RBI bad loan norms take a toll on NBFCs

The tightening of the NPA norms for non-banking financial companies (NBFCs), announced by the RBI in 2014, has led to a steady deterioration in asset quality for NBFCs over the past three years. Until 2014-15, NBFCs recognised the loans-- where borrowers have defaulted in their payments for 180 days or more-- as NPAs. In a bid to bring the asset classification norms on par with banks (90-day cut off), the RBI directed NBFCs to implement tighter NPA norms in a phased manner—150 days by end of March 2016, 120 days by end of March 2017 and 90 days by end of March 2018.

Migrating to the new norms, a few NBFC players have seen a significant rise in their NPAs over the past three years. For instance, the gross non-performing asset (GNPA) ratio stood at 3.79 per cent for Shriram Transport Finance in 2014-15, which recognised NPAs on 180-day norm until then. The tighter norms coming into play since then has led to a steady rise in the company’s GNPA ratio. As of December 2017, its GNPA stood at 7.98 per cent, on a 120-day NPA norm.

Similarly, for Mahindra & Mahindra Financial services, GNPAs have gone up from 5.9 per cent in FY15 to 11.6 per cent in December 2017. Shriram City Union Finance is another player that has seen a rise in its NPAs over the past few years.

In a report last year, the RBI had noted the steady deterioration in asset quality of NBFCs. GNPAs for NBFCs, it said, increased to 5 per cent as of March 2017 from 2.9 per cent at end-March 2012. It had attributed the change in NPA recognition norms to be partly responsible for the deterioration in asset quality.

The cash crunch post demonetisation impacting collections and the uncertainty after the implementation of GST has also weighed on the asset quality of NBFCs.

Not all bad

The impact of the RBI’s norms has been mixed across players, depending on each company’s business model, as well as the provision cover they wish to maintain. Companies such as M&M Finance and Shriram Transport Finance, for instance, cater to customers, who have irregular cash flows. It may seem more difficult for these players to adapt to the new norms. M&M Finance is focussed on the rural and semi-urban areas, while most of Shriram Transport Finance’s customers are small truck operators who do not have regular incomes and cash flows.

However, some players have been better placed than others, to migrate to the new norms. Bajaj Finance, a diversified player focussing on financing mass affluent customers, for instance, has been able to maintain a steady asset quality over the last three years. From 1.5 per cent in 2014-15, GNPA for Bajaj Finance has inched up to just 1.67 per cent as of December 2017. The company has already moved to the 90-day norm. Sundaram Finance, a CV financier, catering to the new vehicle segment (rather than used vehicle segment) has also been able to its bad loans under check. The company has been well ahead of its peers in complying with the norms, by moving to the 90-day cut off in 2015-16 itself. Sundaram Finance’s GNPAs stood at 1.74 per cent as of December 2017.

More pain

For some players, there could be some pain in the March quarter, as they are yet to migrate to the 90-day norm to be met by March 2018. While M&M Finance, Bajaj Finance and Sundaram Finance are already at the 90-day cut off as of December 2017, players such as Shriram Transport Finance and Shriram City Union Finance are still at 120-day norm.

According to the management of Shriram Transport Finance, post the December 2017 results, the transitioning into 90 days NPA recognition could result in an overall increase of 100-120 basis points in GNPAs. Shriram City Union Finance in its September quarter results, had indicated that the GNPA levels could go to 9 per cent (from 6.7 per cent as of December 2017) under the 90-day norm.

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