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RBI’s new norms could lead to spike in NPAs for NBFCs: ICRA

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While the new norms are unlikely to affect regular banks that already comply with RBI norms, ICRA says NBFC NPAs could go up by 160-180 bps. Further, increased focus on collection could set back NBFCs' growth.

RBI’s new norms could lead to spike in NPAs for NBFCs: ICRA
The Reserve Bank of India's revision of bad loan recognition and upgradation norms could bring a sharp spike in the non-performing assets (NPAs) for non-banking finance companies (NBFCs) in the country. Credit rating agency ICRA estimates that the new norms could take NBFC NPAs up by 160-180 bps whereas the spike in the case of house finance companies (HFCs) could remain somewhere between 60-80 bps over March 2021 levels.
On November 12, RBI gave a clarification on the income recognition, asset classification and provisioning IRAC norms for banks and NBFCs and All India Financial institutions (AIFIs). The key points included the classification of special mention accounts (SMAs) and non-performing accounts on a day-end basis, upgrade to an NPA to standard category only after the clearance of all outstanding dues and harmonisation of out-of-order status of cash credit (CC)/overdraft accounts and the treatment of delays in interest payment on a nine-day overdue basis.
This means that NPAs can only be moved to the standard category if all the remaining dues are cleared by the borrower. The move, however, is unlikely to affect NPAs of regular banks that already comply with these norms.
The ICRA projection takes into account a revision in norms and slippage from restructured books with March 2021 as the base. The restructured books of all NBFCs and  HFCs are estimated to have increased to 4.1-4.4 percent and 1.8-2.2 percent, respectively as on September 2021 compared to their figures of 2.2 percent and 1 percent, respectively, in March this year.
Non-banking financial entities will now have to tighten their internal control and augment their management information system for the timely recognition and cash collection and time taken for collections.
The rating agency cautioned that a rise in NPAs could impact earnings over a few quarters if the forward flow into the NPA category was not contained. Increased focus on collection is likely to affect the growth of NBFCs in near future.
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