HFCs Urge RBI to Scrap Strict Asset Classification Guidelines

The Association of Housing Finance Companies (HFC), the umbrella body for all mortgage lenders, has appealed to the Reserve Bank of India Governor Shaktikanta Das and the National Housing Bank to do away with the stringent asset classification guidelines announced recently. HFCs have submitted that the new rules will force a borderline borrower to slip into NPA category, putting a complete halt on payments. As per the new RBI rules, loan accounts can be upgraded to 'standard' from NPA only if all the arrears of interest and principal are paid by the borrower. "Once a borrower genuinely defaults by over 3 EMIs, it is very difficult for him to pay all the overdue EMIs in one go and update the account," the HFCs have stated in the letter. "It has been our experience that the borderline borrowers make all out efforts to pay one EMI if only to avoid getting classified as NPA."  HFCs have said that the new rules will put further capital strain on them and lead to spike in refinancing costs. "Even with monthly cash flows and improving loan-to-value ratios, the financial system will end up showing higher NPA levels artificially and avoidably leading to increased capital strain for the lenders," mortgage lenders said. "All refinancing institutions will demand more margins to cover the refinance or ask us to exclude the NPA and due loans from the portfolio offered as security, even though the account is a moving one." The lenders have also submitted that since these overdue borrowers will have to be reported to the Credit Information Bureaus as NPA, it will cripple them forcing the borrower into long term default. Currently, all loans with 90 days past due (DPDs) have to be treated as NPA. If the borrower brings his loan account below 90 DPD status, non-bank lenders treat the account as a standard asset even though the account may still have some EMIs overdue. The new RBI rules require NBFCs to treat such accounts as NPAs until the borrower updates the account by paying all the EMIs due. The banking sector follows an automated system for tagging accounts as NPAs, under which the accounts are tagged as NPAs on the day the account becomes overdue for more than 90 days. However, in many NBFCs, this classification is made after the end of 90 or 180 days. In general, many non-bank lenders upgrade NPAs as overdues in the accounts reduced to less than 90 days, while banks do not upgrade an NPA until all the overdue amounts are collected. With these changes, the norms have been made largely congruent between banks and NBFCs.