NBFCs gear up to sell bad loans in time to meet RBI’s asset norms

RBI has mandated NBFCs that loan accounts classified as NPAs can be upgraded as ‘standard’ assets only if entire arrears of interest and principal are paid by the borrower.

“We are in the midst of creating pools of assets we want to get rid of, this will help us avoid sudden spikes in bad assets and clean up our books,” said the CEO of a mid-sized NBFC. “The loan sales should pick up steam from the June quarter as the deadline ends in September.”

The RBI last month extended the timeline by six months to September 30 for NBFCs to adhere to the new NPA recognition norms. Earlier, the regulator had set March 31 as the deadline for non-bank lenders to upgrade NPAs only after all arrears and principal dues were paid.

As per an analysis by rating agency ICRA, after the regulator tightened the norms, NPAs for NBFCs were higher by about 150 bps, while for HFCs, they were higher by 70 bps as of December 2021.

“Bad loan sale is the most preferred route to avoid a PCA (prompt corrective action) like scenario, show cleaner books and release liquidity,” said the CEO of another NBFC. “We have held initial talks with a couple of ARCs, the interest is enthusing and will fetch us decent returns without having to take a sizeable haircut.”

The non-banking sector has been facing increased regulatory oversight and a push towards convergence with banks through various measures such as scale-based regulation, realignment in asset quality classification and prompt corrective action norm.

“We see that NBFCs’ stage three assets could increase to 6% by FY23 from 5.6% in the December quarter, primarily due to slippages from the restructured and Emergency Credit Line Guarantee Scheme supported books,” said Jinay Gala, associate director at India Ratings. “The credit cost impact is likely to be moderate as NBFCs have created adequate provisioning buffers.”

According to an analysis of 21 NBFCs and 11 HFCs conducted by rating agency ICRA, about 45% (in loan book terms) of the NBFCs and 25% of the HFCs had not aligned their Gross Stage 3 (GS3) with NPAs as of December 31, 2021. For these NBFCs and HFCs, the NPAs on account of the tightened norms were higher by 3.0% and 1.0%, respectively.

“The extension in the timeline provided by RBI would allow entities to strengthen their systems and controls, add to their provisions and help in a smoother adoption of these norms,” said AM Karthik, vice president-financial sector ratings at ICRA.