India Ratings: RBI’s new norms likely to increase NBFCs’ bad loans by one-third

On November 12, the central bank said loan accounts classified as NPAs may be upgraded to ‘standard’ assets only if the entire arrears of interest and principal are paid by the borrower. The rule will apply to both banks and NBFCs.

However, NBFCs would have to invest in systems and processes to comply with daily stamping requirements, India Ratings said, adding that it understands that NBFCs have presented to the RBI for providing a transition period on this requirement.
However, NBFCs would have to invest in systems and processes to comply with daily stamping requirements, India Ratings said, adding that it understands that NBFCs have presented to the RBI for providing a transition period on this requirement.

Non-banking finance companies (NBFCs) will likely see around one-third rise in their non-performing assets (NPAs) after the Reserve Bank of India’s (RBI) latest clarification on upgradation of non-performing non performing assets (NPAs) kicks in.

On November 12, the central bank said loan accounts classified as NPAs may be upgraded to ‘standard’ assets only if the entire arrears of interest and principal are paid by the borrower. The rule will apply to both banks and NBFCs.

India Ratings said NBFCs will likely have modest impact on provisioning because of the clarification as such lenders are using Indian Accounting Standard (IND-As), and generally for higher-rated NBFCs, provision policy is more conservative than income recognition, asset classification (IRAC) requirements. However, NBFCs would have to invest in systems and processes to comply with daily stamping requirements, India Ratings said, adding that it understands that NBFCs have presented to the RBI for providing a transition period on this requirement.

“Accounts can get into NPA category just for a day’s delay in paying the instalments and once it gets categorised as NPA it will not be able to become standard unless all the arrears are cleared. So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time. Both these accounting treatments would result into higher headline number for NBFCs. It may so happen that NBFCs would disclose NPA numbers as per IRAC norms and stage 3 numbers as per Ind-As separately in their disclosures,” India Ratings said.

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