NPA classification: Temporary relief to MSME borrowers

The Reserve Bank of India on Febraury 7, 2018 vide its circular DBR.No.BP.BC.100/21.04.048/2017-18, given an instrucion to banks and NBFCs not to down grade the asset classification of accounts of MSME borrowers where the borrower’s account was standard as on August 31, 2017.The accounts shall be treated as standard accounts if the borrower unit is registered under GST as on January 31, 2018 and whose aggregate exposure did not exceed Rs.25 Crores with banks and NBFCs.The amount from the borrower overdue as on September 1, 2017 and payments from the borrower due between September 1, 2017 and January 31, 2018 are paid not later than 180 days from their respective original due dates.RBI said that a provision of 5% shall be made by the banks/NBFCs against the exposures not classified as NPA in terms of above said circular. The provision in respect of the account may be reversed as and when no amount is overdue beyond the 90/120 day norm for banks and NBFCs respectively.The Central Bank further clarified that  the additional time is being provided for the purpose of asset classification only and not for income recognition, i.e., if the interest from the borrower is overdue for more than 90/120 days, the same shall not be recognised on accrual basis.
The RBI circular said that the formalisation of business through registration under GST had adversely impacted the cash flows of the smaller entities during the transition phase with consequent difficulties in meeting their repayment obligations to banks and NBFCs.  Presently, banks and NBFCs in India generally classify a loan account as Non-Performing Asset (NPA) based on 90 day and 120 day delinquency norms, respectively and the decission to continue those account as Standard account beyond 90/120 days diliquency norms was taken by Apex Bank as a measure of support to MSME borrowers who have registered under the GST in their transition to a formalised business environment,