RBI panel proposals for NBFCs will structurally strengthen the sector, says Crisil
Moneylife Digital Team 02 September 2011

The ratings agency has welcomed the new recommendations as they better guard firms against potential risks, though additional provisioning could have a short-term impact on profitability 

Ratings agency Crisil has said that the recommendations of the RBI-appointed Working Group on non-banking finance companies (NBFCs), if accepted and implemented, will structurally strengthen the sector in the long term.
The higher risk weights placed on sensitive sectors, the increase in minimum Tier-1 capital, and stipulated liquidity requirements will better cushion NBFCs against potential asset-side and liquidity risks, Crisil says in an appreciation of the Working Group's proposals. They also provide greater clarity on the regulatory framework for these companies which should help enhance stakeholders' confidence.

However, the increased provisioning would have a short-term impact on profitability which, Crisil estimates, could result in a decline in the average return on assets by 25-30 basis points.

"The change in asset classification norms for NBFCs will result in significant increase in the reported gross non-performing asset (NPA) ratios," says Pawan Agrawal, director, Crisil Ratings. "The gross NPA ratio for the sector which was around 2.8% as of March 2011, would become 4.8% as per the revised classification norms. While it does not reflect any change in the inherent asset quality of NBFCs, they will focus increasingly on containing delinquencies in the up-to-90-days bucket."

The introduction of minimum liquidity requirement will enable the NBFC sector to match the standards stipulated for banks and protect NBFCs against any liquidity crisis. But Crisil does not foresee any major impact of this recommendation, as NBFCs have largely been maintaining positive mismatches in the short-term buckets of up to 30 days.

Suman Chowdhury, head of Crisil Ratings, "Capital market and commercial real estate financing entities will be more affected by the recommendations. Crisil estimates that the requirement for higher risk weights will reduce capital adequacy ratios by 2.5% to 3%. However, capitalisation will not be a challenge, as most of these NBFCs have healthy ratios."

The margin finance business, with an estimated portfolio of Rs35 billion as on 31 March 2011 may become less attractive to customers, given that NBFCs will now need to nearly double the margin they collect from customers. Capital market NBFCs have been diversifying into non-capital market businesses and the new recommendations could see a further acceleration of such efforts.

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