New norms to cut NBFCs' returns by 25bps

MUMBAI: The Reserve Bank of India's move to tighten prudential norms for non-banking finance companies (NBFCs) is expected to knock 25 basis points (bps) off the return on assets (RoA) of NBFCs. At the same time, finance companies will have to raise Rs 8,000 crore to meet the new capital adequacy norms RBI proposed on Wednesday.
A study by rating agency Crisil has indicated that NBFCs will need to set aside more of their earnings for provisioning requirements on account of increase in standard asset provisioning and revision in recognition norms for non-performing assets (NPAs).
However, proposals like increase in Tier-I capital adequacy ratio (CAR), stronger liquidity management, and enhanced disclosure requirements will structurally strengthen the NBFC sector over the medium term, the rating agency said.
Prudential norms refer to those guidelines that seek to link lending to the networth of a company and those which require banks to set aside a portion of their earnings for loans that could go into default. According to Crisil, the tightening in NPA recognition norms to 90 days from 180 days and increase in standard provisioning requirement to 0.40 % from 0.25 % will adversely affect the profitability of the NBFC sector. As a result, the RoA is expected to drop by 25 bps over the medium term.
"While the reported gross NPAs will increase in the near-term due to re-classification, the enhanced focus of NBFCs on collections in the initial buckets will lead to an improvement in asset quality gradually over the medium-term," said Pawan Agrawal, senior director, Crisil Ratings.
The proposal to increase Tier-I capital adequacy ratio for NBFCs to 10 % (12 % for select NBFCs) from 7.5 % will improve the quality of capital and enhance the cushion against asset side risks. Also, RBI has increased the risk weights for NBFCs engaged in capital market and commercial real estate financing and investments.