New RBI norms unlikely to impact NBFCs significantly

The proposed revisions in asset classification, provisioning norms and higher Tier-I capital ratio requirements by the RBI would have only a limited impact on non-banking finance companies (NBFCs). There would not be any significant impact on the operating performance due to the requirement of a minimum Tier-I capital ratio of 10% (current requirement of 7.5% for retail finance NBFCs), according to India Ratings.

This is because the weighted average Tier-I capital ratio was around 14% at eight major retail finance NBFCs at the end of March 2012 and over 10% at nearly all the agency rated NBFCs, it said.

Similarly, the transition of NBFCs to the 90-day non-performing assets (NPA) norm from first quarter of 2015-16 (same as banks) from a 180-day NPA norm is unlikely to have a significant impact on NBFCs' profitability in the medium term, India Ratings said.

"The transition is accompanied by a 120-day NPA norm at the first quarter of 2014-15 and a one-time re-adjustment of borrower's repayment schedule, not to be classified as a restructuring," it said. NPA ratios on a 90-day delinquent basis could nearly double at most of the major NBFCs and incremental provisioning expenses could reduce return on average assets (ROA) by around 5-40 bps (0.05%-0.4%), India Ratings estimated.

However, the agency expects NBFCs' monitoring and collection systems and the borrower behaviour to adjust during the transition phase and the 90-day delinquencies to reduce substantially by the time of its introduction.

"The impact on NBFCs' credit costs and ROA could therefore be manageable in the medium term, even though the sector's asset quality faces strong headwinds currently from the cyclical economic downturn and weak industrial growth," India Ratings said.



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