RBI has tightened the NPA recognition and provisioning norms for NBFCs to bring them on a par with those applicable for commercial banks.
The new Reserve Bank framework for non-banking financial companies (NBFCs) is likely to bring down their profitability by around 40 basis points over the next four years, analysts said yesterday.
To better address the risks in the business, enhance regulatory coverage, standardise regulations and improve governance standards, RBI yesterday revised the guidelines for NBFCs, which are to be implemented over the next three financial years.
Among other things, the RBI has tightened the NPA recognition and provisioning norms for NBFCs to bring them on a par with those applicable for commercial banks.
“The revised regulation will slice around 40 basis points off NBFCs’ profitability gradually over the next four years till March 2018,” Crisil said in a report.
The rating agency said the decline in profit will be on account of higher provisioning with the stricter recognition norms for non-performing assets (NPAs) made more stringent to 90+ days past due (dpd) from 180+ earlier.
Another rating outfit Icra said the changes are likely to lead to a rise in the reported gross NPA percentage from 4.5 as on June 2014 to 6-8 per cent once they are fully enforced, thereby increasing incremental credit provisioning.
Over the medium term, delinquencies could settle at a lower level as NBFCs realign their monitoring and recovery systems to the 90-day format and as the operating environment improves, alleviating the pressure on the credit profiles of borrowers, Icra said.
Crisil, however, said the three-year transition period will allow NBFCs to cushion impact on their financial profiles.
Icra said the returns on assets of NBFCs as a whole could also drop by 20 bps, which would translate into a 1.1-1.3 per cent dip in returns on equity.
The new guidelines raised the minimum tier I capital requirements for these financial entities from the current 7.5 to 8.5 per cent by March 2016 and 10 per cent by March 2017.
Most NBFCs maintain a favourable capital structure, and this would enable them to meet the enhanced capital requirements.
“In our estimates, only two or three NBFCs would need to be mobilise additional capital (of around Rs 500 crore or 8-10% of their networth) to maintain a 2 per cent buffer over the revised tier I capital requirements,” Icra said.