NBFCs may see asset quality improve by up to 200 bps going forward Crisil

The non-banking finance companies may see an improvement in their bad loans ratio by as much as 150-200 basis points, going forward, due to the Reserve Bank of India (RBI)'s postponement of the timeline for adhering to upgraded non-performing assets (NPA) norms and improved economic activity are likely to act as tailwinds for the sector, rating agency Crisil said.

RBI's decision to defer the implementation of the NPA upgradation norms is expected to provide a reasonable transition time for NBFCs to recalibrate their processes, revamp their collection infrastructure, and persuade borrowers to align with the new dispensation.

"We expect gross NPAs for NBFCs to reduce 150-200 bps by March 31, 2022", said Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer, Crisil Ratings. The gross NPAs of the NBFC sector rose 150 basis points to 6.8 per cent as of December, 2021, compared to September, 2021, primarily due to the adherence to the clarifications provided by the RBI circular on NPA recognition issued on November 12, 2021.

According to the revised norms, NBFCs have to recognise NPAs on a daily due date basis versus month-end basis, which was the norm earlier. Secondly, NPA accounts can be upgraded only when the borrower has cleared all his dues. Previously, NPA accounts were upgraded to 60+ or 30 + past due buckets if one or two additional installments were paid. Accounts are largely classified as NPAs only if the overdues exceeded 90 days.

According to the rating agency, the impact of RBI's revised norms varied across business segments of the NBFC sector. While there was a negligible impact on the gold loans segment, the vehicle finance segment saw significant impact, with 500 bps movement in bad loans. Within the vehicle finance segment, too, two-wheeler and three-wheeler segments, commercial passenger vehicles, and first-time user customer segments slipped more due to greater volatility in the cash flows of borrowers in these segments.

"Going forward, NBFCs are expected to focus on the near-term overdues to reduce delinquencies in the 60+ days past due bucket and thus curb incremental slippages into NPAs", said Sitaraman.

The improvement in asset quality of NBFCs will also be contingent on the performance of the restructured portfolio. While most of the restructuring done by NBFCs entailed providing a moratorium of six months to one-year, regular billing is expected to start from the fourth quarter of this fiscal. Hence, the performance of these portfolios has to be monitored, the rating agency said. remains a monitorable. Having said that, NBFCs have built enough provisions to cushion their balance sheet in the event of fresh slippages in the restructured accounts.

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