A bad loan breather for shadow banks


Non-banking financial companies (NBFCs) may perform better in the fourth quarter, after the Reserve Bank of India gave them another six months to adopt new rules on upgrading bad debts to standard accounts.

The rule change had led to a spike in bad debts at many NBFCs in the third quarter. While the extra time was granted following requests from industry bodies, bankers say it came a bit too late.

“The extension of the RBI’s NPA Recognition Standard until September 2022 will give a respite to NBFC’s bottom line in Q4FY22,” said YV Chakravarty, Managing Director of Shriram City Union Finance. “We believe this could have been helpful had the measures extending the revised asset classification and provisioning standards had come with the RBI Circular issued on November 12, 2021. Most NBFCs have already absorbed the impact in their results from the third quarter of FY22. The clarification by RBI only defers the adoption of new standards. Although now permitted, this is unlikely to be the path that NBFCs could follow due to accounting complexities,” said said Chakravarty.

In November 2021, RBI requested NBFCs to upgrade Non-Performing Assets (NPAs) only after all interest arrears and principal due were repaid on the credit facilities. It also mandated daily postage of accounts to count the number of days overdue, instead of monthly or quarterly postage. NBFCs have been asked to put systems in place for this by March 31, 2021, and they have started notifying borrowers of the new repayment schedule. On Tuesday, the regulator extended that six-month deadline to September 30, and NBFCs hope to give customers more time to make refunds and avoid defaults.

The new rule had inflated the bad debts of NBFCs and housing finance companies in the third quarter. Mortgage lender Housing Development Finance Corp. Ltd (HDFC) declared gross non-performing loans of 12,400 crore (2.32% of portfolio), of which 2,750 crores were loans less than 90 days past due as of December 31, 2021. Without this, the gross NPA ratio would have been 1.81% from 2% as of September 30. Shriram Transport Finance also reported an increase in NPAs resulting in lower net profit due to new RBI rules.

Generally, if a customer is three or more overdue payments and pays a portion such that the overdue is less than three installments, the account is classified as a standard asset. But the regulator has now asked NBFCs to classify these accounts as standard only if all dues are settled.

According to ICICI Securities, HFCs reported during Q3FY22 earnings that the impact of RBI regulations on asset classification was 40 to 100 basis points beyond Stage 3 or NPA assets. Vehicle financiers said the impact was in the range of 270 to 570 basis points, given the higher stage 2 pool or loans past due between 31 and 89 days.

“A few large NBFCs engaged in vehicle financing will benefit the most as their reported net NPAs were approaching or exceeding the maximum threshold of 6% under the RBI’s Rapid Corrective Actions (PCA). Since the framework was to be applied based on March 31, 2022 financial statements, these NBFCs now have more time to focus on recoveries, make additional arrangements or even raise equity to leave net NPAs below. of the APC watermark,” said Senior Director Krishnan Sitaraman. and Deputy Director of Ratings, CRISIL Ratings.

NBFCs, however, are of the view that the RBI should allow an exemption for retail customers or accounts under 2 crore as their revenue streams are not stabilized yet.

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