NBFCs seek more time to classify defaults as NPAs2 min read . Updated: 26 Dec 2016, 02:56 PM IST
NBFCs have been hit by demonetisation, with dipping collections and asset quality concerns, compounded by political risks
Mumbai: Non-banking finance companies (NBFCs) have asked the Reserve Bank of India (RBI) for more time to classify defaults as non-performing loans, following the government’s decision to scrap high-value banknotes.
A month earlier, RBI had said that banks and NBFCs will get 60 more days to classify stressed standard accounts as non-performing assets (NPAs), if the payments are due between 1 November and 31 December. This was for loans up to Rs1 crore, whether business or personal, secured or otherwise, including home loans and agriculture loans. Now, the Finance Industry Development Council (FIDC), a lobby group for NBFCs, has written to RBI to extend this till April 2017.
“This additional period of 60 days was provided as it was expected that the prevailing cash crunch scenario shall stabilize by the end of December. However, it is now evident that this may take another 2-3 months," FIDC wrote.
“This would prevent creation of undue stress in the system and that too for reasons beyond the control of both the lenders and the borrowers. Further, this shall go a long way in improving the confidence levels of not just banks and NBFCs, but also ensure that the credit record of small and medium borrowers, transport operators, small contractors and farmers are not impacted due to the demonetization and that they are able to continue availing credit facilities in the longer term," FIDC wrote.
NBFCs have been hit by the withdrawal of high value notes with dipping collections and asset quality concerns, compounded by political risks as some local leaders asked people to not repay loans.
Ramesh Iyer, vice-chairman & managing director of Mahindra & Mahindra Financial Services Ltd said repayments in November fell 15% from a year ago and December could be no better. “Small operators of vehicles are (having) repayment difficulty in view of stretched cash flow. We expect the situation to continue for some time until business transactions normalize," said Iyer.
A 13 December Nomura Research note said that among NBFCs, rural businesses were impacted more than urban, and cash collections impacted more than non-cash collections. Among those affected are NBFCs such as Mahindra & Mahindra Financial Services, which has a loan book of Rs39,912 crore.
Even as the existing relaxation has given some respite to NBFCs from asset quality concerns, FIDC highlights that the small borrowers’ business has been affected with no money in circulation.
“Because of the very nature of their trade and credit behaviour, if we don’t collect the available cash from the borrowers, it is most likely to roll forward to the next month, making it more difficult for them to repay. This may lead to loan defaults thereby adding stress to the overall asset quality," FIDC added.