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Tightening of norms may increase NBFCs' headline NPAs: Ind-Ra
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SME Times News Bureau | 05 Jan, 2021
Tightening of norms may increase non-banking finance companies' (NBFCs)
headline non-performing advances (NPA) by around one third, India
Ratings and Research (Ind-Ra) said.
"The Reserve Bank of India's
(RBI) clarification on NPA accounting is likely to increase NPAs by
around one third for non-banking finance companies (NBFCs)," the ratings
agency said.
"However, the impact on provisioning could be
modest, given NBFCs are using 'IND-As' and generally for higher rated
NBFCs, provision policy is more conservative than 'IRAC' requirements."
Besides,
the agency pointed out that NBFCs would have to invest in systems and
processes to comply with daily stamping requirements.
"Ind-Ra understands that NBFCs have presented to the RBI for providing a transition period on this requirement."
On
the other aspects of RBI clarification, the agency said that NBFCs
generally classify an account as stage 3 when there is a payment overdue
for more than 90 days. Typically for monthly payments, this would be
when there are 3 or more instalments overdue on any account.
"However,
when the borrower makes part payment such that the total overdue is
less than three instalments, the account is removed from NPA
classification and classified as a standard asset, although it remains
in the overdue category in case not all overdues are cleared."
"The
RBI clarification would allow stage 3 assets to become standard only
when all the overdues or arrears (including interest) are cleared."
Furthermore,
the agency pointed out that NBFC borrowers are generally a weak class
of borrowers and have volatile cash flows which could mean that once an
account has been classified as NPA, "it could remain there for a
considerable period as the ability to clear all dues may be
constrained".
In terms of the provisioning trend, NBFCs have
transitioned to the 'Ind-As' regime and the provision created on any
account is based on the historical data on "roll backs and roll
forwards" and the credit loss experienced on accounts in different
overdue buckets.
"This is different from the provisioning created
on the accounts as per the standard IRAC norms. The NPA provisioning
under Ind-As depends on the asset class and the riskiness of the
account."
"During Covid times, NBFCs have increased their
provisioning cover for standard as well as NPA accounts. The new norms
would restrict the movement from stage 3 to standard category unless all
the overdues are cleared. So, accounts which have paid some part of the
overdues would remain in NPA category and have to be provided
accordingly."
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