Tightening Of NPA Norms Could Increase NBFCs’ Headline NPAs

India Ratings and Research (Ind-Ra) opines the Reserve Bank of India's (RBI) clarification on non-performing advances (NPA) accounting is likely to increase NPAs by around one third for non-banking finance companies (NBFCs). However, the impact on provisioning could be modest, given NBFCs are using IND-As and generally for higher rated NBFCs, provision policy is more conservative than IRAC requirements. Additionally, NBFCs would have to invest in systems and processes to comply with daily stamping requirements. Ind-Ra understands that NBFCs have presented to the RBI for providing a transition period on this requirement.

Restricted Movement from Stage 3 to Standard Category

NBFCs generally classify an account as stage 3 when there is a payment overdue for more than 90 days. Typically for monthly payments, this would be when there are 3 or more instalments overdue on any account. However, when the borrower makes part payment such that the total overdue is less than three instalments, the account is removed from NPA classification and classified as a standard asset, although it remains in the overdue category in case not all overdues are cleared. However, the RBI clarification would allow stage 3 assets to become standard only when all the overdues / arrears (including interest) are cleared.

NBFC borrowers are generally a weak class of borrowers and have volatile cash flows which could mean that once an account has been classified as NPA, it could remain there for a considerable period as the ability to clear all dues may be constrained.