Reserve Bank of India (RBI)
Reserve Bank of India (RBI)

Non-banking financial companies (NBFCs) on Friday 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 utilization of these reserves is governed by the statute requiring its creation.

"We urge upon RBI to consider, as a one-time measure, to allow NBFCs to draw-down from their Reserves and adjust towards additional Expected Credit Losses (ECL) provision requirement, in excess of provision calculated as per normal Probability of Default (PD) and Loss Given Default (LGD)," Finance Industry Development Council (FIDC), a representative body of assets and loan financing NBFCs, said in a letter to RBI Governor Shaktikanta Das.

NBFCs are required to comply with Indian Accounting Standards (IndAS). The Institute of Chartered Accountants of India (ICAI) has advised 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 and reduction in interest rates.

As per IndAs norms, that are 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 and it will surely make a severe dent on the profitability and net worth of the respective NBFCs particularly considering the impact of COVID-19 on the vulnerable sections of society, FIDC said.

A one-time draw-down from reserves would enable the NBFCs 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 normalizes, the letter read.

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 requested the RBI to increase the ceiling for considering standard asset provision for calculation of capital adequacy to 2.5 per cent from 1.25 per cent.

FIDC has urged the RBI to allow NBFCs a one-time window for restructuring of all loans.

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