Permit us to use reserves: NBFCs to RBI
Move aimed at making provision for expected losses due to COVID-19
- Non-banking finance companies (NBFCs) requested the Reserve Bank of India (RBI) to allow them to draw down from their reserves for making additional provision for expected losses due to COVID-19 pandemic.
- NBFCs appropriate pro- statutory and other reserves, and utilisation of these reserves is governed by the statute requiring its creation.
- NBFCs are required to comply with Indian Accounting Standards (IndAS).
- The Institute of Chartered Accountants of India (ICAI) has advised the NBFCs to measure the impact of COVID-19 on the portfolio quality in the form of PD and LGD with adverse impact on the business of the borrowers or debtors due to COVID-19 on one hand, and prudential regulatory actions to sustain the economy such as loan repayment holidays.
- As per IndAs norms applicable in respect of ECL measurement and disclosure in the financial statements, the NBFCs are required to make additional provisioning in terms of ICAI advisory, which will surely make a severe dent on the profitability and networth of the respective NBFCs.
- A one-time draw-down from reserves would enable them to shore up their balance sheet strength by reporting a more fortified ECL provision cover against their likely increase in delinquent loans and remain eligible to access equity/debt capital when situation normalises.
- The sector has asked the RBI to consider permitting any provisions made as per ECL, in respect of the standard assets, to be reckoned with for the purpose of tier II capital.
- The industry also wanted the RBI to raise the ceiling for considering standard asset provision for calculation of capital adequacy to 2.5% from 1.25%.