Ahead of the Union Budget 2021-22, the Narendra Modi government is considering easing classification norms for non-performing assets, a move aimed at providing relief to industry and especially smaller businesses in light of Covid-19.

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Currently, a loan becomes non­-performing if the interest or instalment of principal remains overdue for more than 90 days, with the exception of accounts eligible for the Covid-19 moratorium provided by the Reserve Bank of India.

The Centre is considering easing it to between 120-180 days, thus making permanent a measure adopted during the pandemic and the nationwide lockdown, a top government official told Moneycontrol. The person added that such a move would require legislative changes.

“There have been a number of consultations on the matter, including with industry and stakeholders. A decision will be taken soon and it may be announced in the upcoming budget,” the official said.

It is understood that Finance Minister Nirmala Sitharaman may announce an intention to bring about these changes in the budget. The legislative process can then happen in two different ways. Either the Banking Regulation Act, which contains the current provision of 90 days for declaring NPAs, can be amended through the Finance Bill 2021 in the Budget Session itself, or it can be amended later separately.

The 90-day asset classification rule was given legal backing by amendments to the Banking Regulation Act in 2017. It is also part of the Reserve Bank of India’s rules for banking operations.

The budget-makers believe that such a move will be beneficial for businesses as well as banks. For businesses, especially in light of Covid-19, it will certainly provide them additional time to pay interest and not be named a defaulter.

“In the case of micro, small and medium enterprises, India has a very different business culture . Here so much of business is carried out on credit and trust. Hence a small business owner can run the risk of being declared an NPA without any fault of theirs,” the official quoted above said.

For banks, their NPAs are expected to rise once the Covid-related moratorium ends. The Centre feels that making the change permanent will help banks maintain their capital adequacy ratios even with the Covid-related defaults.

In September, the RBI extended the loan moratorium till December 31. The 90-day non-performing asset (NPA) norm excludes the moratorium period for the eligible accounts. However, the banks have to maintain an additional provisioning of 10 per cent on such accounts. The bad loan classification period for accounts eligible for the moratorium was also changed from 90 days to 180 days.