New RBI norms may affect NBFCs' return on asset: Crisil

New norms will structurally strengthen the sector and enhance confidence of lenders in them

Rating agency Crisil today said the revised guidelines for non-banking financial companies (NBFCs) could lower their return on asset by 0.25% over next 2-3 years, even though the new norms would structurally strengthen the sector and enhance confidence of lenders in them.

"We believe that tightening in bad asset recognition norms to 90 days from 180 days and the increased standard provisioning requirement to 0.40% from 0.25% will adversely affect the profitability of NBFCs. As a result, the return on asset is expected to drop by 0.25% over the next two-three years," Crisil Ratings senior director Pawan Agrawal said in a note.

The hit on bottomlines will be primarily due to higher provisioning requirements on account of increase in standard asset provisioning and revision in recognition norms for bad assets, he said.

"The new guidelines will enhance the systemic stability of NBFCs and enhance lender confidence in them. We also believe NBFCs will be able to smoothly transit to the tighter regulatory requirements, given the adequate time frame provided by RBI," Crisil director Suman Chowdhury said.

Yesterday, the Reserve Bank issued the draft guidelines based on the Usha Throat committee report on NBFCs.

The new norms envisage, among others, prior RBI nod for making changes in ownership control and management for large NBFCs, apart from making it mandatory for all deposit-taking NBFCs to obtain credit rating apart from making it mandatory to get RBI nod to appoint CEOs for NBFCs with asset size of Rs 1,000 crore and above.

The Crisl report noted that the proposals like increase in tier-I capital ratio, stronger liquidity management, and enhanced disclosure requirements will structurally strengthen NBFCs over the medium term.

"While the reported gross NPAs will increase in the near-term due to re-classification, the enhanced focus of NBFCs on collections will lead to an improvement in asset quality gradually over the medium-term," Agrawal said.

On the proposal to hike the tier-I capital to 10% and 12% for select NBFCs from 7.5%, the report said it will improve the quality of capital and enhance the cushion against asset-side risks.

While the existing tier-I capital ratio of most NBFCs is comfortably above the revised regulatory requirement, the sector will have to raise around Rs 8,000 crore to maintain the current cushion over regulatory minimum, under the revised norms, noted the report.

On the need for RBI nod for major shareholding and key management changes, the report said NBFCs would need to strengthen their internal processes and reporting systems to meet these stipulations, and that the guidelines will enhance transparency and corporate governance practices.