The transition towards the 90 day past due (dpd) NPL recognition norm and the minimum tier 1 capital of 10% would reduce the prevailing regulatory arbitrage between banks and NBFCs for a similar set of assets. While the reported profitability of NBFCs is likely to be significantly impacted in the transition phase, long-term effects are likely to be moderate.
Assuming 10% coverage on incremental NPLs and 20% loan growth, the profitability of NBFCs may be impacted in the range of 1bp-15bp on an on-going basis. The impact, however, is likely to be higher in the transition period till FY18 (up to 30bp) as incremental provision would also have to be taken on the stock of portfolio in addition to loan growth.
Notable exceptions in Ind-Ra's rated universe are NBFCs whose existing provision policies recognise NPLs on 90dpd basis. These are Fullerton India ('IND AA+'), Kotak Mahindra Prime ('IND AAA') and Religare Finvest ('IND AA-'). Sundaram Finance ('IND AA+') provides on 120dpd basis and the impact on its profitability will be minimal.
If the process of convergence in regulations continues, Ind-Ra expects NBFCs to accrue some benefits that currently apply only to banks. These include variable risk weighting based on riskiness of the underlying asset, tax deduction for loan loss provision and applicability of SARFAESI Act.
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