Tag: Ind AS

NBFC NPAs could increase by a third due to tightening of norms: India Ratings

Banking & Finance

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The Reserve Bank of India’s clarification accounting of non-performing advances is likely to increase non-banking finance companies’ (NBFCs) non-performing assets (NPAs) by around a third, according to India Ratings (Ind-Ra).

NBFCs would also have to invest in systems and processes to comply with daily stamping requirements.

Ind-Ra noted that NBFCs have asked the RBI to privide a transition period on this requirement.

Limited impact on provisioning

However, the impact on provisioning could be modest, because NBFCs use Ind-AS (Indian Accounting Standards) and higher rated NBFCs have a more conservative provision policy than IRAC (income recognition and asset classification) requirements.

All arrears to be cleared

The credit rating agency observed that the RBI clarification would allow stage 3 (credit impaired) assets to become standard only when all overdues and arrears (including interest) are cleared.

Earlier, NBFCs would classify an account as Stage 3 when there is a payment overdue for more than 90 days. Typically, for monthly payments, this would be when there are 3 or more instalments overdue on any account.

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However, when the borrower makes a part payment such that the total amount due is less than three instalments, the account is removed from NPA classification and classified as a standard asset. It remains in the overdue category if not all dues are cleared.

Now, RBI has restricted movement from Stage 3 to Standard category.

NBFC borrowers are generally a weak class of borrowers and have volatile cash flows so once an account has been classified as NPA, it could remain there for a considerable period, said Pankaj Naik, Associate Director, Ind-Ra.

Accelerated pace of NPA recognition

Referring to an RBI circular requiring daily stamping of accounts instead of a monthly or quarterly one to count the number of overdue days, Ind-Ra opined that this would result in an accelerated pace of NPA recognition for accounts.

“Where there is cash collection, NBFC borrowers typically pay their overdues with some delays. Accounts can now get into NPA category for just a day’s delay in payment and once categorised as NPA will not be able to become standard unless all arrears are cleared.

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“So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time. Both these accounting treatments would result into higher headline number for NBFCs,” said Naik.

He noted that it may so happen that NBFCs would disclose NPA numbers as per IRAC norms and Stage 3 numbers as per Ind-AS separately in their disclosures.

Varied performance across segments

The agency assessed that borrowers in the earn-and-pay model such as commercial vehicle finance, small ticket business loans, and personal loans to self-employed customers are vulnerable with volatile cash flows.

They are generally not in a position to clear all dues in one go and so the headline numbers would look elevated.

On the other hand, home loan and salaried personal loans could exhibit a better performance.

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Income Taxes: ICAI issues exposure draft of revised Accounting Standard

Banking & Finance

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The CA Institute has come up with an exposure draft for a revised accounting standard on income taxes, to be applicable on entities that are not required to adopt the Indian Accounting Standards (Ind AS) notified by the Corporate Affairs Ministry.

Currently, all listed companies and unlisted companies – with a networth of ₹250 crore and above – are required to adopt the Ind AS. For other corporate and non-company entities, the accounting standards specified by the CA Institute are applicable.

The latest move follows the decision of the various standard setting forums – the Accounting Standards Board (ASB) of ICAI, the NFRA and the Ministry of Corporate Affairs (MCA) – to revise accounting standards.

‘Underlying principles’

“Accordingly, the ASB of ICAI has embarked on the process of upgradation of these standards which will be applicable to the entities to whom the Ind AS are not applicable,” sources said. The objective behind the revision is to ensure that underlying principles are not too different between the Ind AS entities and the other entities.

The exposure draft on Accounting Standard for Income Taxes (AS 12) is the latest among the several standards that are proposed to be revised. The entire set of revised standards are expected to be implemented at one go in a future date and the timeline for this is not yet decided. June 10 is the last date to send comments on the exposure draft. The CA Institute has specified June 10 as the last date by when comments can be sent on the exposure draft.

“For the accounting standard on income taxes, there will not be much change. Whatever standard one is following, almost the same position will continue for entities that are not adopting Ind AS,” sources said.

The proposed revision, which will impinge on public sector banks, certain insurance companies and entities that function as partnerships, will not fully align itself to the Ind AS 12 as the guidance given to ASB by the Central council is not to change the position of existing accounting standard on income taxes (AS 22) to that of Ind AS 12.

One of the main change in the revised accounting standard on income taxes, as against the existing AS 22, will be on the aspect of recognition of deferred taxes. Earlier, when there was unabsorbed depreciation or carry forward losses, there was a question whether deferred taxes should be recognised and will there be future profit to realise the deferred taxes.

“Now although the outcome would be the same, the language has been aligned to Ind AS 12 wherein one has to see the probability of getting profits in the future, reasonable certainty and there is also guidance to determine whether the entity would have profits to realise the deferred tax assets,” sources added.

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Three metrics to look for in NBFC results

Personal Finance

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If you’ve invested in fixed deposits with finance companies (NBFCs) or small finance banks (SFBs), the new business risks created by Covid-19 have made it necessary for you to keep a hawk eye on their financials. Borrowers, hit by income cuts, have been delaying loan repayments.

The RBI had directed lenders to declare a holiday (moratorium) on repayments until August 31. The Supreme Court has been hearing a case on extending this holiday, while stopping lenders from recognising bad loans until it decides.

With these developments, the already jargon-packed results from banks and NBFCs have acquired some new terms. Here are three new metrics you need to get a grip on.

Collection efficiency

The collection efficiency ratio is one performance metric that has materially moved NBFC and small finance bank (SFB) stocks in the recent results season. This is the proportion of loans that a lender has collected in the month or quarter to the outstanding dues at the beginning of the period. The closer it is to 100 per cent, the greater the comfort that borrowers are repaying their dues on time.

During the April-June lockdown, sudden income shocks and the inability of collection agents to visit borrowers severely impacted the collection efficiency of SFBs that gave out micro-finance loans.

Equitas Small Finance Bank, for instance, saw its overall collection efficiency fall to 11 per cent in April. But with unlocking and revival, it improved to 94.3 per cent by October. The ratio can vary for different types of loans.

Stage 1, 2 and 3 assets

Earlier, Indian lenders reported their doubtful loans based on defaults they had already incurred. Loans unpaid for over 90 days were treated as non-performing assets (NPAs). But with Ind AS, lenders such as NBFCs are now required to use an “expected credit loss”, or ECL framework, to recognise doubtful loans.

Here, each lender is expected to forecast expected defaults over the next 12 months and over the life of each loan. These are, in turn, classified and disclosed as Stage 1, Stage 2 and Stage 3 loans.

Stage 1 loans are those where the lender has not seen any change in default risk from the time of disbursement. Stage 2 loans are those where there has been some increase in the default risk from the date of giving out the loan, though there is no objective evidence of this.

Stage 3 loans are those where there’s objective evidence of defaults. The proportion of Stage 2 and Stage 3 loans in an NBFC’s books and the provisions against them can tell you if a big spike in NPAs is coming in future quarters.

Proforma NPAs

With the apex court imposing a standstill on recognising defaults after August 31 as NPAs, official NPA numbers reported by lenders no longer reveal the true state of bad loans. To get around this , some lenders have taken to disclosing ‘proforma NPAs’.

Proforma gross and net NPAs tell you what the lender’s NPAs would have looked like, if it had continued to recognise bad loans without applying the court concessions.

Bajaj Finance, for instance, has said that its proforma gross NPAs and net NPAs for the September quarter would have been 1.34 per cent and 0.56 per cent, respectively, instead of the reported 1.03 per cent and 0.37 per cent, had the SC concession not applied. This is a more reliable estimate than that reported.numbers.

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