Proposed RBI draft guidelines positive for NBFCs: India Ratings

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SummaryThe RBI released the new draft guidelines for NBFCs based on the Usha Thorat Committee report.

Non-banking Finance Companies (NBFCs) are likely to benefit from the proposed guidelines by the Reserve Bank of India (RBI) which focus on enhanced corporate governance, disclosure standards and tightened liquidity management requirements.

"Domestic non-banking finance companies (NBFCs) will benefit from the enhanced corporate governance and disclosures standards and tightened liquidity management requirements proposed recently by the Reserve Bank of India (RBI)," a report by India Ratings and Research said.

It also said that there would be limited financial impact on NBFCs from the proposed revisions in asset classification, provisioning norms and higher tier-I capital ratio requirements.

The RBI released the new draft guidelines for NBFCs based on the Usha Thorat Committee report recommendations on December 12, 2012.

According to the proposed guidelines, NBFCs have to recognise a loan as non-performing asset (NPA) if it is not serviced for 90 days from the present 180 days NPA norm.

The new guideline also proposes to implement 10 percent capital adequacy ratio (CAR) norm for most of the NBFCs.

Referring to the capital adequacy ratio, the report said, " We do not expect any significant impact on the operating performance of the requirement of a minimum Tier I capital ratio of 10 percent (current requirement of 7.5 percent for retail finance NBFCs)."

It also added that the transition of NBFCs to the 90-day NPA norm from the present 180 day from Q1 of FY16 would not have significant impact on profitability.

"The transition of NBFCs to the 90-day NPA norm from Q1FY16 (same as at banks) from a 180-day NPA norm is unlikely to have a significant impact on NBFCs' profitability in the medium term," the report said.

It, however, added that NPA ratios on a 90-day delinquent basis could nearly double as most of the major NBFCs and incremental provisioning expenses (including assuming the provision for standard assets at 0.40 percent, against the 0.25 percent mandatory) could reduce return on average assets (ROA) by around 5-40 basis points.

The rating agency also noted that the monitoring and collection systems and borrower behaviour are likely to adjust during the transition phase and the 90-day delinquencies are likely to reduce substantially by the proposed time of implementation.

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