Restrictions on accessing public deposits likely to narrow margins
Non-banking finance companies catering to small borrowers would likely see a jump in bad loans and provisions as they migrate to the 90-day NPA (non-performing asset) recognition norm by 2018 while restrictions on accessing public deposits will narrow margins, said company officials and analysts.
Retail NBFCs, accounting for 63% of the total assets among NBFCs, will see a rise in their gross NPA ratios by at least a 100 basis points, said Icra. Most NBFCs recognise a loan as NPA once payment is due after 180-days. Crisil expects a drop of 40 bps in their profitability.
However, with many NBFCs already adopting conservative NPA practices, the impact of the norms will be limited. The absence of a drop in share prices of NBFC on Tuesday reflect this positive expectation.
“Reduction in NPL recognition and classification timeline will lead to higher provisioning requirement and affect overall profitability,” said Prabhudas Lilladher.
Truck-financing major Shriram Transport Finance will face tough time aligning with the new NPA norms, said managing director and chief executive officer Umesh Rewankar. “Our customers should not be equated with banks whether it is now or in 2018. We want to discuss the issue of 90-day NPA norm with RBI and present our case,” he said.
Nomura analysts estimate a high provision coverage ratio would provide Shriram Transport Finance some cushion in the coming years.
“We are already at 120-day level for NPA recognition, so we are ahead of schedule. Reaching 90-day norm should not be a problem,” said Laxmi Narsimhan, the chief financial officer at Magma Fincorp.
Ramesh Iyer, the managing director of Mahindra Finance, echoed the similar sentiment and said, “In our case, we already have a 150-day norm for our book. So, definitely for next one year we don’t see much impact.”
RBI had notified new guidelines for NBFCs on Monday, which put restrictions on accessing public deposits and tightened norms for NPAs. The guidelines require NBFCs to treat a loan as NPA once payment is overdue beyond 150 days in 2015-2016. For 2016-17, this period must be brought down to 120 days and 90 days by March 2018.
The norms reduced access to public deposits saying that NBFCs cannot raise deposits more than 1.5 times of their net owned funds. This reduction will likely affect margins of NBFCs such as Mahindra Finance, Shriram Transport Finance and HDFC as they have to take greater recourse to bank loans or bonds.
With most NBFCs adequately capitalised with Tier-I capital ratio ranging from 11-16%, the requirement of higher Tier-I of 10% by 2017 is unlikely to spur aggressive capital raising moves.