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Non-banking finance companies (NBFCs), including housing finance companies (HFCs), may see an increase in non-performing assets (NPAs) for three-four quarters due to the tweak in norms relating to when a borrower account can be flagged as overdue and tightening of rules relating to upgradation of NPA accounts.
However, NPAs are expected to stablise a couple of quarters after the Reserve Bank of India’s modified “Prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) pertaining to Advances” take effect, say industry experts.
The RBI has asked lending institutions to comply with the aforementioned prudential norms at the earliest, but not later than March 31, 2022.
Limited economic impact
Experts assessed that the impact of the modified norms could only be an accounting one and not so much economic as many NBFCs are not only holding more than required provisions under the expected credit loss (ECL) framework but also Covid-related provisioning buffer.
“Many NBFCs are following monthly tagging of NPAs but RBI has proposed NPA tagging as part of day-end process for the relevant date. So, due to the changed norm, assets in the special mention account/SMA-2 category (when principal or interest payment in a loan account is overdue for more than 60 days and up to 90 days) could migrate to the NPA category,” said a senior NBFC official.
Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, assessed that the RBI’s clarifications to the ‘Prudential norms on IRACP pertaining to Advances’, which now ask the NBFCs to recognise NPAs on a daily due date basis as part of their day-end process, will lead to higher gross NPAs (GNPAs).
No more flexibility
Referring to most NBFCs following month-end NPA recognition, he noted that typically, they ramp up collection activity on overdue accounts between the due date and the month end, which is why overdues reduce towards the month-ends. Now, this flexibility is no longer available.
“Bounce rates in the 60-90 days bucket are estimated at 25-35 per cent. Consequently, a significant proportion of the loans in the 60-90 days bucket may slip into the more than 90 days overdue bucket and will have to be recognised as NPA,” Sitaraman said.
On RBI stipulation that loan accounts classified as NPAs can be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower, he opined that typically, it has been difficult for retail borrowers classified as NPAs to fully clear their three or more overdue instalments quickly.
Data shows these borrowers clear only one or two additional instalments typically, so their accounts remain overdue even when it’s for less than 90 days.
Sitaraman said:“The combination of day-end recognition and tighter upgradation criteria means such accounts are likely to remain classified as NPAs for a longer period.
“Consequently, the headline reported GNPAs will rise and stay elevated for some time. This will also increase the operational intensity for NBFCs as they align their systems for daily stamping of NPAs.”
RBI tweaked the criteria for upgradation of accounts classified as NPAs as it found some lending institutions upgrading accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc. To avoid any ambiguity in this regard, the central bank clarified that loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by borrower.
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