RBI’s draft asset norms may push up NBFC bad loans

Pawan Agrawal,director — CRISIL Ratings,said,“The change in asset classification norms will result in significant increase in NBFCs’ reported gross non-performing asset (NPA) ratios. The gross NPA ratio for the sector,which was around 2.8 per cent as on March 2011,would become 4.8 per cent as per the revised classification norms. While it does not reflect any change in NBFCs’ inherent asset quality,they will increasingly focus on containing delinquencies in the up-to-90-days bucket.”

The margin finance business,with an estimated portfolio of Rs 3,500 crore as on March 31,2011,may become less attractive to customers,given that NBFCs will now need to nearly double the margin they collect from customers. Capital market NBFCs have been diversifying into non-capital market businesses; the new recommendations could see further acceleration in such efforts. “Capital market and commercial real estate financing entities will be more affected by the recommendations. CRISIL estimates that the requirement for higher risk weights will reduce these NBFCs’ CARs by 2.5 to 3.0 per cent. However,capitalisation will not be a challenge,as most of these NBFCs have healthy CARs,” Crisil said.

Asset finance companies have a higher gross NPA ratio and hence the impact on specific NPA provisions in case of migration to 90 days from 180 will likely be higher. “We estimate the impact of increase in gross NPAs to 4.5 per cent from 2.7 per cent for Shriram Transport Finance and 6.5 per cent from 5 per cent for Mahindra Finance. Notably,Shriram Transport Finance follows the norm of 180-days-past due dates for NPAs while Mahindra Finance follows the 120-day norm. More aggressive recoveries or a change in provision coverage ratio can provide significant sensitivity to our estimates in the stress scenario,” Kotak said.

The RBI report has increased the minimum Tier I capital adequacy ratio (CAR) to 12 per cent from 10 per cent earlier. The proposed ratio is significantly higher than about 6 per cent for banks; we are not very clear about the reason for increase in CAR. In order to maintain a high investment grade credit rating,NBFCs generally maintain about 12-14 per cent Tier I CAR. Most NBFCs currently have about 18 per cent Tier I and may not have any immediate need to raise capital. “However,a higher regulatory CAR will reduce the leeway of these companies if rating agencies increase comfort on leverage. We find more pressure on leverage if RBI imposes restrictions on loans sold by NBFCs to banks,” Kotak said.