Provisioning for future bad loans takes a toll on NBFC financials

Rs 34-bn net worth already impacted, shows analysis of 10 most valuable firms

Non-banking financial companies (NBFCs) appear to be under stress because of the new accounting rules.

The Indian Accounting Standard (Ind-AS) norms now require NBFCs to provide for losses on bad loans by anticipating future losses (expected credit loss, ECL) based on default probability, as opposed to waiting for loans to go bad as was the case under the earlier system.

The Reserve Bank of India (RBI) has postponed the implementation of the norms for banks by a year. However, NBFCs have started to follow it from the June quarter. They also provide reconciliation figures for the corresponding quarter of the previous year, which allows an assessment of the difference between the two accounting standards.

An analysis of these numbers shows that the provision for future bad loans has already resulted in a hit of at least Rs 34 billion to their net worth, adjusted against reserves and surplus as on April 1, 2017, so far, a Business Standard analysis of the results declared of the ten most valuable NBFCs has shown.

L&T Finance Holdings (LTFH) mentioned that it additionally accounted for Rs 18 billion against its reserves during the transition to the new accounting new norms. It had provisions of Rs 12 billion under the old accounting standards in FY2018.

Mahindra and Mahindra Financial Services’ investor presentation also marked a Rs 13.575 billion hit due to ‘additional impact of increased provisioning on account of ECL adoption.’ And, it is Rs 2.7 billion for Bajaj Finance.

An analysis of the ten most valuable NBFCs shows a hit to their profit and loss statement for the June-2017 quarter in six of ten cases because of expected credit loss adjustments. Interestingly, the impact on the profit and loss statement is seen to be positive on an aggregate basis after adjusting for earlier changes to reserves. 

“As this is the first instance of transition to the new standards, companies have used their discretion in taking the hit through the P&L or from the net worth. Assumptions on expected credit losses have also varied across entities,” said Karthik Srinivasan, senior vice-president at rating agency ICRA Limited.

A clearer picture is expected to emerge in the days ahead on the impact of expected credit losses. This is not the only impact of the new accounting standards that one can expect in future results.

“In the days ahead, the NBFCs would have major Ind-AS impact, due to areas such as effective interest rate accounting under Ind-AS, under which the income/expense recognition of upfront fees and charges would be deferred… different accounting under Ind AS for securitisation transactions; (and) fair valuation of investments,” said Suresh Surana, founder at tax firm RSM Astute Consulting.

Some players have said that they would make use of a provision to provide results slightly later during the transition period.

Others have said that there would be a differentiation based on the nature of the business.

While the June 2017 quarter shows a marginal hit on profitability, Edelweiss said that the impact in the current quarter has been positive.

“…the Ind-AS impact for Edelweiss has been minimal and actually positive… we have continued with our conservative provisioning methodology and retained the provisions already made. Even after following conservative policy, Net ECL impact is zero on profitability in Q1FY19,” said an Edelweiss spokesperson.

Other NBFCs on the list did not comment on the matter.

Bad news on bad loans:

• NBFCs have to account for possible bad loans in advance
• Earlier they only had to do it after loans went sour
• Examination of results shows at least a Rs.30 billion hit to reserves so far
• Six out of ten firms show hit to profitability
• Banks have got another year to implement the norms