RBI refuses to relax asset classification, provisioning norms for NBFCs

The Reserve Bank of India (RBI) has turned down the request of non-banking financial companies (NBFC) to relax asset classification and provisioning norms.  

This will give rise to bad debt numbers of such para banks on technical grounds while making asset quality norms standardised across banks and NBFCs. The para banks are now rapidly filling in the positions left vacant by the risk-averse banks, and their asset book is close to 20 per cent of banks’ total credit.  

The NBFC lobby group Finance Industry Development Council (FIDC) had approached the RBI to offer relaxation in the NPA norms, but the RBI has declined to do so, sources say.  

The central bank in a November notification said NBFCs must recognise their debts as bad debts if they are not serviced for more than 90 days, bringing them in line with banks. Most large NBFCs already follow this practice, but smaller NBFCs make an account standardised only if one monthly installment is paid after the borrower defaults on three monthly instalments. This is because of the nature of the credit profile the NBFCs lend money.  

NBFCs mainly borrow money from banks to lend it further. Therefore, the lending rates of NBFCs are always higher for borrowers who do not get funds from banks because of their low credit profile.  

Given the element of risk in these customers, NBFCs follow a delayed NPA recognition and generally classify an account as an NPA only when it is due for 180 days. Earlier, NBFCs were officially allowed by the RBI to let bad debts be recognised only when they were not serviced for 180 days.  

There are various estimates by agencies on the spike in bad debt numbers. India Ratings estimates that the NPA numbers could rise by as much as a third. According to ICRA, NPAs could rise by 160-180 basis points by March for the sector. The housing finance could also see their NPAs rise by about 60-80 basis points by March because of the RBI norms.  

In a recent report, India Ratings explained that NBFCs generally classify an account as stage three, or special mention account (SMA-3), when there is a payment overdue for more than 90 days. Typically for monthly payments, this would be when there are three or more installments overdue on any account. However, when the borrower makes part payment such that the total overdue is less than three installments, the account is removed from NPA classification and classified as a standard asset, although it remains in the overdue category in case, not all overdue is cleared.  The RBI’s November 12 notification said such stage three assets can become standard only when all the overdue, including interests, are cleared by the borrower.  

However, India Ratings did not expect a significant spurt in provisioning, as the NBFCs generally are more proactive than banks in providing for their stressed accounts, given the nature of uncertainties in their business. In the 8th annual economic conclave of the State Bank of India, RBI governor Shaktikana Das had assured the NPA spike would not be as alarming as is expected by the analysts.  

“We have done our homework. Some media reports are saying the norms will increase the NPA level of NBFCs to very alarming proportions. It will not be so, we have looked at the SMA figures of NBFCs, we know exactly how much remains in various SMA baskets and to how much it will go up by,” RBI Governor Das had said.

“The reports that this will lead to a sudden increase in the NPAs of NBFCs is not correct. The NPA numbers will rise, of course, but it will not be very alarming,” Das said on November 16 during an SBI event.