Updated: November 18, 2021 6:27:14 am
Gross non-performing assets (NPAs) of non-banking finance companies are expected to rise by 300 basis points following the Reserve Bank decision to ask NBFCs to recognise bad loans on a daily due date basis and upgrade NPA accounts only after all overdues are cleared.
Bad loans of NBFCs were 6.4 per cent of their exposure as of March 2021, according to the Financial Stability Report of the RBI.
Analysts said the tightening norms made applicable to NBFCs could result in more loans being classified as NPAs as partially paid loans could be classified as a slippage and would increase the gross NPAs — loans with dues of over 90 days — in the middle of the year. The increase in gross NPAs would vary according to the different asset classes, borrower characteristics and loan tenure. Rating agency CARE expects an increase of up to 300 bps with limited impact for shorter tenure loans. “The average increase is expected to be around 150 bps in gross NPAs, being a proportion of assets moving from SMA2 (special mention account-2) buckets,” it said.
In absolute terms, the asset size of NBFC sector (including HFCs) as of March 2021 was over Rs 54 lakh crore with over 9,600 NBFCs registered across 12 categories and the sector has grown at an annual rate of close to 18% over the last five years and currently stands at 25% of the size of the banks, said Care Ratings.
Typically, NBFCs ramp up collection activity on overdue accounts between the due date and the month end, which is why overdues reduce towards the month-ends. “This flexibility is no longer available. Bounce rates in the 60-90 days bucket are estimated at 25-35%. Consequently, a significant proportion of the loans in the 60-90 days bucket may slip into the 90 days plus overdue bucket and will have to be recognised as NPA,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings.
Ambit of rules
The rules apply to new loans on or before December 31, 2021, and for existing loans as and when changes occur.
In addition to the end-of-the-day recognition, the RBI has also clarified that upgradation of NPA accounts can take place only after all overdues are cleared. But it has typically been difficult for retail borrowers classified as NPAs to fully clear their 3 or more overdue instalments quickly. “Data shows these borrowers clear only 1-2 additional instalments typically, so their accounts remain overdue even when it’s for less than 90 days,” Sitaraman said.
The banking sector has largely been following an automated system for tagging accounts as NPAs, under which the accounts were tagged as NPAs on the day the account becomes overdue for more than 90 days. However, in many NBFCs, this classification was being made at the end of the reporting period. Further, many NBFCs were upgrading NPAs as overdues in the accounts reduced to less than 90 days, while banks do not upgrade a NPA till all the overdues are collected. With the latest changes, the norms for NBFCs have been aligned with banks.
The combination of day-end recognition and tighter upgradation criteria means such accounts are likely to remain classified as NPAs for a longer period. Consequently, the headline reported GNPAs will rise and stay elevated for some time. “This will also increase the operational intensity for NBFCs as they align their systems for daily stamping of NPAs,” he said.
The revised recognition norms could reduce the profitability of NBFCs by up to 70 basis points, but this impact will be for just one or two quarters as the transition to the new regime happens.
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