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  1. Rising NPAs in NBFCs could hurt banks

Rising NPAs in NBFCs could hurt banks

The Reserve Bank of India, in its Financial Stability Report on Monday, stated that it is concerned about the rising non-performing assets...

By: | Mumbai | Published: December 30, 2014 2:30 AM

The Reserve Bank of India, in its Financial Stability Report on Monday, stated that it is concerned about the rising non-performing assets (NPAs) in the books of the non-banking financial companies (NBFCs) and Systemically Important Non-Deposit accepting NBFCs.

“Given the significant inter-connectedness of NBFCs with the rest of the financial system, especially banks, they could impact banks under conditions of stress and may face difficulties if banks show reluctance to lend to them in case of a liquidity crunch,” said the report.

The report noted that NBFCs were advised to identify incipient stress in their accounts by creating a sub-asset category, ‘Special Mention Accounts’ (SMA), which was further divided into three sub-categories (viz., SMA-0, SMA-1 and SMA-2) based on the extent of principal or interest payment overdue as also the weakness of their accounts.

The central bank also wants government-owned finance companies (not being banks) registered with the Reserve Bank as NBFCs, which account for significant proportion of the total assets and business of the NBFC sector.

Government-owned NBFCs hold 37% of the assets of the entire NBFC sector, but are exempt, at present, from certain regulatory prudential norms of the Reserve Bank of India, according to the data with the central bank.

“While these NBFCs have been playing a useful role in financing certain critical infrastructure sectors, and certain degree of forbearance might have been warranted in the initial stages,” said the report

According to the RBI, the asset quality of the NBFCs-ND-SI sector has been deteriorating since the quarter ended March 2013. So, the central bank issued separate guidelines for both banks and NBFCs with an objective of mitigating the stress due to their NPAs last month.

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