What changed
RBI amended the NBFC Income Recognition, Asset Classification and Provisioning Directions to insert new paragraphs 36A, 36B, and 36C. These allow NBFCs to consider DLG arrangements when computing ECL provisions, provided the DLG is integral to the loan contract and not recognised separately. After each DLG invocation, NBFCs must recompute ECL provisions adjusting for the reduced cover.
What it means for you
NBFCs can now reduce provisioning requirements for portfolios with DLG, improving capital efficiency. However, they must ensure DLG is embedded in loan terms and follow IndAS disclosure norms. Post-invocation, provisions must be recalculated, preventing over-reliance on diminishing cover. This aligns prudential norms with digital and co-lending growth.
What you must do
- Review all existing DLG arrangements to confirm they are integral to loan contracts per IndAS requirements.
- Update ECL provisioning models to incorporate DLG as a factor across all stages, ensuring no separate recognition.
- Establish processes to recompute ECL provisions immediately after each DLG invocation event.
- Enhance disclosure practices to comply with IndAS 1 requirements for DLG-related information.
Who it affects
NBFCs engaged in digital lending with DLG arrangements, NBFCs participating in co-lending with DLG cover, Risk and compliance teams at NBFCs, Auditors reviewing ECL provisioning under IndAS
Can NBFCs now treat DLG as a separate financial guarantee for provisioning?
No. The DLG must be integral to the loan's contractual terms and cannot be recognised separately under IndAS. It is factored into the ECL calculation as part of the loan portfolio.
What happens to provisioning after a DLG is invoked?
The DLG cover reduces by the invoked amount. NBFCs must recompute ECL provisions across all stages, adjusting for the reduced cover, to ensure adequate provisioning.
Does this amendment apply to all NBFCs or only those with digital lending?
It applies to all NBFCs with DLG arrangements permitted under the Credit Facilities Directions and Transfer and Distribution of Credit Risk Directions, covering digital lending and co-lending.