RBI refuses to relax asset classification and provisioning standards for NBFCs

The Reserve Bank of India (RBI) has rejected the request by non-bank financial corporations (NBFCs) to relax asset classification and provisioning standards.

This will lead to a number of bad debts from these parabanks for technical reasons while standardizing the standards of asset quality between banks and NBFCs. Parabanks are now quickly filling positions left vacant by risk-averse banks, and their asset portfolios account for nearly 20 percent of total banks’ credit.

The NBFC Finance Industry Development Council (FIDC) lobby group had approached the RBI to offer a relaxation of the NPA standards, but the RBI refused to do so, sources said.

In a November notification, the central bank said NBFCs must recognize their debts as bad debt if they are not paid for more than 90 days, bringing them into compliance with the banks. Most large NBFCs already follow this practice, but smaller NBFCs only provide a standardized account if a single monthly payment is paid after the borrower defaults on three monthly payments. This is due to the nature of the credit profile to which the NBFCs lend money.

NBFCs mainly borrow money from banks to lend more. Therefore, NBFC borrowing rates are always higher for borrowers who do not get funds from banks due to their poor credit profile.

Considering the risk element of these customers, NBFCs follow a deferred NPA recognition and typically classify an account as a NPA only when it is due for 180 days. Previously, NBFCs were officially authorized by the RBI to allow recognition of bad debts only when they were not paid for 180 days.

There are various estimates from agencies on the surge in the number of bad debts. India Ratings estimates that the number of NPAs could increase by a third. According to the ICRA, NPAs could increase by 160 to 180 basis points by March for the sector. Housing finance could also see its NPAs rise by around 60 to 80 basis points by March due to RBI standards.

In a recent report, India Ratings explained that NBFCs typically classify an account as Third Stage, or Special Mention Account (SMA-3), when there is a payment delay of more than 90 days. Typically, for monthly payments, this would be when there are three or more late payments on an account. However, when the borrower makes a partial payment such that the total delinquency is less than three installments, the account is removed from the NPA classification and classified as a standard asset, although it remains in the delinquency category in the event. where all outstanding payments would not be settled. The RBI’s Nov. 12 notification said that these third-stage assets can only become standard when all delays, including interest, are cleared by the borrower.

However, India Ratings did not expect a significant increase in provisioning, as NBFCs are generally more proactive than banks in funding their distressed accounts given the nature of the uncertainties in their business. During the 8th annual economic conclave of the State Bank of India, the governor of the RBI, Shaktikana Das, assured that the peak of the NPA would not be as alarming as expected by analysts.

“We did our homework. Some media reports say the standards will raise the NPA level of NBFCs to very alarming proportions. We will not, we have looked at the NBFC SMA numbers, we know exactly how much is left in various SMA baskets and by how much it will increase, ”RBI Governor Das said.

“Reports that this will lead to a sudden increase in NBFC NPAs are not correct. The NPA numbers will increase, of course, but it won’t be very alarming, ”Das said on November 16 at an SBI event.

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