The recent clarification by the Reserve Bank of India on non-performing advances (NPA) may increase non-banking financial companies’ (NBFC) bad loans by one-third, says a report.
Last month, the RBI had provided clarification on income recognition asset classification and provisioning (IRAC) norms for banks, NBFCs and All-India Financial Institutions.
The clarification included classification of special mention account (SMA) and NPA on a day-end position basis and upgrade from an NPA to standard category only after clearance of all outstanding overdues.
“The RBI’s clarification on non-performing advances (NPAs) accounting is likely to increase NPAs by around one-third for non-banking finance companies (NBFCs),” domestic rating agency India Ratings and Research said in a report on Friday.
However, the impact on provisioning could be modest, given NBFCs are using Indian Accounting Standards (IND-AS) and generally for higher rated NBFCs, provision policy is more conservative than IRAC requirements.
The report said the RBI circular also calls for daily stamping of accounts to count the number of days they are overdues instead of a monthly or quarterly stamping.
This again would result in an accelerated pace of NPA recognition for accounts, it said.
NBFC borrowers, typically where there is cash collection, pay their overdues generally with some delays. Accounts can get into NPA category just for a day’s delay in paying the instalments and once it gets categorised as NPA it will not be able to become standard unless all the arrears are cleared, the report said.
“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 in higher headline numbers for NBFCs,” it said.
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, the agency said.
Smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers.
Growth in non-banking financial companies’ (NBFC) assets under management (AUM) is likely to recover to about 7-9% in FY22 from a flattish performance in FY21, rating agency Icra said on Wednesday. In order to achieve this rate of growth, they will have to raise Rs 1.9-2.2 lakh crore, in addition to refinancing existing lines. The rating agency carried out a survey across non-banks, involving about 60 entities, together accounting for over 50% of the sectoral AUM and about 23 investors. The survey revealed that more housing finance companies (HFCs) expect growth of over 10% as compared to NBFCs. Also, smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers. However, investors have a relatively muted growth outlook.
A M Karthik, vice president and sector head – financial sector ratings, Icra, said that growth in FY22 is likely to be driven by the improvement in demand from all the key target segments. Some of the key segments which would bolster growth include gold loans, home loans, personal credit, rural finance and microfinance. Growth in the vehicle finance and business loans segments, which are closely linked to economic activity, are expected to take longer to register a reasonable revival.
Non-bank exposures to commercial real estate and other large corporate or wholesale exposures are expected to register a decline even in FY22 after the decline of about 15% in FY20 and a 10% expected contraction in FY21. “As per the survey, majority (~70%) of issuers and investors do not expect co-lending to account for less than 10% of non-bank AUM over the next two-three years. Access to adequate funding, therefore, would remain critical for the sector to register a sustained improvement in growth,” Karthik said.
Growth would be contingent upon the access to adequate funding lines. Incremental bank loans to non-banks, considering their high sectoral exposure to the NBFC segment, remains to be seen and would, in turn, depend on overall bank credit growth. Mutual funds registered some improvement in their exposures to non-banks over the recent past, but their sustainability will be critical. An expected improvement in securitisation volumes in FY22 after the sharp contraction in FY21 and access to funding from other sources, including retail or overseas lenders or investors, would be key for sustainable growth.
Icra expects the slippages from the restructured book (estimated at 4-6% of AUM) to keep NBFC non-performing assets (NPAs) at elevated levels even in FY22 after an increase of up to 200 basis points (bps) in FY21. This is after considering that entities, especially those having retail exposures, would prefer to write off sticky overdues, in view of the provision build-up, adequate earning performance and their comfortable capital structures. Collection efficiency, notwithstanding the improvement since April 2020, remains about 5-15% lower than pre-Covid levels, thereby exerting pressure on their current asset quality.
“While part of the stress could get restructured, slippages would increase in H2FY21. As per the survey, ~90% of the investors expect the NPAs to increase by about 100-200 bps by March 2021 vis-a-vis 40% of the issuers. Further, another 40% of the issuers expect the NPAs to remain stable vis-a-vis March 2020 levels,” Icra said.
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