New RBI norms to structurally strengthen NBFCs, say analysts

The latest RBI norms for non-banking financial companies (NBFCs) are a step towards convergence of regulations between banks and large NBFCs, which would increase transparency through better disclosures, though profitability would be hit in the short-to-medium term, analysts said.
While profitability of NBFCs is likely to be significantly impacted in the transition phase, long-term effects are likely to be moderate, as the 90-day past due (DPD) NPA recognition norms and the minimum tier 1 capital of 10 per cent would reduce prevailing regulatory arbitrage between banks and NBFCs for a similar set of assets, India Ratings said in a note issued here today.

Meanwhile, another rating agency Care said that such measures may lead to a jump in NPAs over the short-term which would impact profitability due to higher provisioning requirement with increase in NPAs and interest reversals.
India Ratings said that a 10 per cent coverage on incremental NPAs and 20 per cent loan growth, would see their profitability impacted by around 15 bps on an on-going basis.
However, the impact is likely to be higher in the transition period till FY18 (up to 30 basis points) as incremental provision would also have to be taken on the stock of portfolio in addition to loan growth.

Care Ratings said that over the years, the NBFC sector has become systemically important with rise in assets under management from around 11 per cent of bank assets in 2009, to 13 per cent of bank assets in 2013.
To better address business risk, enhance regulatory coverage, standardise regulations and improve governance standards, the RBI revised regulatory guidelines for NBFCs yesterday, which are to be implemented over the next three financial years.