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NBFC bad loans set to rise with RBI clarification on IRAC norms, say analysts

Analysts said while banks have been following the new rule on upgrades, it will be a fresh start for most NBFCs.

NBFC bad loans set to rise with RBI clarification on IRAC norms, say analysts
There is no categorisation of standard and non-performing loans for NBFCs under this system.

Bad loans reported by non-banking financial companies (NBFCs) may rise after March 2022 as the Reserve Bank of India’s (RBI’s) latest clarification on upgradation of non-performing assets (NPAs) kicks in. Analysts said while banks have been following the new rule on upgrades, it will be a fresh start for most NBFCs.

On Friday, the central bank had said loan accounts classified as NPAs may be upgraded to ‘standard’ assets only if entire arrears of interest and principal are paid by the borrower. The rule will apply to both banks and NBFCs. According to sector experts, most NBFCs currently upgrade gross stage-3 loans, or NPAs, to gross stage-2 loans — or special mention account (SMA)-2 — upon payment of just a single installment.

Anil Gupta, vice president – financial sector ratings, Icra, said the rule on upgradation of bad loans can lead to a rise in NPAs reported by some NBFCs. Also, there could be some ambiguity with regard to classification of such accounts where part of the dues may have been cleared, but some installments may still be due. “If such accounts have payments that are due for less than 90 days then they are currently classified as stage-2. But as these accounts will be NPA going forward, these could be classified as stage 3 also. This could lead to an increase in provisioning against such accounts classified as stage 3,” he said.

NBFCs in India follow the Ind-AS guidelines, under which delinquent loans are classified as gross stage-1 (loans overdue by up to 30 days), gross stage-2 (loans overdue between 31 and 89 days) and gross stage-3 (loans overdue for over 90 days). There is no categorisation of standard and non-performing loans for NBFCs under this system.

In a report on Monday, Kotak Institutional Equities (KIE) said as a market practice, all NBFCs have preferred to have a uniform definition for non-performing loans and gross stage-3 or 90 days past due (dpd) loans. “However, NBFCs may choose to have parallel reporting under Ind-AS and regulatory filings to RBI. Our preliminary discussion with market participants suggests that NBFCs may not go for parallel reporting and continue the current practice (uniform definition for non-performing loans and gross stage-3). Hence, gross stage-3 loans will likely increase,” KIE said.

Some analysts are of the view that while bad loans may rise, the regulatory clarification may not have a significant impact on provisioning. Prakash Agarwal, director and head – financial institutions, India Ratings and Research, said non-banks will report higher NPAs, especially in small-ticket unsecured loan asset classes. “However this is unlikely to have a significant impact on the provisions for the NBFCs and hence P&L (profit and loss) may not get impacted much,” he said.

On the other hand, Agarwal expects that the co-lending market could get a push from the new norms on asset classification. “This would give a fillip to co- lending as the norms of banks and NBFCs will be aligned. This was one of the important issues that was a cause of challenge for co-lending,” he said.

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