RBI’s new norms likely to ‘stifle’ NBFCs

Non-bank finance companies (NBFCs) may see a sharp rise in bad loans and their bottomlines could be dented as a result of the Reserve Bank of India’s revised regulatory framework governing them.

The framework put out by the RBI on Monday has left many industry participants dissatisfied, with most calling this as a move that is likely to “stifle” the sector.

While all stakeholders (NBFCs, credit rating agencies, and broking firms) are of the view that some provisions in the new framework such as enhanced capital requirements, disclosure norms, etc., will strengthen the sector, a few disagreed, saying that a couple of other provisions will deal a “body blow” to the sector. Credit rating agencies such as ICRA cautioned that the new framework will likely push up the non-performing assets (NPAs) of NBFCs by about two percentage points, when the asset classification norms are fully implemented over the next three-and-a-half years. The framework seeks to bring NBFCs on a par with banks, by mandating NBFCs to classify an account as a non-performing loan if the customer does not service the instalment for more than 90 days.

Currently, NBFCs have 180 days to classify an account as NPA.

ICRA has estimated that retail NBFCs covering 63 per cent of the sector’s total advances of ₹3.7-lakh crore as on June 30, 2014, classify NPAs on the basis of the existing 180-day norm, while NBFCs with 20 per cent advances are already on the 90-day norm.

“Thus the change in norm is likely to lead to a rise in the reported gross NPA from 4.5 per cent as on June 30, 2014, to 6-8 per cent once the norms are fully implemented, thereby increasing incremental credit provisioning,” ICRA said in a report.

While analysts believe that the new framework will be a net-positive for the sector and the financial system in the long run, industry captains almost unanimously flayed the new framework.

Sunil Kanoria, Vice-Chairman of Kolkata-based Srei Infrastructure Finance, said, “The new framework is a big disappointment. When, like banks, they want us to recognise NPAs 90 days past due, why don’t they give us tools like Sarfaesi to go out and recover our loans?” The RBI is sending us into the battlefield without enough weapons and armoury, he added

Lakshmi Narsimhan, CFO of Magma Fincorp, concurs with Kanoria’s observations. “The customers that NBFCs serve have to deal with erratic cash flows. It would have been better had the RBI followed the Nachiket Mor committee recommendations to classify NPAs based on underlying risks,” Narsimhan added.

When an asset is classified as non-performing, banks and NBFCs have to provide for the same. However, banks get some tax concessions on such provisions which have not been extended to NBFCs yet. “Such half-baked framework will kill the sector,” SREI’s Kanoria added.

According to ratings agency Crisil, the rule change will “slice around 40 basis points” of NBFCs’ profitability over the next four years till March 31, 2018, as their provisioning will increase.

The RBI has also increased the Tier-I capital requirements for NBFCs from the current 7.5 per cent to 10 per cent. While most NBFCs already comply with this requirement, they have a grouse against the risk-weights for the same assets being different for banks and NBFCs.

The risk-weights for the same assets should be aligned for banks and NBFCs, Narsimhan added. According to ICRA, “Increasing the Tier-I capital for NBFCs while not aligning (reducing) the risk weights with what is allowed to banks would reduce the NBFCs’ leveraging capacity vis-à-vis banks.”