RBI’s silence on new branch opening, lending rate caps and cash transactions is a big positive.
Non-banking financial companies (NBFCs) can rejoice, as the Usha Thorat committee report has taken the middle path and chosen not to impose stringent regulations on the sector. The report has few negatives for the sector as a whole, such as enhanced capital adequacy, tighter norms for non-performing loan accrual, higher provisioning requirements, maintenance of minimum liquidity and accounting convergence with that of banks. While some of these would result in lowering the sector’s ability to navigate, the downside is broadly restricted, believe most analysts.
Interestingly, the central bank has refrained from taking an aggressive stance on plugging regulatory arbitrage between banks and NBFCs in terms of reserve requirements, branch opening, end-use/KYC norms, cash transactions, bank lending limitations and lending rate caps (as was expected for gold loan companies). Instead the RBI has chosen a middle path of calibrated use of measures, to lower the regulatory arbitrage between banks and NBFCs. However, for gold loan players like Manappuram Finance, analysts think the negatives are largely immaterial, though the requirement of accounting convergence with reference to revenue recognition, NPA accrual and provisioning can be open to interpretation, which remains a key risk.
| CURRENT SCENARIO | ||
| NBFCs | NPLrecognition norm | General Provisioning |
| Shriram Transport | 180 days for on-book AUMs and 90 days for off-book AUMs | 0.25% |
| Mahindra Finance | 5 months | 0.25% |
| Manappuram Fin | 18 months | 0.25% |
| Kotak Mahindra Prime | 180 days | 0.25% |
| Shriram City Union Fin | 180 days | 0.25% |
| Power Finance | 18 months | NIL |
| REC | 18 months | NIL |
| IDFC | 180 days | 70-80 bps |
So, how will life change for this sector? From here on, NBFCs will have to realign non-performing loans (NPL) provisioning with banks. For this, they will be given time. Currently, NBFCs follow either 180 days or six quarters of non-repayment of loan, as against the 90 days followed by banks. This will increase delinquencies for NBFCs, but will not impact the actual credit loss, says Edelweiss Capital. Analysts say managements are expected to accelerate their collection/recovery procedure.
Also, NBFCs will now have to increase standard provisioning from 25 basis points to 40 basis points. So, if an NBFC has a loan book of Rs 1,000 crore, it will need to have a standard provision of Rs 40 crore, as against Rs 25 crore. Also, government-owned NBFCs like Rural Electrification Corporation and Power Finance Corporation will come under the ambit of this regulation. Analysts say every 10 basis points change in credit cost will impact their profit before tax by two-three per cent.
