NBFCs: Panel proposes stiffer terms on bad assets, capital

NBFCs: Panel proposes stiffer terms on bad assets, capital

Mumbai: A Reserve Bank of India (RBI) working group has recommended tighter norms for non-banking financial companies (NBFCs) to improve regulatory supervision and reduce the difference between these companies and banks, especially in terms of how they classify and recover loans.

The working group, headed by former RBI deputy governor Usha Thorat, has recommended raising the tier-I capital requirement for these firms and tightening the asset classification in line with banks.

RBI released the draft guidelines on Monday and asked for public comments till the end of September.

Tier-I capital, comprising equity and reserves, is being raised to 12% from 7.5%, and NBFCs will be required to classify loans not serviced for 90 days as non-performing assets (NPAs). The current NPA norms deem an asset bad when a borrower does not pay for 180 days.

Once an asset turns bad, an NBFC needs to set aside money for it, denting profit.

While the new asset classification norms may see higher NPAs for some NBFCs, the working group is in favour of allowing these companies to recover bad assets by bringing them under an Act that currently covers only banks.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarefaesi) Act, 2002, allows banks and financial institutions to move debt recovery tribunals against loan defaults, but NBFCs have so far been denied this route to recover bad loans.

NBFCs will be given three years to take their tier-I capital adequacy to 12%, the working group said.

It has also recommended raising risk weights for NBFCs with capital market exposure to 150% and for commercial real estate to 125%, from 100% currently. This will raise the capital requirement and push up the cost of money.

Other recommendations include amendment of the Reserve Bank of India Act to insist on a minimum asset size of over 50 crore for registering new NBFCs.

“Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years," the working group said.

The transfer of shareholding of 25% or above, and merger or acquisition of any registered NBFC should have prior RBI approval, it added.

Besides Thorat, other members of the group include Bharat Doshi, executive director and group chief financial officer of Mahindra and Mahindra Ltd; Rajiv Lall, managing director and chief executive officer of Infrastructure Development Finance Co. Ltd, and Pratip Kar, former executive director of the Securities and Exchange Board of India.

Although the guidelines are tighter than the existing norms, companies will be given time to meet RBI’s requirements, said Santosh Singh, research analyst at Espirito Santo Securities.

“The large NBFCs are well placed in terms of capital, but they will have to adjust to the new norms on NPAs," he said. “Higher risk weightages for companies lending to capital markets and commercial real estate will impact companies like Religare Finvest, India Infoline and Indiabulls."

Nirmal Jain, chairman of India Infoline group, said higher risk weightages will increase the cost of loans to the capital markets.

“Costs will go up and growth will slow down relatively," he said. “They’ve also introduced some other measures like transfer of equity and liquidity ratio, which we think is aggressive, because the industry has not faced any default-like situation."

The working group has recommended that NBFCs should set aside cash, bank balances and holdings of government securities to cover any gaps between outflows and inflows for 30 days.

“These are positive because they are aimed at strengthening the risk-taking profile of NBFCs," said Nilanjan Karfa, analyst at Brics Securities.

Sunil Kanoria, vice-chairman of Kolkata-based Srei Infrastructure Finance Ltd, said the higher tier-I capital can be adjusted to, but higher minimum asset size will dissuade smaller companies from getting into the sector.

“India is a vast country and not all companies are big," he said. “Many of the NBFCs are lending to niche sectors and increasing net owned funds to new NBFCs may shut the door on many small businesses."

R. Sridhar, managing director of Shriram Transport Finance Co. Ltd, a truck finance firm, said tightening of NPA reporting norms will force companies to educate their customers to maintain fiscal discipline.

“We’ll have to tell them that they cannot now afford to take 180 days to pay loan instalments and have to be fiscally disciplined," he said. “They are comfortable with 180 days and have to readjust, which will take time."

Sridhar said by proposing to introduce the Sarefaesi Act for NBFCs, RBI has given in to a long-pending request.

“This is a big positive because it will quicken recovery. Also, reporting NPAs at 90 days will help us get a tax break. The message is that if you are on a level playing field with banks in terms of regulation, there will be rewards," he said.