RBI Strengthens NBFC Lending Governance Regarding Defaulted Borrowers

The Reserve Bank of India (RBI) has raised concerns with several non-banking financial companies (NBFCs) regarding their practice of extending fresh loans to borrowers who have already defaulted on earlier credit facilities, as per The Economic Times report. 

The issue has surfaced during the central bank’s annual inspections of select NBFCs, where officials examined lending books and internal policies governing credit decisions. 

RBI seeks clearer policy on fresh lending 

As per report, the regulator has asked lenders to ensure that such lending decisions are supported by board-approved frameworks. 

During inspections, supervisors reportedly identified instances where borrowers who had defaulted on vehicle loans were subsequently granted fresh credit such as home loans or loans against property. 

Concerns over potential loan evergreening 

Regulators are particularly cautious about the risk of “evergreening”, a practice where borrowers receive new loans to service existing stressed loans, masking the true quality of the lender’s asset book. 

Under current norms, a loan becomes an NPA once interest or principal remains unpaid for more than 90 days. Before reaching that stage, stressed loans are categorised as Special Mention Accounts (SMA), depending on the number of days overdue. 

Read More: RBI Reinstates Default Loss Guarantees Framework for NBFCs! 

Conclusion 

The move signals closer regulatory scrutiny of lending practices within the NBFC sector. By pushing for stronger governance and board-approved policies, the RBI aims to ensure that fresh lending to stressed borrowers does not weaken credit discipline or conceal rising loan stress in the financial system. 

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