NBFCs asked to provide for standard assets

CHENNAI: The Reserve Bank of India has asked NBFCs or non banking financial companies to set aside 0.25% of their standard assets as a financial buffer to tide over economic downturns. Till now, NBFCs where required to make provision only for bad loans or non performing assets. Standard assets are loans where borrowers regularly pay interest rates.
"In the interest of counter-cyclicality and to ensure NBFCs create a financial buffer to protect themselves from the effect of economic downturns, we have decided to introduce provisioning for standard assets also," RBI said in a letter to all NBFCs.
The RBI has also made it clear that NBFCs cannot take the provision into account while calculating their net non-performing assets (NPAs). However, an exception has been made in tier II capital with a maximum limit of 1.25% of total risk to the assets.
While most NBFCs have welcomed the new norms, some feel that they should be accorded the same privilege as banks and housing finance companies.
"I think it is clearly in the direction of bringing NBFCs in line with what banks and HFCs follow. But, when we are brought on a par with banks in regulation, we should have same privilege they enjoy in direct tax limits and risk weightages," said T T Srinivasaraghavan , managing director of Sundram Finance.
Banks get tax concession on their provisioning on standard assets. Also, while banks make provisioning based on their assets and ratings, NBFCs are required to set aside 100% of their risk weightage.
NBFCs believe that the new norms will not impact their profitability or affect their interest rates. "It's a very small amount (provision for standard assets). It not going to have any big impact on the balance sheet," said N Srinivasan, director (finance), Murugappa Group. "Interest rates are determined by many factors, including cost of funds. I don't think a provision of 0.25% for standard assets is going to increase rates," Srinivasaraghavan said. He also said that the cost of funds for NBFCs have gone up by 50-100 bps (100 bps = 1%) in the past couple of months. Consequently, NBFCs have raised interest rate by 0.25% to 1% for their loans.