RBI draft norms to dent NBFCs' profitability: Crisil

Higher provisioning and capital adequacy norms, as recommended by the working group of the Reserve Bank of India (RBI) on non-banking finance companies (NBFCs), may affect the profitability and non-performing asset (NPA) norms of these companies.

According to a report by ratings agency Crisil, the recommendations, if accepted by RBI, will hit the profitability of the sector in the short term, as the average return on assets for NBFCs could fall by 25 to 30 basis points. Similarly the gross NPA ratio for the sector, which stood at 2.8 per cent in March, would become 4.8 per cent according to the revised classification norms where NBFCs would be required to mark an asset non-standard if an account is overdue for a period of more that 90 days, as against the current norm of 180 days.

“While it does not reflect any change in NBFCs’ inherent asset quality, they will increasingly focus on containing delinquencies in the up-to-90-days bucket. Moreover, access to SARFAESI (the asset seizure law for defaulting borrowers) will enhance NBFCs’ ability to recover and reduce ultimate credit losses,” Crisil said in a report.

On the whole, however, the NBFC sector would emerge structurally stronger in the long term as the recommended measures would cushion its potential asset-side and liquidity risks. In addition, it will align the regulations with those governing banks and result in a tighter regulatory framework for NBFCs.

“The higher risk weights placed on sensitive sectors, increase in minimum Tier-I capital, and stipulation of liquidity requirements will cushion NBFCs against potential asset-side and liquidity risks. Further, the recommendations provide greater clarity on regulatory framework for NBFCs, which should help enhance stakeholders’ confidence,” the report said.

The report also said the higher risk weights associated with the real estate and the margin finance business would reduce the capital adequacy ratios of NBFCs by 2.5-3 per cent.

“The margin finance business, with an estimated portfolio of Rs.35 billion as on March 31, may become less attractive to customers, given that NBFCs will now need to nearly double the margin they collect from customers. Capital market NBFCs have been diversifying into non-capital market businesses; the new recommendations could see further acceleration in such efforts,” the report added.