Relief rally in NBFC stocks

Priya sundarajan | | | Updated on: Nov 12, 2014

Stocks of non-banking finance companies (NBFCs) continue to remain in focus today, after the Reserve Bank of India tightened norms for NBFCs on Monday, to bring about a level playing field between NBFCs and banks. While the new regulations bring in more stringent asset quality norms for NBFCs, the additional time given by the RBI to comply with these norms has come as a relief to the sector.

The RBI has allowed NBFCs to implement these norms in a phased manner up to March 2018, which gives them enough time to migrate to the new regulatory norms. Leading the pack is M&M Finance which has moved up 10 per cent today, while the other such as Sundaram Finance, Shriram Transport Finance and Bajaj Finance have gone up 1-3 per cent.

One of the significant changes that have been made is the tightening of the NPA recognition norms. Currently, the loans, where borrowers have defaulted in their payments for 180 days or more, are classified as NPAs. Now, as per the new regulation, this has been brought down to 90 days at par with banks. This will lead to an increase in NPAs and hence provisioning requirements.

However, given that this will be enforced in a phased manner, the impact on earnings will be lower than what was expected earlier.

“On a snapshot basis there will be a rise because we have always been planning for a 180-day situation. However, as we have time to adjust – bring it down to 150 days in 18 months, to 120-day level by 2017 and 90-day by 2018 -- it gives us sufficient comfort. If the economy does improve, the situation can be far better managed without any serious impact on the financials or the company” says N Sivaraman, President & Wholetime Director, L&T Finance Holdings.

Also some of the companies are well provided for and have been following a prudent asset classification norm. Bajaj Finance for instance has already moved more than 90 per cent of its loan portfolio to 90-day cut off. Sundaram Finance too has moved to a 120-day norm.

But some players feel that as their customers have irregular income and cash flows, it may be difficult to conform to these norms.

“Most of our customers, who make their livelihood from running the vehicle (small truck operator), do not have regular income and their cash flows are not smooth. So their ability to pay is not as predictable as any banking customer,” says Umesh Revankar, Managing Director, Shriram Transport Finance.

“Also, the impact may be more when we migrate from 120 to 90 days. Right now, it may be difficult to calculate, because the average tenure of our portfolio is 3 years. So by 2017, what will happen is difficult to guess,” he adds.

Other tweaks

The RBI has also increased the capital requirement—Tier I capital adequacy from 7.5 per cent to 10 per cent. Given that most players are well capitalised and the RBI has given time up to March 2017 to comply with this norm, the business growth of most companies may not be impacted.

The RBI has also tweaked the norm on acceptance of deposits. All asset financing NBFCs will now be allowed to accept deposits upto 1.5 times their net owned funds, down from four times earlier. However, with most NBFCs having deposits well within this limit, the impact will not be significant.

Published on November 12, 2014

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