Will hit financial inclusion, but RBI had little choice
Non-banking financial companies (NBFCs) in India are a heterogeneous lot and, to that extent, asking all of them to conform to the same set of rules might seem somewhat harsh. However, Reserve Bank of India (RBI) doesn’t really have too much of a choice but to regulate them broadly on the same lines, differentiating on some parameters for housing financing companies or infrastructure financing ones. The new rules announced on Tuesday—to be put in place in a graded manner by March 2018—are more or less on expected lines; given how financial entities are becoming increasingly inter-linked and how the collapse of one could pose serious risks to others, the central bank has upped capital requirements and tightened non-performing asset (NPA) recognition norms and called for higher provisioning. NBFCs will need to be better capitalised with Tier I capital now pegged at 10% rather than the current 7.5%. Much like banks, they will now need to classify an account, where repayments are due for more than 90 days as NPAs; earlier this was a longer period of 180 days. While stricter NPA recognition norms are a prudent measure, they will hurt those intermediaries lending to small enterprises or those financing the purchase of second-hand trucks. That is unfortunate because such NBFCs cater to borrowers who are unable to access bank funding—the financial inclusion that the government wants to promote—and the central bank needed to find some way to keep their interests in mind. According to Crisil, were the new norms in place today, NPAs for NBFCs would rise from 3.7% as of March 2014 to a whopping 7.8%; in terms of earnings, Crisil reckons this will shave off 40 bps from earnings.
While there can be no doubt that NBFCs need to detect potentially stressed assets earlier than they do now and try to collect their dues faster, the specialised nature of some businesses needs to be recognised. In the case of banks too, the central bank has been putting in place mechanisms that will help them spot risks earlier and has tightened provisioning norms for restructured loans. For NBFCs too, RBI has increased the provisions for standard assets for NBFCs from 0.25% of the outstanding to 0.4% by March 2018. That will mean more capital getting used up; some of them may now need to tap the capital market earlier than they might have anticipated. Which is why RBI could have provided for some flexibility on the borrowing side, maybe access to markets overseas. As of now, NBFCs will have to rely on banks and the bond markets because accessing retail money can be a costly proposition. So unless, the government borrows less and interest rates drop, it is unlikely their cost of funds is going to come down dramatically. Although they have time to adjust, it is going to be a tougher existence for most.