With the introduction of a 25-basis points (bps) provisioning on standard assets, the Reserve Bank of India (RBI) today tightened norms for non-banking finance companies (NBFCs).
“In the interests of counter-cyclicality and to ensure NBFCs create a financial buffer to protect themselves from the effect of economic downturns, we have decided to introduce provisioning for standard assets also,” RBI said in a letter to all NBFCs.
However, provisions on standard assets should not be considered while arriving at net non-performing assets (NPAs), RBI said.
NBFCs are, however, allowed to include general provisions on standard assets in their tier-II capital. Moreover, with other general provisions or loss reserves, it can be admitted as tier-II capital only up to a maximum of 1.25 per cent of the total risk-weighted assets.
“RBI should have policies to ensure that NBFCs are well capitalised. We want fewer but well capitalized NBFCs. We are well ahead of what RBI has asked us for,” said Indiabulls Financial Services Director and CEO Gagan Banga.
The company has a total provision of Rs 140 crore, as against a loan book of Rs 11,000 crore.
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Experts said RBI had brought NBFCs at par with banks. Banks also have to make a provisioning of 0.25 per cent on standard assets.
“NBFCs have a good collection mechanism. This is their key advantage when compared with banks. RBI is doing it for good governance. It is just an economic syndrome. We hope it is not permanent,” said Subhasri Sriram, executive director, Shriram City Union Finance.
Edelweiss CEO Himanshu Kazi said the finance company had been making such a provision for some time.
As a prudential step, Edelweiss began provisioning of 50 bps on standard assets. For a loan book of Rs 3,000 crore, it had a total provision of Rs 15 crore.
RBI said the provisions made for standard assets could be shown separately as ‘contingent provisions against standard assets’ in the balance sheet.
Standard assets are assets with regular payment.