According to the draft guidelines, based on the Thorat committee report on reviewing existing norms for NBFCs, these companies must classify loans as NPAs within 90 days of non-payment, bringing them on par with banks. This is much tighter than the current limit of 180 days. In addition, the draft suggests NBFCs will have to raise provisioning on standard assets to 0.40% from the current 0.25% of outstanding amount from March 31, 2014, onwards.
Most of our customers are from the humble backgrounds and do not have a very steady flow of income. Sometimes, they need more time to repay the loans. This shorter time would mean that you are excluding these smaller borrowers and terming them as NPAs, said Umesh Revankar, MD, Shriram Transport Finance. It is likely that Shriram Transport would make some form of communication with RBI to reconsider this norm.
Crisil expects that the average return on assets (RoA) of NBFCs to drop by 25 bps over the next 2-3 years, the rating agency said in a report. This will be primarily due to higher standard asset provisioning and revision in recognition norms for non-performing assets (NPAs).
According to the draft guidelines, this transition from 180 days to 90 days would be made in a phased manner. A 120-day norm will be applied from April 01, 2014, to March 31, 2015, and a 90-day norm thereafter.
Ramesh Iyer, MD, Mahindra Finance, believes that the central bank has taken in to account the feedback it received from various market participants on the Thorat Committee report, which is reflected in the phased execution of this guideline.
Mahindra Finance has already moved to 150 days for NPA classification, so moving to 90 days over a period of time will not be very difficult, Iyer said.
The funding of infrastructure companies is as such that we cannot ask them for repayment on a monthly basis. That is why repayment is on a quarterly basis and, thus, quarterly basis classification into a NPA is not appropriate, Satnam Singh, CMD, Power Finance Corporation, said.
PFC too will address this issue with RBI and put forth its logic, Singh added. Another point under discussion is the raising to 12% the Tier-I capital requirement of captive NBFCs and companies lending to sensitive sectors like capital markets, real estate and commodities, while that of all other NBFCs, including infrastructure finance companies, stands at 10%, up from the current requirement of 7.5% Tier I Capital.
For large NBFCs, this will not be much of a problem, since they are positioned comfortably in terms of capital. However, smaller companies may have to go for raising equity, which can be a difficult exercise for them, said Revankar.
For Shriram Transport, Tier-I capital stands comfortably at 16.8%, while Mahindra Finance which raised capital through a Qualified Institutional Placement (QIP) is sitting on more than 20% of Tier I capital.