Now the Reserve Bank has shown strictness on a particular loan practice of non-banking finance companies (NBFC). RBI has asked at least three NBFCs why they are giving new loans to those customers who have not repaid the earlier loan on time. During the annual inspection, RBI officials found that in some cases the customer defaulted on the vehicle loan, but the same was given a new loan in the name of property or home loan.
RBI says that it is not saying that the second loan should not be given at all. This may be a business decision of the company. But for this there should be a clear policy approved by the board, which states under what circumstances the new loan will be given and how it will be ensured that it is not used for evergreening.
What is Evergreening?
Evergreening is a method in which a borrower in trouble is given a new loan to repay the old loan. Due to this, the real position of bad loans in the balance sheet of the company gets hidden. According to the rules, if the installment of a loan remains outstanding for 90 days then it is declared as NPA (Non-Performing Asset).
- Account SMA-0 after first default
- SMA-1 on 3160 day delay
- 6190 days delay on SMA-2
RBI’s stance is that if nothing is written about this in the internal loan policy of an NBFC, it does not mean that it can do this. According to sources, the same strictness may be applicable for NBFCs whose net worth is more than Rs 250 crore and which follow IndAS (Indian Accounting Standards).
Why is IndAS considered strict?
In IndAS, risk has to be identified and provisioned in advance. That is, after a delay of 30 days, the potential loss of the entire loan has to be estimated considering a significant increase in credit risk. This is called ECL (Expected Credit Loss) model, in which one does not wait for default to happen, but the potential loss is kept in mind from the beginning. The aim of RBI is that NBFCs should adopt better governance, risk management and transparency, so that a situation like hiding bad loans does not arise in future.