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NBFCs bad loans to likely increase by one-third, over new RBI new norms: Study

07:48 PM Dec 03, 2021 | FPJ Web Desk

The recent clarification by the Reserve Bank of India on non-performing advances (NPA) may increase non-banking financial companies (NBFC) bad loans by one-third, says a report.

Last month, the RBI had provided clarification on income recognition asset classification and provisioning (IRAC) norms for banks, NBFCs, and All-India Financial Institutions. The clarification included classification of special mention account (SMA) and NPA on a day-end position basis and upgrade from an NPA to standard category only after clearance of all outstanding overdue.

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''The RBI's clarification on non-performing advances (NPAs) accounting is likely to increase NPAs by around one-third for non-banking finance companies (NBFCs),'' domestic rating agency India Ratings and Research said in a report on Friday.

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However, the impact on provisioning could be modest, given NBFCs are using Indian Accounting Standards (IND-AS) and generally, for higher rated NBFCs, provision policy is more conservative than IRAC requirements.

The report said 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. This again would result in an accelerated pace of NPA recognition for accounts, it said.

NBFC borrowers, typically where there is cash collection, pay their overdue generally with some delays. Accounts can get into the NPA category just for a day's delay in paying the installments and once it gets categorized as NPA it will not be able to become standard unless all the arrears are cleared, the report said.

''So, in other words, accounts would get categorized as NPAs at a faster pace and would remain sticky in that category for a longer time. Both these accounting treatments would result in higher headline numbers for NBFCs,'' it said. It may so happen that NBFCs would disclose NPA numbers as per IRAC norms and stage 3 numbers as per Ind-As separately in their disclosures, the agency said.

(With inputs from PTI)

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