The Reserve Bank of India’s modified norms on non-performing asset (NPA) recognition and upgration will lead to a spike in the NPAs of non-banking financial companies (NBFCs), including housing finance companies (HFCs), in the near term, ICRA has cautioned.

The credit rating agency expected the stricter NPA recognition and upgradation requirement to push up the March 2022 NPAs of NBFCs and HFCs by 160-180 basis points (bps) and 60-80 bps, respectively, over the March 2021 level. One basis point is equal to one-hundredth of a percentage point.

ICRA observed that this will impact earnings over the next few quarters if the forward flows into the NPA category were not contained.

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“The increase in NPAs and corresponding increase in provisions as per IRAC (income recognition and asset classification), on account of the new RBI guidelines, is not expected to significantly impact earnings in the near term.

“However, it would be critical to contain the flow into the NPA category over the medium term,” the agency said in a report.

Internal controls

AM Karthik, Vice-President-Financial Sector Ratings, ICRA, said the increase in NPAs factors in the expected slippages from the restructured book, slippages from the 31- to 90-day category (Stage-2), and the delay in upgradation to the standard category.

He felt that entities would have to tighten their internal controls and augment their MIS for timely recognition and updation of collections, especially cash collections.

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ICRA estimates the restructured books of NBFCs and HFCs to have increased to 4.1-4.4 per cent and 1.8-2.2 per cent, respectively, as of September 2021, vis-à-vis 2.2 per cent and 1.0 per cent, respectively, in March 2021.

The agency estimated the slippage from the NBFC restructured book to be higher, at 20-25 per cent vis-a-vis 3-5 per cent for HFC, considering the prolonged stress witnessed in key NBFC segments, namely vehicle, business loans and so on.

Arrears

Referring to the norm for the upgrade of an NPA to standard category only after all arrears are cleared, the agency said the movement to standard category for NBFC NPAs would be impacted as their target borrowers generally have a limited ability to clear all dues.

Until now, NBFCs have been upgrading an NPA account even with a partial payment of the outstanding overdues, as long as the total overdues on the reporting date were for less than 90 days.

Tightening processes

Provisions made by NBFCs under IndAS are generally higher than the IRAC norms, and the provisions were further augmented because of the pandemic.

Thus, no significant incremental impact is envisaged on the near-term profitability, ICRA said, adding that pressure would be felt over the medium term if the forward flows into the NPA category is not contained.

“Entities would have to tighten their internal processes to capture their collections, especially cash collections by branches, agents etc. It is estimated that 40-45 per cent of NBFC and 5-10 per cent of HFC collections are in cash,” the agency said.

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