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With the new framework issued by the Reserve Bank for non-banking finance companies (NBFCs), their gross NPA or bad loan level is likely to be in the range of 5.8—6.1 per cent of their advances by 2018, says a report.
Last month, RBI had issued ‘Revised Regulatory Framework for NBFCs’, aimed at strengthening the structural profile of the sector. The guidelines are to be implemented over the next three financial years.
“With the new framework, we estimate the gross NPA level (for NBFCs) may be in the range of 5.8-6.1 per cent by 2018 from around 3.4 per cent currently,” credit rating agency CARE said in a report.
It said the profitability of NBFCs would also see an impact of 35 to 45 bps due to revised guidelines.
NBFCs have witnessed a stress in asset quality during the last two—three years due to weak operating environment and economic downturn.
Sectors which are directly linked to economic activities like commercial vehicle, construction equipment and infrastructure financing have witnessed sharp deterioration in asset quality.
Gold loan NBFCs have also witnessed asset quality concerns on account of regulatory uncertainties, correction in gold prices and funding constraints.
In the new framework, RBI has tightened the NPA recognition and provisioning norms for NBFCs to bring them on par with those applicable for commercial banks.
The central bank made recognition norms for non— performing assets (NPAs) more stringent to 90+ days past due from 180+ earlier.
CARE said on the asset quality front, the transition phase will help in reducing the impact, but the asset quality parameters are likely to deteriorate during transition phase.
It believes that over the next three years there will be economic recovery and credit growth will pick up for NBFC sector as well.
“As a result, and over the period of three years, outstanding advances book will increase thereby lowering the NPA percentage,” the report said.
It also expects drastic reduction in fresh slippages for NBFCs with the economic recovery.
Over the transition phase, NBFCs will fine tune their systems and processes and try to align their borrowers to new reporting systems, the report said.
“We perceive revised regulations to be positive for the NBFC sector. We also believe that current profitability levels can absorb impact of additional provisioning requirements,” CARE said.
The regulations will make the NBFC sector structurally stronger, increase transparency and improve their ability to withstand asset quality shocks in the long run, it added.
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