Strict norms to push NBFCs bad loans by 1.6-1.8% by March 2022: Icra

Tighter norms for stressed loans and upgradation are likely to increase the non-performing assets (NPAs) of finance companies by 160-180 basis points to 6.2-6.4 per cent by March 2022. An increase of up to 80 basis points is expected in the case of housing finance companies, taking the NPA level to 3.8 per cent, according to rating agency Icra.

The potential rise takes into account a revision in norms and slippage from restructured books, with March 2021 as the base. The GNPAs were 4.6 per cent and 3.0 per cent for NBFCs in March 2021.  

The Reserve Bank of India's clarification on asset quality norms would mean classification as a special mention account (SMA) and non-performing account (NPA) will be on a day-end position basis. Also, accounts can be upgraded from an NPA to a standard asset only after clearance of all outstanding overdues, Icra said in a statement.

Limitations in upgrading and a tighter NPA recognition norm would cause a spike in the NPAs in the near term, and higher stickiness of NPAs going forward for NBFCs.

Besides, revision in norms, the slippages from restructured book would also add to NPA kitty. The slippage from the NBFC restructured book is estimated to be higher at 20-25 per cent, considering the prolonged stress witnessed in some of the key NBFC target segments, namely vehicle, business loans etc. The slippages for HFCs are pegged between 3-5 per cent.

Icra said provisions made under accounting standards - IndAS - are generally higher than the RBI’s rules for provisions.  They (provisions) were further augmented because of the pandemic. Thus, no significant incremental impact is envisaged on the near-term profitability. The pressure would be felt over the medium term if the forward flows into the NPA category is not contained.

Entities would have to tighten their internal processes to timely capture their collections, especially cash collections by branches, agents etc. It is estimated that close to 40-45 per cent of the NBFCs and about 5-10 per cent of the HFC collections are as cash, Icra said.