Central bank?s proposed norms may hit NBFCs? profitability

The guidelines suggested by an RBI working group on Monday are likely to impact the NBFCs? profitability. Industry experts feel that with increased capital requirement in a rising interest rate scenario, NBFCs are likely to face tough challenges in maintaining a decent bottomline growth once the guidelines are implemented.

There were 12,662 NBFCs in India on March 31, 2010, with an asset base of R6,61,186 crore in FY10. Deposit-taking NBFCs registered 3% return on their assets during the year and non-deposit taking systematically important NBFCs 2% return.

The working group report wants to bring non-performing loan provisioning guidelines in line with that for the banks. ?We are completely into retail lending and banks are largely into wholesale. So there will be a disadvantage for NBFCs,? said Sanjay Chamria, vice chairman & MD, Magma Fincorp.

According to industry experts, the banks are following a 90-day-past-due norm for calculating non-performing loans, while it is 180 days for the NBFCs. According to Nischint Chawathe from Kotak Institutional Equities, if the norms are brought on a par with the banking sector, NPLs of the NBFCs are likely to increase considerably.

Meanwhile, with uptrend in bank borrowing to 18.4% in 2009-10 from 16% in 1997-98, cost of funds for the NBFCs has also increased substantially, especially with high interest rates.

?Our cost of funds has increased by 150-200 bps in the last one year. This has definitely put pressure on our margins. Although we passed it on to our clients, there is a time lag and we have to absorb the impact,? said Hemant Kanoria, chairman & MD, Srei Infrastructure Finance. Bank borrowing for NBFCs has increased.

The capital adequacy ratio for Tier I capital is also proposed to be increased to 12%. Although many of the NBFCs maintain around 12-14% Tier I CRAR, the new set of guidelines will put pressure on the smaller ones. ?Either the NBFCs will have to raise capital or have to slow down,? said Lakshmi Narasimhan, CFO of Magma Fincorp.

Monish Shah, director of Deloitte in India, said that the cost of operation for the companies would go up and there would be pressure on performance and efficiency. ?The NBFCs will have to focus more on fee-based activity to countercycle the impact,? he said.

The report has also proposed introduction of liquidity ratio for NBFCs, prompting them to infuse more capital. ?There will be some impact of that on the first year of operation. A similar situation will arise in case of provisioning where the NBFCs will require more capital during the first year. But things will start falling in a cycle after that,? said Narasimhan.