NBFC's bad loans are likely to increase in the near future

- Banks are adhering to new rules on upgrades while it will be a new beginning for NBFCs

Bad loans of non-banking finance companies (NBFCs) may increase in the near future after clarification on IRAC (Income Recognition and Assets Classification) standards by the Reserve Bank. Following the RBI's clarification on the IRAC issue, banks have taken up the issue and are working on new loans. On the other hand, this is a new beginning for NBFCs operating in the country. So the NBFC has a long way to go on this issue.

The RBI said loan accounts classified as NPAs could be upgraded to "standard" assets. If the full balance of interest and principal is paid by the borrower. This rule will apply to both banks and NBFCs. According to experts, most NBFCs currently upgrade Gross Stage-2 loans or NPAs to Gross Stage-2 loans or Special Mechanical Accounts (SMA) -2 on a single installment payment only.

The rule on upgrading of bad loans may lead to an increase in NPAs registered by some NBFCs. Also, there may be some ambiguity regarding the classification of such accounts where part of the outstanding amount may have been cleared, but some installments may still be outstanding. If such accounts have payments for less than 90 days, they are currently classified as Stage-3. But these accounts will be NPAs going forward, this can also be classified as Stage 3. This may increase the provision against such accounts classified as Stage 2.

In India, NBFC adheres to Ind-AS guidelines, under which criminal loans are classified as Gross Stage-1 (loans up to 60 days maturity), Gross Stage-2 (loans with maturity between 21 and 3 days) and Gross Stage-2. . Loan outstanding for more than 90 days). There is no classification of standard and non-performing loans for NBFCs under this system.

According to a report, as a market practice, all NBFCs have opted for the same definition for non-performing loans and Gross Stage-3 or DPD loans up to 60 days in advance. However, under NBFC Ind-AS, parallel reporting and Reserve Bank regulatory filing may be preferred. Our initial discussions with market participants suggest that NBFCs cannot go for parallel reporting and continue the current practice (same definition for non-performing loans and Gross Stage-3). Therefore, there is a possibility of increase in Gross Stage-3 loans. KIE said.

Some analysts believe that while bad loans may increase, the provision of regulatory clarification will not be particularly affected. Non-banks will report higher NPAs, especially in small-ticket unsecured loan asset classes. However, this is unlikely to have a significant impact on the provisions for NBFCs and therefore will not have a further impact on profits and losses.

The co-lending market may be under pressure from new asset classification standards. This will give impetus to co-lending as the standards of banks and NBFCs will be aligned.