NBFC NPA: What impact will RBI asset classification standards have on bad debts in MSMEs, other segments


RBI has also asked lenders to classify borrower’s accounts as overdue as part of their end-of-day process, regardless of when that process is performed. (Image: Pexels.com)

Credit and financing for MSMEs: The “clarification” on asset classification standards issued by the Reserve Bank of India (RBI) last week, which places non-bank financial corporations (NBFCs) on par with banks in classification standards, could lead to a growth in their non-performing assets (NPAs) including among MSME borrowers, experts say. According to RBI, loan accounts can only be upgraded to the NPA standard if all interest and principal arrears are paid by the borrower. This, RBI said, for the avoidance of doubt, because “some lending institutions upgrade accounts classified as NPA to the” standard “asset class by paying only late interest, partial delays, etc. . “This is one of the concerns.

“At the aggregate level, this will certainly lead to greater disclosure of NPAs, including MSME accounts, and increase the risk of further slippages. The impact will not be uniform across all NBFCs. It depends entirely on whether the NBFC in question followed the spirit of the classification standards. This change makes any accommodative position of lenders towards borrowers difficult. NBFCs will certainly be more loan-demanding and growth may slow, ”Kunal Bhakta, research manager, First Water Capital Fund, told Financial Express Online.

Although the changes will take effect from March 31 of next year, so far the NBFC have upgraded NPA accounts even though full dues are not cleared. With the RBI guidelines now, NBFCs, which cannot upgrade accounts to a Special Mention Account (SMA) without receiving a full refund, can record a jump in NPAs.

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“The impact would be on all types of borrowers, such as consumers or businesses, not just MSMEs. But MSME lenders could be more affected as they would have a higher proportion of loans under NPA and restructuring due to covid. However, classifications should not lead to an increase in bad debts, they will result in a reduction in the number of bad debts revalued to standard assets. Therefore, funding and capital requirements could increase for NBFCs and banks, ”Aditya Damani, founder of Credit Fair, told Financial Express Online.

Another issue is that RBI has instructed lenders to classify borrowers’ accounts as past due as part of their end-of-day process, regardless of when that process is performed. Likewise, lenders should also classify accounts as ADM as well as NPA according to the end of day process for the relevant date instead of the end of the month. “In other words, the date of the SMA / NPA must reflect the status of the classification of the assets of an account at the end of the day of this calendar date,” the RBI notification said.

This basically means that at NBFC, if payment takes longer than 30 days from November 16, say, the overdue amount will become overdue and NPA after 90 days. This contrasts with looking at the end of the month to classify the account as overdue or NPA in case the payment is not received. It could also impact NBFC NPAs for a while.

“The rule for classifying standard accounts after receipt of full payment will certainly have an impact on the overall amount of APNs, but one can only guess how high it would be. The quantity cannot be specified. However, filing past due accounts at the end of the day will be more of a software adjustment case for lenders. From the customer’s perspective, that will be a problem, ”Madan Sabnavis, chief economist, Care Ratings, told Financial Express Online.

However, according to Manish Lunia of FlexiLoans, mMost major NBFCs already follow the 90 day gross NPA and 180/270 day depreciation policy in the country and all systemically important NBFCs (with an asset size of Rs 500 crore and above) which affect the financial stability of the overall economy also follow the modeling of the expected credit loss that accumulates the NPA at the lending body based on the models. Therefore, “we do not expect a significant increase in MSME NPAs due to these rules. It’s mainly about forward-looking notifications and standardization of reporting and communication with customers beyond, ”Lunia told Financial Express Online.

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Nonetheless, what NBFCs can do is warn borrowers of the new exemption and work with them to avoid the NPA classification. Although disbursements may be affected at some point, but the demand pipeline would also have been strong for lenders due to the recovery of the economy after Covid, pent-up demand for goods in the markets, etc. standardization standards. Some impacted NBFCs will need to speed up NPA and credit cost accounting if they are not already synchronized. This will have a one-off impact on these entities, ”added Lunia.

Referring to the central bank’s proposal to apply scale-based regulation to NBFCs, RBI Deputy Governor Mr. Rajeshwar Rao said last month at a CII virtual event that with growth Due to the size and complexity of the NBFC industry, there is regulation necessary to deal with the resulting systemic risks, Financial Express reported. Rao had also said that NBFCs should keep the customer at the center of all innovation and address concerns about governance. “As they grow in size and complexity that pose a risk to the financial system, the case for greater regulatory oversight grows stronger,” Rao said at the event.

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