When does an NBFC classify a loan as non-performing?
An NBFC classifies a term loan as non-performing when interest or principal remains overdue for more than 90 days. The longer period some companies used before the glide path ended is not the test now. The account is upgraded to standard only when the entire arrears of interest and principal are paid.
When is the loan non-performing?
For a term loan, the date that matters is the date interest or an instalment of principal fell due and stayed unpaid. More than 90 days of that overdue makes the asset non-performing. A cash-credit or overdraft account is non-performing when it is out of order: the balance stays above the sanctioned limit or drawing power for 90 days, or there are no credits for 90 days, or the credits in that period do not cover the interest debited. A temporary irregularity is not itself the classification. The record of recovery is.
How is a non-performing loan classed?
An asset that is being serviced is a standard asset. Once it is non-performing, the class follows how long it has stayed there.
| Class | When it applies |
|---|---|
| Sub-standard | It has remained non-performing for not more than 12 months |
| Doubtful | It has remained sub-standard for 12 months |
| Loss | The company, its auditor, or the Reserve Bank has identified it as not collectible, even if it is not yet written off |
The classification is of the borrower, not of one facility in isolation. If one account is non-performing, the borrower’s other facilities with that NBFC are classified with it. The directions also set a provision for each class. This page does not reprint those percentages. A part payment does not move the account back to standard.
When is income recognised?
Interest on a non-performing asset is recognised when it is received, not accrued. Interest already taken to income and not realised is reversed. Recovery, where the law allows it for that company, may be a restructuring, a negotiated settlement, a suit, the insolvency process, or the securitisation route. Not every NBFC can use the securitisation statute. The certificate and the layer, which decide what else the company reports to the Reserve Bank, are on the NBFC page and the returns page.
Frequently asked questions
Four questions cover the 90-day test, a part payment, other facilities of the same borrower, and provisioning.
Is the test still 180 days?
No. The longer overdue period some NBFCs used has ended. A term loan is non-performing when interest or principal remains overdue for more than 90 days.
Does a part payment upgrade the account?
No. The account is upgraded to standard only when the entire arrears of interest and principal are paid.
Does one overdue facility mark the others?
Yes. The classification is borrower-wise. If one facility of the borrower is non-performing, the other facilities of that borrower are classified with it.
Does this page set the provision?
No. The Reserve Bank’s directions set the provision for a standard, sub-standard, doubtful, and loss asset. Those percentages are not reprinted here.
Sources
Asset classification for an NBFC follows the Reserve Bank’s prudential directions. The November 2021 clarification requires the whole arrears to be paid before an account is upgraded, and the longer overdue period used during the glide path has ended.