What changed
RBI has prescribed specific provisioning rates for standard assets held by NBFC-Upper Layer entities, replacing the earlier uniform approach. The rates vary by asset category: individual housing and SME loans at 0.25%, teaser-rate housing loans at 2% (dropping to 0.40% after reset), CRE-RH at 0.75%, other CRE at 1%, and all other loans at 0.40%. Restructured advances follow existing prudential norms. Derivative exposures also attract standard asset provisioning.
What it means for you
NBFC-ULs must recalibrate their provisioning buffers, especially for teaser-rate home loans and CRE exposures, which carry higher rates. This increases the cost of holding these assets and may impact profitability and capital planning. Ind AS-compliant NBFCs must ensure impairment allowances meet the new prudential floor, though these provisions cannot be used to calculate net NPAs.
What you must do
- Classify all standard assets into the specified categories and apply the new provisioning rates from the effective date.
- Update provisioning policies and systems to handle the differential rates, including the teaser-rate transition from 2% to 0.40%.
- For Ind AS NBFCs, compute the prudential floor as per the March 2020 circular and ensure impairment allowances meet or exceed it.
- Review derivative exposures and set aside provisions as per counterparty asset classification.
- Train credit and risk teams on the new definitions for CRE, CRE-RH, and MSME categories.
Who it affects
All NBFCs classified as Upper Layer (NBFC-UL), Housing Finance Companies in the Upper Layer, NBFCs with net worth of ₹250 crore or more following Ind AS
What is the provisioning rate for teaser-rate housing loans after one year?
After one year from the date the teaser rate is reset to a higher rate, if the account remains standard, the provisioning rate reduces from 2% to 0.40%.
How is Commercial Real Estate – Residential Housing (CRE-RH) defined?
CRE-RH includes loans to builders/developers for residential housing projects, excluding captive consumption. If commercial space exceeds 10% of total FSI, the entire loan is classified as CRE (not CRE-RH).
Do these provisions apply to derivative transactions?
Yes, current credit exposures from permitted derivative transactions attract the same provisioning rate as the standard asset category of the counterparty.