured terms. (now stands changed)

Doubtful asset shall mean any asset, which remains as sub-standard asset for a period exceeding 18 months*.

Loss asset shall mean an asset which is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or non-availability of security or due to any fraudulent act or omission on the part of the borrower.

Prudential Norms

As per Prudential Norms, the income recognition policy should be objective and should enforce that income is recognised based on the record of recovery, instead of any subjective considerations. NBFCs are not supposed to charge/ debit interest in any NPA account and for taking to income account (i.e. income recognition). However, interest on advances against Term Deposits/ NSC/ IVP/ KVP/ Life policies may be recognised on due date (i.e. without realisation), provided adequate margin is available.

Also, the Management and Statutory Auditors are responsible for ensuring that requisite/ adequate provisioning has been made, based on the ‘age of assets having been classified as NPA’ and the realisable value of the available security under respective accounts, for compliance with the Prudential Norms.

Provisioning requirements

After taking into account the time lag between an account becoming non-performing, its recognition as such, the realisation of the security and the erosion over time in the value of security charged, make provision against sub-standard assets, doubtful assets and loss assets as provided hereunder:-

Loss Assets

The entire asset shall be written off. If the assets are permitted to remain in the books for any reason, 100% of the outstanding shall be provided for.

Doubtful Assets

100% provision to the extent to which the advance is not covered by the realisable value of the security to which the applicable NBFC has a valid recourse shall be made. The realisable value is to be estimated on a realistic basis.

In addition to item (a) above, depending upon the period for which the asset has remained doubtful, provision to the extent of 20% to 50% of the secured portion (i.e. Estimated realisable value of the outstanding) shall be made on the following basis:-

Period for which the asset has been considered as doubtful

Up to one year 20%

One to three years 30%

More than three years 50%

Sub-standard assets

A general provision of 10 percent of total outstanding shall be made.

Standard asset provisioning

Provision for standard assets shall be  at 0.25 percent of the outstanding, which shall not be reckoned for arriving at net NPAs. The provision towards standard assets need not be netted from gross advances but shall be shown separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet.

Disclosure in the balance sheet

(1) Every applicable NBFC shall separately disclose in its balance sheet the provisions made as per these Directions without netting them from the income or against the value of assets.

(2) The provisions shall be distinctly indicated under separate heads of account as under:-

(i) provisions for bad and doubtful debts; and

(ii) provisions for depreciation in investments.

(3) Such provisions shall not be appropriated from the general provisions and loss reserves held, if any.

(4) Such provisions for each year shall be debited to the profit and loss account. The excess of provisions, if any, held under the heads general provisions and loss reserves may be written back without making adjustment against them.

Norms for restructuring of advances.

Rescheduled loans are most common when the borrower informs the lender that he/she will be unable to repay the loan in time, or when the borrower cannot afford to make payments. Because a default would hurt both the borrower and the lender  and  the lender often works with the borrower through options, such as rescheduling the Payment.

Income recognition

Income including interest and other charges on NPA shall be recognised only when it is actually realised. Any such income recognised before the asset became non-performing and remaining unrealised shall be reversed.

General

Company should refrain from interference in the affairs of the borrower except for the purposes provided in the terms and conditions of the loan agreement

In case of receipt of request from the borrower for transfer of borrowal account, the consent or otherwise i.e. objection of the company, if any, shall be conveyed within 21 days from the date of receipt of request.

In the matter of recovery of loans, company shall not resort to undue harassment viz; persistently bothering the borrowers at odd hours etc., as complaints from customers also include rude behavior from the staff of the companies.

As a measure of customer protection and also in order to bring in uniformity with regard to prepayment of various loans by borrowers company shall not charge foreclosure charges/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers.

Information on secured assets possessed under SARFAESI Act 2002.