New RBI rules are expected to raise NBFC bad loans by one-third

According to a study, the Reserve Bank of India’s recent clarification on non-performing advances (NPA) could result in a one-third increase in bad loans for non-banking financial companies (NBFCs).

Last month, the Reserve Bank of India (RBI) clarified income recognition asset categorization and provisioning (IRAC) requirements for banks, non-banking financial companies (NBFCs), and all-India financial institutions (AIFIs).

The clarification included the possibility to upgrade from an NPA to a regular category only when all outstanding overdues were cleared, as well as the classification of special mention accounts (SMA) and nonperforming assets (NPA) on a day-end position basis.

According to a report released on Friday by domestic rating agency India Ratings and Research, “the RBI’s clarification on non-performing advances (NPAs) accounting is predicted to increase NPAs by around one-third for non-banking financing companies (NBFCs).”

However, because NBFCs utilise Indian Accounting Standards (IND-AS) and higher-rated NBFCs’ provision practises are frequently more conservative than IRAC rules, the impact on provisioning could be small.

According to the newspaper, the RBI circular also calls for daily stamping of accounts to record the number of days they are past due rather than monthly or quarterly stamping.

This, according to the research, would result in a faster rate of account NPA identification.

NBFC borrowers frequently pay their past dues late, especially when cash is received. According to the research, accounts can be categorised as non-performing assets (NPAs) for as little as a day’s late payment, and once classified, they won’t be able to return to regular status unless all arrears are paid.

“In other words, accounts would be designated as nonperforming assets (NPAs) more quickly and for a longer period of time. “It was indicated that both of these accounting processes would result in NBFCs reporting greater headline statistics.”

NBFCs may declare NPA numbers in accordance with IRAC norms and stage 3 numbers in compliance with Ind-As separately in their disclosures, according to the regulator.

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