The Reserve Bank of India’s review of bad debt recognition and upgrading standards could lead to a sharp increase in non-performing assets (NPAs) for non-bank financial corporations (NBFCs) in the country. Rating agency ICRA estimates that the new standards could increase NBFC NPAs by 160 to 180 basis points, while the peak in the case of real estate finance companies (HFCs) could remain somewhere between 60 and 80 basis points. compared to March 2021 levels..
This means that NPAs can only be moved to the standard category if all remaining contributions are cleared by the borrower. However, this decision is unlikely to affect the NPAs of mainstream banks that already comply with these standards.
The ICRA projection takes into account a revision of standards and a slippage of restructured books with a base of March 2021. The restructured books of all NBFCs and HFCs are estimated to have increased to 4.1-4.4% and 1.8- 2.2%, respectively, in September 2021, compared to their figures of 2.2% and 1%, respectively, in March of this year.
Non-bank financial entities will now have to strengthen their internal control and increase their management information system for timely accounting and collection and the time required for collections.
The rating agency warned that an increase in NPAs could impact earnings over a few quarters if forward flows to the NPA category were not contained. The increased focus on fundraising is likely to affect the growth of NBFCs in the near future.
(Edited by : Shoma bhattacharjee)
First publication: STI