Tighter norms increase NPAs of NBFCs and HFCs; timeline extension by RBI for implementing revised NPA norms would facilitate smoother adoption: ICRA

23 Feb 2022 , 04:25 PM

NBFC NPAs as per the tightened norms were higher by about 150 bps while for HFCs it was higher by 70bps as of December 2021.
About 55% (in loan book terms) of the NBFCs and 75% of the HFCs had aligned their reporting under gross stage 3 reporting under INDAS with the tightened NPA norms

The extension in the timeline provided by RBI would allow entities a smoother adoption of the tightened norm, if they look to align their reporting. NBFCs carry adequate provisions in the form of overlays, HFCs however have lower buffer 

The impact of the Reserve Bank of India’s (RBI) clarification (November 12, 2021) on the recognition and upgradation of the non-performing advances (NPAs) for non-banking financial companies (NBFCs) and housing finance companies (HFCs) was visible in Q3 FY2022; NPAs as per the tightened Income Recognition, Asset Classification and Provisioning (IRAC) norms were higher by about 150 bps for NBFCs and 70 bps for HFCs.

Says A M Karthik, Vice President, Financial Sector Ratings, ICRA, “We have analysed NBFCs (21) and HFCs (11), accounting for around 75% and 85% of the overall private NBFC and HFC loan book, respectively, to assess the above impact. Entities, which had a relatively lower impact of the second wave of the Covid-19 pandemic or carried higher expected credit loss (ECL) provisions or witnessed lower divergence between their gross stage 3 (GS3) as per IndAS vis a vis the NPA as per the tightened IRAC norms, have aligned their GS3 reporting by factoring in the tightened NPA norms. About 45% (in loan book terms) of the sample NBFCs and 25% of the HFCs had not aligned their GS3 with NPAs as of December 31, 2021. For these NBFCs and HFCs, the NPAs on account of the tightened norms was higher by 3.0% and 1.0%, respectively.”

ICRA noted that many entities have been augmenting their provisions since the start of the pandemic and carry higher provisions, including an overlay, in view of the uncertainties posed by the pandemic. NBFC and HFC provisions as per the expected credit loss (ECL; including overlay) provisioning under IndAS were comfortably above the IRAC requirement at 2.7x and 1.6x, respectively, in March 2021. While the provisions did not increase commensurately with the increase in the overdues in 9MFY2022, NBFC and HFCs still had higher provisions vis a vis their requirement. NBFCs which are yet to align their INDAS reporting with NPA, continue to carry adequate provisions in the form of overlays, while HFCs, which are yet to align will have to augment their provisions by about 30-40 bps.

The extension in timeline till September 2022, provided by the RBI, vide a notification of February 15, 2022 for implementing the tightened NPA upgradation norm, would allow entities to strengthen their systems and controls, add to their provisions and help in a smoother adoption of these norms. However, ICRA also notes that some entities may continue with disparate reporting of the GS3 under INDAS and GNPA (under IRAC norms) post September 2022.