Up to 180 bps higher NPA likely for NBFCs, says ICRA

A rise in non-performing assets is likely for non-banking finance companies following the revised bad loan recognition and upgradation norms, rating company said.

It projected a 160-180 basis point rise in NPAs for NBFCs by the end of March 2022 over March 2021 level. The rise in NPAs for housing finance companies (HFCs) could be by about 60-80 basis points over the same period.

“The modified norms will lead to a spike in NPAs of NBFCs, including HFCs in the near term. Further, it will impact earnings performance which would be visible over the next few quarters, if the forward flows into the NPA category are not contained,” ICRA said Thursday.

The Reserve Bank of India through a note on November 12 provided clarification on income recognition, asset classification and provisioning norms for banks, NBFCs and all-India financial institutions. The key points include classification of special mention account (SMA) and NPA on a day-end position basis and upgrade from an NPA to standard category only after clearance of all outstanding overdues.

In other words, lenders can upgrade NPAs to standard category only after the entire arrears are cleared. This will have to be complied immediately.

While banks will not be impacted by this as they have been following this norm, NBFCs normally have been upgrading an NPA account even with partial payments of the outstanding overdues, as long as the total overdues on the reporting date were for less than 90 days, ICRA said.

Going forward, movement to the standard asset category would be impacted as borrowers from NBFCs generally have limited ability to clear all dues.

The increase factors in the expected slippages from the restructured book, slippages from the 31-90 day category (Stage-2) and the delay in upgradation to the standard category, said AM Karthik, vice president for financial sector ratings at the rating company. “Entities would have to tighten their internal controls and augment their MIS for timely recognition and updation of collections, especially cash collections,” he said.

The restructured books of NBFCs and HFCs are estimated to have increased to 4.1-4.4% and 1.8-2.2% respectively, as of September 2021 vis-à-vis 2.2% and 1.0%, respectively, in March 2021.

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