Higher provisioning, as recommended by the Reserve Bank of India, could have an adverse impact on the profitability of non-banking finance companies (NBFCs) in the short term, states a report by rating agency Crisil.
The average return on assets could drop by 25-30 basis points, driven by increased provisioning. Also, NBFCs lending to the capital market and commercial real-estate segments may witness a drop in their capital adequacy ratios (CARs) by 2.5-3 per cent, said the report.
The higher risk weights placed on sensitive sectors, increase in minimum Tier-I capital, and stipulation of liquidity requirements will cushion NBFCs against potential asset-side and liquidity risks. Further, the recommendations provide greater clarity on the regulatory framework for NBFCs, which should help enhance stakeholders' confidence, Crisil said.
Aligning the regulations
The recommendations will align the regulations governing NBFCs with those governing banks and result in a tighter regulatory framework for NBFCs.
Mr Pawan Agrawal, Director, Crisil Ratings, said: “The change in asset classification norms will result in significant increase in NBFCs' reported gross non-performing asset (NPA) ratios. The gross NPA ratio for the sector, which was around 2.8 per cent as on March 2011, would become 4.8 per cent as per the revised classification norms. While it does not reflect any change in NBFCs' inherent asset quality, they will increasingly focus on containing delinquencies in the up-to-90-days bucket.”
Moreover, access to SARFAESI will enhance NBFCs' ability to recover and reduce ultimate credit losses.
The margin finance business, with an estimated portfolio of Rs 3,500 crore as on March 31, 2011, may become less attractive to customers, given that NBFCs will now need to nearly double the margin they collect from customers.
Capital market NBFCs have been diversifying into non-capital market businesses; the new recommendations could see further acceleration in such efforts, the report said.