RBI compliance for NBFCs: asset classification, penal charges, the KFS and the returns
CS Manoj Famra · Guide · 2026-08-12 · 11 min read (estimated)
Most RBI requirements on an NBFC are discharged by a policy document and a board resolution. A smaller set cannot be: they are arithmetic, and they have to be right in the system that moves the money every day. Asset classification, income recognition, the treatment of penal amounts, the disclosure in the Key Facts Statement and the valuation of gold collateral are all in that second category. This guide covers those — what each direction requires, where systems typically get it wrong, and what a correct implementation looks like.
It is written for the person who has to answer for the numbers: a compliance officer, a credit head, a finance controller, or a founder who is all three. Every position below names the direction it comes from so you can check it against the source.
How does asset classification work under RBI norms?
An account is overdue if any amount due to the lender is not paid on the due date. Classification follows from how long it stays that way.
| Stage | Trigger | What it is |
|---|---|---|
| SMA-0 | Overdue 1–30 days | Special Mention Account — early warning, not impairment |
| SMA-1 | Overdue 31–60 days | Still a standard asset. A second cycle missed |
| SMA-2 | Overdue 61–90 days | The last stage before impairment |
| NPA (Sub-standard) | Overdue more than 90 days | Non-performing asset |
| Doubtful | 12 months as sub-standard, 18 in the Base Layer | The provision now splits — the secured part by age, the rest in full |
| Loss | Identified as such | Unrecoverable. Provided at 100%, or written off |
Three points decide whether an implementation is right.
It is a day-end event. The RBI's clarification of 15 November 2021 on prudential norms (RBI/2021-2022/125) put this beyond argument: an account is flagged overdue as part of the day-end process for the due date itself. Not the next morning, not on the reporting date, not when somebody runs a report. A system that classifies when asked, rather than every night, will produce different answers depending on when it was asked.
Overdue means demanded and unpaid. Interest that has accrued but has not yet fallen due is not overdue. This distinction is what makes a bullet-repayment or interest-servicing product behave correctly: the clock starts on the date the sanction says the money is due, not on the date interest began to accrue.
Upgrade is stricter than most systems assume. The same 2021 clarification requires that an account classified as NPA is upgraded to standard only when the entire arrears of interest and principal are paid. Part-payment that brings the account below ninety days does not upgrade it.
Where implementations go wrong: a classification field somebody can edit; a nightly job that skips accounts in some states; and per-product classification logic, where a gold loan and a term loan take different code paths and quietly diverge on what counts as overdue.
What happens to interest when a loan turns NPA?
Income recognition stops being accrual-based. On classification as non-performing, interest that has accrued but not been collected must be reversed — it was recognised as income and it should not have been — and from that date interest on the account is recognised only when it is actually received.
In accounting terms: reverse the accrued interest out of income into a suspense account; recognise from suspense to income only as receipts arrive.
This is the position most commonly implemented halfway. The reversal is done, because it shows up in the P&L and somebody notices. The second half — recognising on receipt — is often not, because nothing forces it: the interest sits in suspense and the borrower's later payments quietly reduce principal instead. The result is an understated income line, an overstated recovery on principal, and a suspense balance that only grows.
The test is simple. Take an NPA account with interest in suspense, post a payment, and follow it. The payment should meet the suspended interest before it touches principal, the suspense balance should fall, and income should be recognised for exactly that amount on the date of receipt.
Are penal charges interest? (No — and what that changed)
The RBI's circular on fair lending practice and penal charges in loan accounts (RBI/2023-24/53, dated 18 August 2023, effective for new loans from 1 April 2024 and applied to existing ones at their next review) settled a question a lot of systems had answered the other way.
Penal amounts on a default are penal charges, not penal interest. Four consequences follow, and each one lands in code:
- No capitalisation. The charge is not added to principal. An outstanding that includes levied
penal is a wrong outstanding.
- No compounding. Interest is not computed on a penal charge.
- They are charges in the books. Which, on an accrual-versus-receipt view, means income when
received rather than when levied.
- They must be disclosed and reasonable. Quantum and the circumstances of levy go into the
agreement and the Key Facts Statement, and the same charge cannot be levied twice for the same default under two names.
A useful way to hold it: the borrower's liability arises when the charge is levied, but the lender's income arises when it is received, and those are two different dates. A statement of account for the borrower should show the levy; the trial balance should not, until it is collected. Systems that use one number for both are wrong for one of the two audiences.
What must the Key Facts Statement contain?
The Key Facts Statement (KFS) is a standardised summary given to the borrower before execution, required under the RBI's guidelines on the KFS for retail and MSME loans (RBI/2024-25/18, dated 15 April 2024). Two things matter operationally.
The APR is computed, not quoted. It is the annualised cost of the loan including interest and all charges recovered by the lender — processing fee, documentation, insurance premium financed — excluding only those genuinely collected on behalf of a third party and disclosed as such. A KFS where somebody typed the APR into a template is a disclosure waiting to be contradicted by the schedule printed next to it.
Charges not in the KFS cannot be recovered later. That is the clause with teeth. It makes the KFS a limit on the lender rather than a summary of its intentions, and it means the KFS has to be generated from the loan's own sanctioned terms rather than assembled by hand.
What changed for gold loans under the 2025 directions?
The Reserve Bank of India (Lending Against Gold and Silver Collateral) Directions, 2025 harmonised what had been a patchwork. The changes with operational teeth:
| Area | The requirement |
|---|---|
| Valuation reference | The lower of the 30-day average and the previous day's closing price of 22-carat gold, published by IBJA or a SEBI-recognised exchange; lower purities adjusted proportionately |
| Return of collateral | On repayment, the same day or within 7 working days; compensation payable per day of delay |
| Unclaimed collateral | Treated as unclaimed after two years from full repayment |
| Auction surplus | Returned to the borrower within 7 working days |
| Loss or damage in custody | The lender compensates |
The valuation rule is the one that breaks existing systems. Valuing at "the latest rate on file" is no longer sufficient, and a branch that has not keyed the rate for a fortnight is valuing that morning's pledge at a fortnight-old price — over-lending on a falling market, short-changing the borrower on a rising one, and unable to demonstrate the basis afterwards either way.
The return deadline is the one that creates a liability nobody notices, because it accrues by doing nothing: the loan is closed, the borrower has a no-dues certificate, and the packet sits on the shelf.
What returns follow from all of this?
The classification, the income treatment and the charge treatment above are the inputs to the reporting. If they are wrong, everything downstream is wrong in the same direction.
- DNBS returns — the supervisory returns applicable to your layer under scale-based regulation.
- CRILC — large-borrower reporting, including SMA status, which comes straight from the DPD you
computed at day-end.
- Credit information reporting — submissions to the credit information companies, on the
fortnightly cycle now required.
- Priority sector — where applicable to your classification of advances.
The practical test of a reporting stack is whether a return can be traced back to the accounts that produced it. Where returns are assembled in a spreadsheet from an extract, the return and the ledger are two claims about the same quarter and reconciling them is a manual exercise every time.
Common mistakes
- A classification that can be typed. If a human can set it, it can differ from the ledger.
- Reversing NPA interest but never recognising it on receipt. Half the rule, and the half that
understates income.
- Penal amounts in the principal outstanding. Directly contrary to the April 2024 position.
- A KFS with a typed APR. It will eventually contradict the schedule on the same page.
- Per-product classification logic. Two engines diverge; the divergence surfaces in an
inspection.
- Gold valued at whatever rate is on file. Not the prescribed basis, and not defensible after
the fact.
- Editing a scheme and restating live loans. The borrower was told something; that has to remain
true.
How Lenviq handles this
Every position above is implemented in the engine rather than in a reporting layer over it. Classification runs in the day-end process from the due events, on one path for every product. Interest is reversed to suspense on NPA and recognised from suspense on receipt — the receipt meets suspended interest before principal. Penal amounts are levied as charges, are never capitalised, and reach the general ledger only when collected. The KFS is generated from the loan's own sanctioned terms with the APR computed. Gold is valued at the reference the 2025 directions prescribe, and the seven-working-day return clock is monitored rather than left to memory.
Each of these is set out with its citation on the compliance page, and the boundary is stated there too: software implements a position, it does not make a lender compliant.
Frequently asked questions
When does an account become NPA under RBI norms?
When it has been overdue for more than ninety days, determined in the day-end process rather than at a reporting date. The RBI's 15 November 2021 clarification requires the overdue flag to be applied as part of the day-end process for the due date itself, which is what makes the ninety-day count start on day one rather than whenever a report is run.
Can an NPA account be upgraded when the borrower part-pays?
No. The 2021 clarification requires the entire arrears of interest and principal to be paid before an account classified as NPA is upgraded to standard. A part-payment that brings the account under ninety days does not upgrade it, which is a change from what many systems did previously.
Are penal charges allowed to be compounded?
No. Under RBI/2023-24/53 penal amounts are charges rather than interest, so no interest is computed on them and they are not capitalised to the principal outstanding. They must also be disclosed in the loan agreement and the Key Facts Statement, and be reasonable relative to the default.
What gold rate should an NBFC use for valuation?
The lower of the 30-day average closing price and the previous day's closing price of 22-carat gold, as published by IBJA or a SEBI-recognised exchange, with lower purities adjusted proportionately. Using the latest rate on file, however old, does not meet the basis the 2025 directions prescribe.
Is compliance software enough to satisfy an RBI inspection?
No, and any vendor who says otherwise should worry you. What a system can do is make the correct treatment automatic, keep the classification and the ledger reading from the same rows, and leave a trail that shows what was applied and when. The policy decisions, the board approvals and the sign-offs remain the lender's.
Related reading: Penal charges are charges · Classification is a day-end event · Income reversal on NPA · What the KFS APR includes · The 2025 gold directions · SMA classification
If you want to see how these are implemented rather than described, ask for a walk-through.
Read next
- What is a loan origination system, and what does an NBFC need one to do?
What a loan origination system is, what each stage owns, and what separates an LOS an NBFC can be audited on from one it cannot.
- NBFC software: the complete guide to what the stack actually contains
LOS, LMS, core lending, accounting, collections and reporting — what each layer does, where the seams are, and what to buy as one system.
- Digital lending for NBFCs: what the guidelines require of your systems
Who may hold the money, what a lending service provider may not do, KFS and cooling-off — and what each means inside the loan management system.
From the people who wrote this
Run your lending on Lenviq
Seeing it run on your own book is faster than reading about it — a demo works through your products, your schemes and your classification rules, not a generic tour.
Lenviq is loan origination, servicing and accounting for NBFCs, built by FastLegal Technologies.