The clarification issued by the Reserve Bank of India (RBI) on non-performing assets (NPAs) 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 that NBFCs are using Indian accounting standards (IND-AS). Generally, for the higher-rated NBFCs, provision policy is more conservative than income recognition and asset classification (IRAC) requirements, says a research note.
Additionally, the report from India Ratings and Research (Ind-Ra) points out that NBFCs would have to invest in systems and processes to comply with daily stamping requirements. Ind-Ra says it understands that NBFCs have presented to RBI for providing a transition period on this requirement.
NBFCs generally classify an account as stage-3 when a payment is overdue for more than 90 days. Typically for monthly payments, this would be when there are three or more instalments delinquent 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 the NPA classification and is reclassified as a standard asset, although it remains in the outstanding category until all overdue amounts are cleared.
However, RBI clarification would allow stage three assets to become standard only when all the overdue amounts or 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.
The RBI circular also calls for daily stamping of accounts to count the number of days they are overdue instead of a monthly or quarterly stamping.
According to Ind-Ra, this again would result in an accelerated pace of NPA recognition for accounts. It says, “NBFC borrowers, typically where there is cash collection, pay their overdues generally with some delays. Accounts can get into the NPA category just for a day’s delay in paying the instalments and once it gets categorised as NPA it will not be able to become standard unless all the arrears are cleared. So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a more extended period.
“Both these accounting treatments would result in higher headline numbers for NBFCs. It may so happen that NBFCs would disclose NPA numbers as per IRAC norms and stage three numbers as per Ind-AS separately in their disclosures,” the rating agency says.
The rise in the headline numbers depends on the asset category also. Borrowers in the earn-and-pay model such as commercial vehicle finance, small-ticket business loans, personal loans to self-employed customers, and tractors, are typically vulnerable to volatile cash-flows. They generally are not able to clear all their dues in one go and so the headline numbers would look elevated. On the contrary, home loans and salaried personal loans can improve performance.
Further, the provisioning impact of this circular depends on the quantum of provisions done under Ind-AS and how that is comparable with IRAC-based provisioning. Almost all the higher rated entities have provided in excess for stage-3 and standard assets and may not have a disproportionate impact on provisions, Ind-Ra points out.
On the provisioning trend, the rating agency says, NBFCs have transitioned to the Ind-AS regime and the provision created on any account is based on the historical data on rollbacks and roll forwards and the credit loss experienced on accounts in different overdue buckets.
It says, “This is different from the provisioning created on the accounts as per the standard IRAC norms. The NPA provisioning under Ind-AS depends on the asset class and the riskiness of the account. During COVID times, NBFCs have increased their provisioning cover for standard as well as NPA accounts.
“The new norms would restrict the movement from stage three to standard category unless all the overdues are cleared. So, accounts which have paid some part of the overdues would remain in the NPA category and have to be provided accordingly,” Ind-Ra concludes.