RBI: NBFCs prepare to sell bad debts in time to meet RBI asset standards

Mumbai: With the Reserve Bank of India giving non-bank lenders six months to meet asset classification standards, major NBFCs are gearing up to sell a large chunk of their bad asset pool to clean up their books and free up cash.

RBI has mandated NBFCs to ensure that loan accounts classified as NPA can be upgraded to “standard” assets only if all arrears of interest and principal are paid by the borrower.

“We are creating pools of assets that we want to get rid of, this will help us avoid sudden spikes in bad assets and clean up our books,” said the CEO of a medium-sized NBFC. “Loan sales are expected to accelerate from the June quarter, with the deadline ending in September.”

Last month, the RBI extended the six-month deadline until September 30 for NBFCs to adhere to the new NPA recognition standards. Previously, the regulator set March 31 as the deadline for non-bank lenders to upgrade NPAs only after all arrears and principal due have been paid.

According to an analysis by ratings agency ICRA, after the regulator tightened standards, NPAs for NBFCs were about 150 basis points higher, while for HFCs they were 70 basis points higher. basis in December 2021.

“Mis-selling loans is the most preferred path to avoid a PCA (quick corrective action) type scenario, show cleaner books and free up cash,” said the CEO of another NBFC. “We’ve had initial discussions with a few ARCs, the interest is exciting and will bring us decent returns without having to take a major haircut.”

The non-banking sector has faced increased regulatory scrutiny and a push towards convergence with banks through various measures such as ladder-based regulation, realignment of asset quality classification and prompt corrective action standard.

“We see NBFC Stage 3 assets could decline from 5.6% in the December quarter to 6% by FY23, primarily due to slippages from the restructured books and backed by the collateral program of emergency line of credit,” said Jinay Gala, associate director at India Ratings. . “The impact on the cost of credit is expected to be moderate as NBFCs have created adequate provisioning reserves.”

According to an analysis of 21 NBFCs and 11 HFCs conducted by the ICRA rating agency, approximately 45% (in terms of loan portfolio) of NBFCs and 25% of HFCs had not aligned their raw stage 3 (GS3) with the Postal code as of December 31. , 2021. For these NBFCs and HFCs, the NPAs due to tighter standards were 3.0% and 1.0% higher, respectively.

“The extended timeline provided by RBI would allow entities to strengthen their systems and controls, add to their provisions and contribute to a smoother adoption of these standards,” said AM Karthik, Vice President of Financial Industry Ratings. at CIFAR.

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