Tag: NPAs

RBI Discussion Paper moots expected credit loss model for banks to address NPA

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) has issued a discussion paper that seeks to move banks towards an expected loss approach with respect to bad loans.

This is a new approach for provisioning by banks, which is in the works, and that is going to align the Indian banks with global standards.

Non-banking financial companies (NBFCs) have already moved to the expected loss model and now, RBI has floated a discussion paper on the same for banks.

So, currently banks follow what is an incurred loss model where they make provisions only once repayments are delayed or not paid, but now, RBI proposes that banks start providing as soon as they start expecting any kind of loss or non-repayment.

Under this expected credit loss model, banks have to classify loans into three categories. Stage one will mostly be all standard assets, stage two will be loans that are seeing some signs of potential stress. And stage three can broadly be loans which are in default.

Banks can design and implement their own models to assess how much they need to provide for each of these stages. But there is going to be a floor, which is set by the RBI in terms of minimum provisions they’ll have to make. These models will also have to be independently verified and disclosures will have to be made by banks.

As far as the transition is concerned, comments are invited by the February 28 and then RBI will come out with final guidelines. But the impact will not be immediate because banks will get at least one year for implementation and a maximum period of five years to phase out the higher provisioning to avoid any capital shock.

RBI, in its own words, expects the potential initial impact of this to be significant and broadly, the sense is that provisions will rise.

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CLSA, for instance, expects a limited impact on private banks but public banks will have to build their buffers. Macquarie believes the provisions could be high because the probability of default has been very high in the last five to 10 years. The impact will be felt starting FY26 for banks. Morgan Stanley believes the potential impact is going to be manageable with larger private banks better placed than others and Jefferies also holds a similar view.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Steady fall in bad loans help PSU banks roar in 2022

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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There has been a breathtaking rally in public sector undertaking (PSU) bank stocks. The primary reason behind the upswing has been a steady fall in gross non-performing assets (NPAs) or the ‘bad loans’ on all their balance sheets. The net NPAs are even lower than they were in 2016, i.e. before the asset quality review (AQR) started in 2017 by the Reserve Bank of India (RBI).

The Nifty PSU Bank Index is the best-performing index this year as most stocks in it have rallied over 100 percent.

Moreover, PSU banks have steadily increased their profits and their loan books too. The latest reading is almost 17 percent in the last available quarter.

Recently, the market valuation too crossed Rs 10 lakh crore for the first time ever, although more than half of it comes from the leader of the pack and India’s largest lender, State Bank of India.

In a note put out in early December, Morgan Stanley raised earnings estimates, valuation multiples and price targets for most PSU Banks and highlighted Bank of Baroda and Bank of India as the names with the best relative risk-reward.

For more, watch the accompanying video

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High NPAs in education loan segment turn banks cautious

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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High defaults of about 8 percent in the education loan portfolio have made banks cautious and go slow on the sanction of such credit.

Non-performing assets (NPAs) in the education loan category including public sector banks’ (PSBs) were 7.82 percent at the end of the June quarter of the current financial year. Outstanding education loans were about Rs 80,000 crore at June end.

Cautious approach is adopted at the end of branches while sanctioning education loans due to high NPAs, a senior public sector bank official said. As a result, some genuine cases are overlooked and there are delays, the official said.

Recently, the finance ministry called a meeting of PSBs to take stock of the education loan portfolio and cut down on delays. The ministry exhorted banks to spread awareness about the Central Sector Interest Subsidy Scheme among field formations.

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The sharp increase in non-performing assets (NPA) in education loans extended by commercial banks in India in recent years is a matter of concern, as it could hamper the growth of bank credit for higher education in the country, according to an occasional paper published by RBI.

In India, around 90 percent of education loans are disbursed by the PSBs. Private sector banks and regional rural banks (RRBs) accounted for around 7 percent and 3 percent of total education loan outstanding, respectively, as of end-March 2020, the paper published in June 2022 said.

The outstanding education loans of all banks were Rs 79,056 crore at the end of March 2020 and at Rs 78,823 crore as of March 2021, as per the Report on Trend and Progress of Banking in India 2020-21 by the RBI. However, the outstanding loans increased to Rs 82,723 crore as of March 25, 2022.

According to Resurgent India managing director, Jyoti Prakash Gadia, fresh job creation has not kept pace with the number of graduates coming out of the colleges, thereby adversely impacting the timely repayment of education loans.

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As a result, NPAs have gone up and banks are hesitant to grant fresh education advances, particularly loans up to Rs 7.50 lakh which are without any collateral and third-party guarantee, he said.

The effective implementation of the New Education Policy, which lays due emphasis on basic skills development and employability, shall create a win-win situation for all the stakeholders, he added.

Most banks offer a scheme for education loan as per the Indian Banks’ Association (IBA) model education loan scheme to students pursuing higher studies in India and abroad.

As per this model loan scheme, education loans of up to Rs 4 lakh do not require any collateral to be provided by the borrower, education loans up to Rs 7.5 lakh can be obtained with collateral in the form of a suitable third-party guarantee, while education loans above Rs 7.5 lakh require tangible collateral.

In all the above cases, co-obligation of parents is necessary. The second category of education loans are sanctioned to those students who obtain admissions to colleges/universities through management quota, provided they satisfy the minimum marks criteria in the preceding examination.

The third category of education loans includes schemes for needy students for pursuing vocation education courses run by industrial training institutes (ITIs), polytechnics, training partners affiliated to National Skill Development Corporation (NSDC)/sector skill councils, state skill mission/corporation, preferably leading to a certificate/diploma/degree issued by such organisation as per National Skill Qualification Framework (NSQF) and any other institutions recognised by either the central or state education boards or university.

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The fourth category of scheme specifically caters to the requirement of students studying in premier institutions like IITs/IIMs/NITs/IISc or courses abroad, with demand for a higher quantum of the loan amount.

All education loans of up to Rs 10 lakh (enhanced to Rs 20 lakh in September 2020) have been included within the priority sector definition by the Reserve Bank of India.

Under most of these schemes, the moratorium period consists of the course period plus six months to one year, and there are nil/negligible processing fees for schemes with high-value education loans.

The interest rate under the various schemes consists of a markup of 2-3 percent above the marginal cost of funds-based lending rate (MCLR)/external benchmark, based on the reputation of the course/institutions. The repayment period is in the range of 10-15 years.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Banks can’t take heart from improving recoveries as RBI warns of possible rise in bad loans

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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RBI Governor Shaktikanta Das on Monday said that banks keeping a close watch on non-performing assets (NPAs) was the need of the hour even as the central bank shifts its focus to containing inflation from growth.

Das, in an interview with CNBC-TV18, said that expecting more repo rate hikes in upcoming monetary policy meetings was a ‘no brainer’.

The RBI, in an unscheduled monetary policy announcement earlier this month, hiked the repo rate — the rate at which the central bank lends money to commercial banks — by 40 basis points to 4.4 percent. One basis point is one-hundredth of one percentage point.

Experts suggest the central bank should hike the key rate by at least 100 basis points to control inflation which has hit multi-year high recently.

Consecutive hikes in interest rate force banks to raise their lending rates. This, amid a relatively slow growth rate, leads to impact on the borrowers’ capacity to pay debt.

Das told CNBC-TV18 that both public sector and private banks have been alerted on the need to maintain NPAs in check. He highlighted that the overall gross non-performing assets (GNPA) for the banking sector are at 6.5 percent. However, on a positive note, collection efficiency has improved for banks, so the situation is not grave as of now, mentioned Das.

“You see the GNPA or the gross NPA remains at 6.50 percent. The currency and finance report was basically saying that this is an area which has to be watched, because it depends on again, so many factors — how the salaries of people are coming, the EMIs and other payments,” he said.

“The collection efficiencies have improved in almost all the banks, and they are almost at 100 percent,” said Das, adding that lenders have raised substantial amount of capital during the COVID period and have various capital raising plans going forward as well.

Here’s a look at GNPA as percentage of total loans: 

(source: Moneycontrol)

On being asked if the interest rate hikes will have a dampening effect on banks’ credit offtake, Das explained that there are numerous factors besides interest rate which affect a lender’s credit growth such as consumption, demand, the overall macroeconomic fundamentals and so on. He expects bank credit growth to remain steady.

“Credit offtake depends on a multiplicity of factors. It depends on how well the economy is doing, how the private consumption, private demand is picking up,” said Das.

“I think bank credit offtake should remain steady. The latest number I have… is of bank credit growth being about 11 percent year-on-year,” said Das.

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Lok Sabha question: Govt says about 5,200 cos with credit exposure of over Rs 5 crore declared as NPAs till Dec 2021

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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More than 5,200 companies having credit exposure of Rs 5 crore or above were categorised as non-performing assets (NPAs) or bad loans on the banks’ books as of December 31, 2021, Parliament was informed on Monday. Scheduled commercial banks (SCBs) and All Indian Financial Institutions report certain credit information of all borrowers having aggregate credit exposure of Rs 5 crore and above to the RBI, under its CRILC database, since the quarter ended June 2014, Minister of State for Finance Bhagwat Karad said.

The number of unique borrowers having aggregate credit exposure of Rs 5 crore and above, identified as companies, and classified as non-performing assets (NPA) stood at 5,231 as of December 31, 2021, Karad said in a written reply to the Lok Sabha. The Central Repository of Information on Large Credits (CRILC) is tasked to collect, store, and disseminate credit data to lenders.

Under this, banks are required to furnish credit information to CRILC on all their borrowers, having aggregate fund-based and non-fund based exposure of Rs 5 crore and above. The number of companies with large credit exposure fell when compared to 5,623 such entities as of March 31, 2021, the minister said citing data from the Reserve Bank of India (RBI). Further, he said that the RBI data maintained since 2015-16 shows that action has been initiated against 11.25 lakh borrowers by banks under the SARFAESI Act from 2015-16 to 2020-21.

“RBI has informed that the details of properties attached under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, are not maintained at it,” Karad said. On being asked if the government has any data on the number of suicides that took place as a result of non-availability of sufficient bank credit, rising interest rates, unauthorised private lending apps among others, he said there were a total of 5,213 cases related to suicides due to bankruptcy or indebtedness in 2020, citing data from the National Crime Records Bureau (NCRB).

In reply to a separate question on illegal lending apps, he said “As per the findings of the RBI’s Working Group on digital lending, the number of illegal lending apps stood at approximately 600 from January 1, 2021, to February 28, 2021”. As per the RBI, its ‘Sachet’ portal mechanism for registering complaints by the public against unregistered entities has received approximately 2,562 complaints against digital lending apps from 1 January 2020 to 31 March 2021, Karad added.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Housing financiers’ bad loans jump by 70 bps following new asset quality norms: Report

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Since the introduction of new asset quality norms last November that brought in shadow banks and housing financiers on par with banks, housing finance companies’ gross bad loans have gone up by 70 basis points (bps) even as their portfolio quality has improved, according to a report. The bad loan pile is expected to stabilise by the end of this quarter, Crisil Ratings said in the report.

The Reserve Bank of India (RBI) had on November 12, 2021, introduced tighter asset quality reporting norms for all lenders, which brought in housing financiers and non-banking financial companies (NBFCs) on par with commercial banks. Though the new norms had to be implemented by December 31, 2021, by all; earlier this week, the monetary authority extended the timeline for NBFCs and housing finance companies (HFCs) till September 30, 2022.

While affordable housing companies have seen a 140-bp spike in gross non-performing assets, other housing finance companies saw their gross NPAs rising to 3.3 percent by December 31, 2021, up from three percent in September 2021. This is primarily because of the November 12, 2021, circular on recognition and calculation of NPAs, rather than any real mark-down in asset quality, Crisil Ratings said in the report on Thursday. Had it not been for this, their gross NPAs would have been at 2.6 percent in December, which means the new norms have delivered a 70-bp impact on their overall asset quality, it added.

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Crisil studied 35 HFCs comprising 95 percent of the industry’s assets under management. Stated differently, without the change in rule, their portfolio quality on-quarter and on a like-to-like basis would have shown an improvement of 40 bps.

The RBI, on February 15, 2022, deferred the implementation of the revised norms pertaining to NPA upgrades to September 30, 2022, from December 31, 2021. However, this is unlikely to have much impact because most HFCs have already switched to the new way of calculating and that they are well-positioned to improve their gross NPA ratio to three percent by the end of this fiscal. The two RBI clarifications, on daily stamping of accounts and NPA upgrades on interest payback, have impacted HFCs. However, the extent of the impact is diverged based on asset class and borrower segment, it noted.

It pointed out that those with relatively more-vulnerable customer profiles, a higher proportion of affordable home loans, self-employed borrowers, and/or loans against property have been impacted more. Krishnan Sitaraman, a senior director and deputy chief ratings officer at Crisil Ratings, said affordable housing finance companies have seen a higher 140 bps impact on average due to the revised recognition norms because their borrowers tend to have limited financial flexibility and volatile cash flows and thus have higher bounce rates.

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Also, most cannot repay their entire arrears in one go, which could lead to stickier gross non-performing assets (GNPAs) in the segment, it added. On their part, HFCs are trying to change borrower behaviour and reduce additional slippages. This, however, will lead to increased operational intensity as they beef up their collection efforts.

Crisil Ratings Director Subha Sri Narayanan said that since many HFCs have already switched to the new norms, they are unlikely to revert to the previous regime, a flexibility now available till September 2022 after the RBI clarification on February 15. Because the increase in reported GNPAs for many of them is not significant and is more of an accounting, rather than an economic, impact, said Narayanan.

The required provisioning levels also have not been materially affected, as HFCs generally follow Indian accounting standards, where provisioning levels are typically higher compared with the IRACP requirements. Assuming they do not avail of this dispensation, overall GNPAs for the sector are expected to settle at 3 percent by March 2022, Narayanan said, adding that asset quality of HFCs is expected to remain better than other NBFCs.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

View: Bad bank and the role it will play for small finance banks

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The setting up of the National Asset Reconstruction Company (NARCL) has come as a welcome move for the banking sector, which has been reeling under the weight of bad loans. A broad assessment on the future of bad loans in India revealed that Non-Performing Assets (NPAs) are expected to rise in the near future and peak in 2022-23 estimated at 10-13 percent of the loan book.

While NPAs are viewed as bad credit decisions, they should be considered as a reflection of risk-taking ability. The NARCL will help recover bad loans and act as another solution to the bad loans problem in India, not the only one.

While the immediate beneficiaries of the bad bank are likely to be the traditional PSU and private banks, especially large ones, one expects NARCL to be a vehicle of support for the broader financial services industry. This is important, especially because the financial services regulator has highlighted increased risks with respect to Non-Banking Finance Companies (NBFCs) and Small Finance Banks (SFBs).

The Reserve Bank of India (RBI) has introduced a prompt corrective action (PCA) framework for large NBFCs, introducing restrictions for whenever key metrics dip below a defined threshold. Among other things, the PCA framework has set the first threshold of NPAs at 6 percent. This is where I believe NBFCs would be vulnerable, and it will force them to be conservative.

While the intent behind RBI’s introduction of PCA is understandable, it is important to recognise that NBFCs play an important intermediation role and often bridge funding gaps when banks are hesitant. Thus, by their very structure, NBFCs are expected to take more risk and have higher NPAs. Will the introduction of PCA next year force NBFCs to alter their business model? We will have to wait and watch.

This brings me to small finance banks. Traditionally, SFBs have been focused on retail and small business loans. However, the introduction of PCA framework for NBFCs could create an opportunity for them to grow their corporate loan book. Their cost of funds is lower and with NBFCs becoming more selective, SFBs can make inroads into the non-blue chip corporates. While SFBs have tighter regulations as compared to NBFCs, the recent spike in NPAs for the small finance banks suggests that all is not well. Against this backdrop, do SFBs feel that NARCL would be an alternative should their books feel the pinch of growing NPAs? It is too soon to tell.

Pandemic, while having created growth opportunities, hasn’t been too kind to small and medium enterprises and has impacted the NPA levels of SFBs. Pre pandemic, NPAs for small finance banks were about 2 percent; reasonably good keeping in mind the profile of the borrowers. However, post pandemic, the ratio has jumped to around 7 percent. With the anticipation of another COVID wave, come March 2022, SFBs could be staring at double-digit NPAs. High capital buffers do add an extra layer of cushion for SFBs, and most should be able to digest this loss. However, capital that was earmarked for growth being used up for provisioning and write-off isn’t its best use. This will push SFBs towards alternatives including the sale of NPAs.

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The immediate solution for small finance banks might be through Asset Reconstruction Companies (ARCs). The role of ARCs has been under immense scrutiny in the last few years. It has been over two decades since the introduction of ARCs in India, but constant regulatory changes meant that their overall impact has been limited. Some view introduction of NARCL as a partial failure of the ARC industry. However, I wouldn’t be too harsh on them because the operating environment for ARCs to succeed hasn’t been easy. The introduction of the Insolvency and Bankruptcy Code (IBC) about six years back also significantly changed the way Indian creditors approached NPAs.

However, pandemic has offered a new lease of life to ARCs and they are working out their new avatar. With banks looking at transferring bigger ticket NPAs to NARCL, many ARCs are now shifting direction and looking at acquiring small ticket loans. The disruption caused by the pandemic resulted in many good small and medium businesses being shut down and hence defaulting on loans. However, these are inherently good businesses and ARCs believe that pooling of assets can help in stronger recovery.

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Further, acquisition of smaller ticket NPAs (including retail) is challenging and relies heavily on technology support. SFBs, who are relative smaller and nimble, have strong technology implementation and are able to monitor the portfolio more closely than many large banks. This makes them a prime candidate for ARCs.

Given India’s size and demographics, SFBs play an important role. A strong regulatory framework should only be an enabler and SFBs should be motivated to go where larger banks failed. Credit dissemination to low-income groups and the weaker section is important to achieve high sustainable growth and income equality. Access to NARCL and ARCs will motivate small finance banks to take more risks without unreasonably worrying about capital.

The author Tarun Bhatia is MD and Head of Kroll South Asia. Views expressed are personal.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

View: Banking Sector – Expectations from the Union Budget 2022

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The past two years have been no less than a roller coaster ride for many industries. The banking industry is considered as backbone of any economy. The asset quality and profitability of banks are mostly impacted by the pandemic. However, enhanced spending on infrastructure, speedy implementation of projects, improved access to banking system, etc. are expected to provide impetus to growth in the banking sector.

While with the ease of restrictions, the economy was reviving and getting back on the growth trajectory, it remains to be seen whether recent spike in Covid cases and modest restrictions (introduced so far) cause any impact on the economy and especially the banking industry.

The economic growth can be accelerated by bringing right set of policies for the banking industry. Towards this, since the Union Budget 2022 is around the corner, the banking industry is looking forward to some positive amendments under the income-tax provisions.

1. Reduction in headline corporate tax rate for foreign companies

Currently, the foreign bank branches are subject to corporate tax at 40 percent [1]. The Government has reduced headline corporate tax rate for domestic companies from 30 per cent1 to 22 percent 1 starting from financial year 2019-20. This change has widened the gap between the corporate tax rate applicable to foreign companies vis-à-vis domestic companies. In view of this, there is certainly a need to reduce the headline corporate tax rate for foreign companies including bank branches.

2. Conversion of foreign bank branch into wholly owned subsidiary (WOS)

The Government had introduced specific provisions under income-tax law making conversion of foreign bank branch in WOS tax neutral subject to fulfillment of stipulated conditions. On this front, it needs to be ensured that there is smooth transition and continuity of tax affairs from branch to WOS. To elaborate, provision for bad and doubtful debts balance, advance/withholding tax credit and pending tax proceedings/litigation of the branch should be smoothly transitioned to the WOS post conversion.

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3. Relaxation of tax deducted at source (TDS)/tax collected at source (TCS) provisions

The Finance Act, 2020 introduced TCS provisions on sale of goods whereas the Finance Act, 2021 introduced TDS provisions on purchase of goods. The term ‘goods’ is not defined under the income-tax law and based on definition provided in other laws, it may include securities and derivatives. While there is clarity regarding listed securities being outside the purview of TDS/TCS provisions, there is no clarity in respect of other securities.

Banks as part of their business invest in securities including debt papers and derivative instruments. Such transactions are well-regulated by the RBI and there are in-built reporting requirements. Thus, such transactions should not pose risk of non-disclosure of transactions.

A suitable clarification carving out all securities (including derivatives) from the ambit of TDS/TCS provisions relating to purchase/sale of goods would be applauded by the banking industry.

4. Rationalisation of provision for bad and doubtful debts

The income-tax deduction for provision for bad and doubtful debts is allowed to banking industry given its nature of business. Apart from this, as an incentive for promotion of rural banking as it is a socio-economic need of the country, additional income-tax deduction is allowed for rural advances. However, given the challenging business environment and to incentivise the banking industry, there is a case to enhance the limit of income-tax deduction for provision for bad and doubtful debts.

5. Deduction of head office (HO) expenses

There is a cap of 5 per cent of total income for claiming deduction of HO expenses by non-residents having branch in India including foreign bank branches. Given that India has full-fledged transfer pricing rules to determine the arm’s length price of any transactions (including HO expenses) between HO and Indian branch, the policy makers may look at relaxing artificial restriction of 5 per cent cap applicable to HO expenses.

6. Interest on non-performing asset (NPA)

Currently, as per RBI prudential norms, advances are to be considered as NPA where recovery is not received for a period of 90 days or more. However, under the income-tax law, the said period is 180 days i.e., as per erstwhile RBI regulations. This inconsistency between the RBI provisions and income-tax law has resulted in unwarranted litigation whereby tax authorities seek to tax interest on loans classified as NPAs as per RBI norms. There is a need to align income-tax provisions with RBI provisions to avoid further litigation on this issue.

The banking industry is striving to come out of the woods caused by the pandemic. A right set of tax and regulatory policies would bring the banking industry back on speedy growth trajectory. It would be interesting to see the amendments Union Budget 2022 has for the banking industry.

— 1. The income-tax mentioned above are excluding applicable surcharge and rates.

— The author, Sunil Badala, is Partner and Head, Financial Services, Tax, KPMG in India. Views expressed are personal

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Rise in COVID-19 cases, restrictions trigger fears of NPA surge 

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

NBFCs to witness revival in growth this year; may see slight uptick in NPAs

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Non-banking financial companies (NBFCs) showed resilience in 2021 despite the coronavirus pandemic woes and are expected to witness continued momentum in growth this year. This year, the growth will be driven by the uptick in the economy, stronger balance sheet, higher provisions, and improved capital positions of NBFCs.

On the other hand, gross non-performing assets (NPAs) of NBFCs are likely to rise, following the Reserve Bank of India’s (RBI) move to tighten the NPA norms in November 2021. “Our baseline assumption is that the worst is behind them (NBFCs) and things will start improving here on. We expect NBFCs to show higher growth and they will benefit from the economy moving up,” Crisil Ratings Ltd Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman said.

The asset under management (AUM) of shadow banking players is expected to grow at 6-8 percent in the current financial year and 8-10 percent in the next financial year, Sitaraman said. Recently, the Trends and Progress of Banking of India in 2020-21 report released by the RBI said, “With the increased pace of vaccinations and the broadening revival of the economy, the NBFC sector is expected to remain buoyant.” ICRA Ltd Vice-President and Sector Head AM Karthik said the NBFC sector, including housing finance companies (HFCs) but excluding infra-focussed and government-owned entities, experienced a roller-coaster trend in the past 12-18 months.

The rebound in the second-half of FY2021 on the back of the pent-up demand and after relaxation of the COVID-19 lockdown supported growth and earnings performance, he said. Karthik also said this fragile recovery was hindered by the second wave of the pandemic in the first quarter of FY2022.

The impact was relatively limited vis-a-vis the past fiscal, with the sector bouncing back in the second quarter of FY2022 in terms of disbursements and AUM (asset under management) growth, he added. Mortgage financier Indiabulls Housing Finance’s Deputy Managing Director Ashwini Kumar Hooda said, “I think 2022 will be a very good year. Already, we have seen that real estate (sales) has picked up and volumes are almost 30-50 percent higher than the previous year.” With lower interest rates, rising income and stable property prices, there will be demand for home and home loans.

“So, the growth in home loans will be at least 15-20 percent during the year 2022,” he said. In the current cycle, all home sales are backed by end-user demand and there are no investors in the market, he added.

To strengthen supervision over NBFCs, the RBI introduced scale-based regulation and revised NPA recognition and upgradation norms during 2021. The revised norms included the 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.

CARE Ratings Senior Director Sanjay Agarwal said that with the new RBI’s asset classification norms, NPAs of NBFCs are likely to be elevated compared to FY21 levels. In a report released in November 2021, CARE Ratings said there would be an increase of up to 300 basis points (bps) in gross NPAs with a limited impact for shorter-tenure loans due to the revised NPA norms.

The average increase is expected to be around 150 basis points (bps) in gross NPAs, being a proportion of assets moving from SMA2 buckets, the report had said. Sitaraman expects reported NPAs for NBFCs to rise between 25-300 basis points, depending on which segment they are operating in.

While for a home loan and gold loans, NPAs will be in the lower end of the range; and for MSMEs or unsecured loan NBFCs, it will be at the higher end of the range, he said. “However, this will not impact the fundamental asset quality material because it is more of an accounting metrics,” Sitaraman said.

According to the Financial Stability Report (FSR) released by the RBI in December, the gross NPA ratio of NBFCs, which had declined in September 2020 reflecting the standstill on asset classification prevalent then, rose to reach 6.5 percent as at the end of September 2021. In December, the RBI brought in the prompt corrective action (PCA) framework, which was aimed at increasing market discipline among non-bank players and aligning their regulations at par with those of banks.

The norms brought in a risk threshold monitoring for NBFCs based on the total capital, tier-1 capital and net NPAs. The framework will come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022. PCA framework, which prescribes a certain level of NPA number, means NBFCs will focus more on the collection and will not allow an account to fall into NPA category, said Pankaj Naik, associate director (financial institutions) of India Ratings and Research.

In 2021, the RBI superseded the boards of Reliance Capital Ltd, Srei Infrastructure Ltd and Srei Equipment Finance. The central bank also initiated the corporate insolvency resolution process (CIRP) against the three defaulting NBFCs. Dewan Housing Finance Ltd (DHFL), which was facing insolvency proceedings, was acquired by Piramal Enterprises in 2021. The defaulting company was the first NBFC to be sent to National Company Law Tribunal (NCLT) in 2019 by the RBI.

In terms of funding, NBFCs are seeing improvement in their access to capital. The funding condition of NBFCs is stabilising because banks are lending to them. Mutual funds, that had become very cautious to lend to NBFCS, have now also started lending. NBFCs are also diversifying their funding base by looking at retail borrowing,” Crisil’s Sitaraman said.

The financial system is maturing from a bank-dominated space to a hybrid system wherein non-bank intermediaries are gaining prominence, the Trends and Progress on Banking in India 2020-21 said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow