RBI to introduce new norms on directors loans, NPA divergence

The Reserve Bank of India’s (RBI) April 19 move to introduce norms on directors’ loans along with non-performing asset (NPA) divergence reporting will raise the corporate governance standards of non-banking finance companies (NBFCs) and lead to investor confidence in the NBFC sector.

NBFCs classified under the upper and middle layer will be required to tighten their credit policy on loans to directors and entities in which their shareholders, directors, or other stakeholders have interest, Investment Information, and Credit Rating Agency of India Limited (ICRA) said in a note dated April 21. Unless approved by the Board, NBFCs shall not grant loans and advances aggregating Rs 5 crore to these investors and officials, as per the new norms.

Similarly, all loans less than Rs 5 crore extended to directors and other senior employees will also have to be reported to the Board and sufficiently disclosed in annual financial statements.

Director of financial institutions at India Ratings & Research, Pankaj Naik, told the media that for the overall NBFC sector, these are structural changes that would boost the governance framework providing healthy growth for the sector.

The RBI has also instructed NBFCs in the upper and middle layer categories to make divergence reporting in case the additional provisioning requirements assessed by RBI or National Housing Bank (NHB) surpass 5% of the reported profits before tax and impairment loss on financial instruments for the assessed period.

NBFCs will also have to make divergence reporting if the additional gross NPAs identified by the regulator surpass 5% of the reported gross NPAs for the period.

These limits are tighter than those of banks where the thresholds are 10% and 15%, respectively, on additional provision and additional gross non-performing assets (GNPA) assessed by the RBI for the reference period, said A M Karthik, vice president & sector head of the financial sector ratings at ICRA.

He said that the grown disclosure requirements are positive from a transparency perspective and can help enhance lender and investor confidence.

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