New Reserve Bank of India RBI Norms Likely To Increase NBFC Bad Credit By A Third: Study


Last month, the RBI had clarifications on IRAC standards for banks, NBFCs

The Reserve Bank of India’s recent clarification on non-performing advances (NPA) could increase non-performing loans from non-bank financial firms (NBFC) by a third, a report said. Last month, RBI provided clarifications on Income Recognition Asset Classification and Provisioning (IRAC) standards for banks, NBFCs and All-India Financial Institutions.

The clarification included the classification of Special Mention Account (SMA) and NPA on an end-of-day position basis and upgrading from an NPA to a standard category only after all outstanding overdue payments have been settled.

“The RBI’s clarification on accounting for non-performing advances (NPAs) will likely increase NPAs for non-bank financial firms (NBFCs) by around a third,” domestic rating agency India Ratings and Research said in a report on Friday.

The impact on provisions could be modest, however, as NBFCs use Indian Accounting Standards (IND-AS) and, in general, for higher rated NBFCs, the provision policy is more conservative than the IRAC requirements.

According to the report, the RBI circular also calls for daily stamping of accounts to count the number of days they are overdue instead of monthly or quarterly stamping. This, in turn, would accelerate the pace of NPA recognition for accounts, it said.

NBFC borrowers typically pay their overdue amounts with some delay when they typically collect cash. Accounts can only be added to the NPA category with a one-day delay in the payment of the installments, and once categorized as NPA they cannot become the standard unless all arrears are paid, it says in the Report.

In other words, accounts would be categorized faster than NPAs and would stay in that category for a longer period of time. Both accounting treatments would lead to higher headline numbers for NBFCs, ”it said.

NBFCs may occasionally disclose NPA numbers under IRAC standards and Level 3 numbers under Ind-As separately in their disclosures, the agency said.

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