Loan Commitments explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A credit loss that has nowhere to sit as a deduction has to be recognised as a liability instead — and for an NBFC with undrawn limits, that situation is not unusual.
The provisions head
Provisions shall be classified as:
- Provision for employee benefits;
- Others (specify nature).
"Others" would include all provisions other than provisions for employee benefits, such as provision for litigation, provision for decommissioning liabilities, loan commitments etc. These amounts should be disclosed separately specifying nature thereof.
Loss allowance as a provision
For loan commitments and financial guarantee contracts, as per Ind AS 109 the loss allowance is recognised as a provision.
The reason is structural. A loss allowance is normally a deduction from the carrying amount of a financial asset — but an undrawn commitment is not an asset. Nothing has been advanced yet; the entity has only promised to advance. There is no carrying amount to deduct from, so the expected credit loss can only be recognised as a liability.
The same holds for a financial guarantee contract issued: the entity has no receivable, only a potential obligation to pay if the guaranteed party defaults.
An entity should disclose information about the changes in the loss allowance for financial assets separately from those for loan commitments and financial guarantee contracts.
Many NBFC facilities are a single instrument with two components — an amount drawn and a limit still available. Ind AS 109 anticipates that the credit loss on the two may not be separable:
If a financial instrument includes both a loan (i.e. financial asset) and an undrawn commitment (i.e. loan commitment) component, and the entity cannot separately identify the expected credit losses on the loan commitment component from those on the financial asset component, the expected credit losses on the loan commitment should be recognised together with the loss allowance for the financial asset.
So the default is to treat the combined loss as a deduction from the drawn balance. But that only works while the drawn balance is large enough to absorb it:
To the extent that the combined expected credit losses exceed the gross carrying amount of the financial asset, the expected credit losses should be recognised as a provision.
The situation arises where a borrower has drawn very little of a large facility and has deteriorated badly. The expected loss across the whole exposure can exceed the small drawn amount — and the excess cannot be deducted from an asset that is not there. It becomes a liability on the face of the balance sheet.
That is a meaningful signal in an NBFC's accounts. A provision arising this way says the entity is contractually committed to lend more to a borrower whose credit has already deteriorated past the amount outstanding.
The two-step test
- Can the expected credit losses on the loan commitment component be separately identified from those on the financial asset component?
- Yes → allowance against the asset; provision for the commitment.
- No → recognise the combined loss together with the loss allowance for the financial asset.
- Does the combined loss exceed the gross carrying amount of the financial asset?
- No → it remains entirely a loss allowance.
- Yes → the excess is recognised as a provision.
Disclosing the nature
The instruction to disclose separately specifying nature thereof applies across the "Others" category. A provision for litigation, a decommissioning provision and a provision arising from loan commitments are entirely different in origin, timing and reliability of estimate — presenting them as one figure would tell a reader nothing about any of them.
Common mistakes
- Deducting the loss allowance on an undrawn commitment from a financial asset.
- Combining the movement in loan commitment provisions with the asset loss allowance disclosure.
- Capping the combined loss at the drawn balance instead of recognising the excess as a provision.
- Presenting a single "other provisions" figure without specifying its components.