 "New norms for NBFCs may double sector's bad loans")
Bad loans, or non-performing assets (NPAs), of non-banking financial companies (NBFCs) are set to rise while earnings would take a hit due to the Reserve Bank of India (RBI)'s revised framework for their operations.
RBI had cut down the non-performing assets (NPAs) recognition period and raised the provision for standard assets from 0.25 per cent to 0.40 per cent.
According to the existing norms for NBFCs, an asset is classified as NPA when it remains overdue for six months or more for loans and 12 months or more in case of lease rental and hire purchase instalments, compared with 90 days for banks. The new norms for NBFCs seek to reduce the duration in a phased manner so that the norms for NBFCs are at par with that of banks by March 31, 2018.
In the past, NBFCs had opposed the NPA recognition norms as their borrowers generally come from the unorganised and informal sections of the economy. "The 90-day norms will be very harsh on them. This is one of the reasons we have been conveying to RBI. The central bank should treat it differently when it comes to small operators," said Umesh Revankar, managing director and CEO, Shriram Transport Finance Company.
Revankar added that although RBI has given a time-frame, the customer profile is not going to change. "We may lose customers to the unorganised sectors like the moneylenders."
RBI also proposed to increase standard asset provisioning from 0.25 per cent to 0.40 per cent in a phased manner by the end March 2018. RBI said the standard asset provisioning would be raised to 0.30 per cent by March 2016, 0.35 per cent by March 2017 and 0.40 per cent by March 2018.
According to estimates, NBFCs - except housing finance companies - take 120-180 days to recognise NPAs.
According to Credit Suisse, moving to a 90-day regime will have two effects - de-recognition of interest income on assets that incrementally get classified as NPA and an impact on profit and loss credit costs for the higher delinquencies and standard provisioning.
"In our analysis, NBFCs like Shriram Transport Finance Company/Mahindra & Mahindra Financial Services could see 12-16 per cent earnings impact for FY16/FY17 if these changes are implemented. However, the companies can choose to soften the impact by reducing provision coverage ratio," said a note released by Credit Suisse.
However, not many NBFCs believe they can take it comfortably. "There will be an impact on standard asset provisioning of 15 basis points of assets, but that too is not a significant amount," said V Vaidyanathan, chairman and managing director of Capital First.
For Muthoot Finance the extra provisioning will be about Rs 50 crore over the next three years. "This is miniscule for us," said George Alexander Muthoot, MD of the company. As far as the hike in provision for standard assets is concerned, Muthoot said that they had already increased it to 0.46 per cent in the last four quarters.
ARE NBFCs IN DEEP WATERS?
RBI had cut down the non-performing assets (NPAs) recognition period and raised the provision for standard assets from 0.25 per cent to 0.40 per cent.
According to the existing norms for NBFCs, an asset is classified as NPA when it remains overdue for six months or more for loans and 12 months or more in case of lease rental and hire purchase instalments, compared with 90 days for banks. The new norms for NBFCs seek to reduce the duration in a phased manner so that the norms for NBFCs are at par with that of banks by March 31, 2018.
Also Read
"Stringent non-performing loan (NPL) recognition norms could significantly increase gross NPLs for asset financing NBFCs," UBS said in a note to clients. Elaborating on the impact, UBS said its discussion with Shriram Transport Finance Company/Mahindra & Mahindra Financial Services management indicated that gross NPLs could double from 3.8 per cent/6.3 per cent in September 2014 to eight per cent/12 per cent, if NPL are recognised in 90 days immediately.
In the past, NBFCs had opposed the NPA recognition norms as their borrowers generally come from the unorganised and informal sections of the economy. "The 90-day norms will be very harsh on them. This is one of the reasons we have been conveying to RBI. The central bank should treat it differently when it comes to small operators," said Umesh Revankar, managing director and CEO, Shriram Transport Finance Company.
Revankar added that although RBI has given a time-frame, the customer profile is not going to change. "We may lose customers to the unorganised sectors like the moneylenders."
RBI also proposed to increase standard asset provisioning from 0.25 per cent to 0.40 per cent in a phased manner by the end March 2018. RBI said the standard asset provisioning would be raised to 0.30 per cent by March 2016, 0.35 per cent by March 2017 and 0.40 per cent by March 2018.
According to estimates, NBFCs - except housing finance companies - take 120-180 days to recognise NPAs.
According to Credit Suisse, moving to a 90-day regime will have two effects - de-recognition of interest income on assets that incrementally get classified as NPA and an impact on profit and loss credit costs for the higher delinquencies and standard provisioning.
"In our analysis, NBFCs like Shriram Transport Finance Company/Mahindra & Mahindra Financial Services could see 12-16 per cent earnings impact for FY16/FY17 if these changes are implemented. However, the companies can choose to soften the impact by reducing provision coverage ratio," said a note released by Credit Suisse.
However, not many NBFCs believe they can take it comfortably. "There will be an impact on standard asset provisioning of 15 basis points of assets, but that too is not a significant amount," said V Vaidyanathan, chairman and managing director of Capital First.
For Muthoot Finance the extra provisioning will be about Rs 50 crore over the next three years. "This is miniscule for us," said George Alexander Muthoot, MD of the company. As far as the hike in provision for standard assets is concerned, Muthoot said that they had already increased it to 0.46 per cent in the last four quarters.
ARE NBFCs IN DEEP WATERS?
- RBI cuts NPA recognition period
- According to the existing norms for NBFCs, asset is classified as NPA when it remains overdue for 6 months or more for loans and 12 months or more in case of lease rental and hire purchase instalments, compared with 90 days for banks
- New norms seek to reduce the duration in a phased manner so that they are on a par with those of banks by March 31, 2018
- In the past, NBFCs had opposed the NPA recognition norms as their borrowers generally come from the "unorganised and informal sections"