Non-banking finance companies (NBFCs) have objected to the more stringent provisioning norms proposed for them by the Reserve Bank of India. At present, NBFCs need to classify a loan as a non-performing asset (NPA) if the borrower defaults for 180 days. Banks must do once 90 days have passed and RBI has suggested this same rule apply for NBFCs.
The latter say this will hit them hard for two reasons. One, their borrowers generally come from the unorganised and informal sections of the economy.
There often are some difficulties in repayment due to issues like fuel cost increase, insurance and so forth but this doesn’t essentially translate into default. Second, NBFCs don’t get any tax benefit on their provisioning, while banks do. If the same rule is to apply to them, says the Finance Industry Development Council (FIDC), a body of NBFCs, this benefit should, too, from the coming Union budget.
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And, if RBI insists on tightening the provisioning norms to 90 days, says FIDC, it should allow NBFCs to use the stringent loan recovery law, the Sarfaesi Act, as banks can. And, implement the new norms over three years, rather than the two years in the draft norms.
FIDC’s representation also says the existing tier-I capital ratio should be maintained, given the difficulties in raising equity. RBI’s draft norms had prescribed the tier-I capital be raised to 10 per cent from the existing 7.5 per cent. For captive NBFCs, it was proposed to be raised to 12 per cent.
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FIDC notes RBI has over the last four years increased the total capital adequacy ratio floor from 10 to 15 per cent, due to which NBFCs have been consistently raising capital for the past three years. “To raise any further capital, NBFCs will perforce need to absorb the capital already raised and exhibit appropriate returns to their stakeholders before being able to access the capital market,” went FIDC’s representation.
If RBI wants to raise the tier-I capital ratio, then it should lower the risk weightage in productive and low-risk assets such as construction equipment or commercial vehicles to 50 per cent from the existing 100 per cent, it has said.
The draft norms say NBFCs having an asset size less than Rs 25 crore need not be registered with RBI and should be out of the regulatory ambit, as they don’t create any systemic risk.
FIDC says 70 per cent of NBFCs will be deregistered and thrown out of the business if this goes through and urged RBI to maintain the rule.
It also urged RBI to open the external commercial borrowing window for asset financing in NBFCs.