There have been fresh regulations announced by The Reserve Bank of India (RBI) recently for large non-banking financial companies (NBFCs). It is about alerting provisioning norms for standard assets that are normally risk-free. The norms are an effort to bridge the regulatory gap between non-banking financial companies and banks.
These latest provisioning norms from the RBI will reduce liquidity in the short term. There will be an effect on the interest rate. It should also be noted by the financial institutions that this move may have an implication on the compliance requirements. They will increase further.
The Reserve Bank of India or RBI has given clear guidelines and asset classification norms for npa management in non-banking financial companies. It is to bring them comparable to banks.
There are two changes of rules for NBFCs.
According to the first rule, the classification of NPA should be done as of EOD or End Of Day, not EOM or End Of Month.
Secondly, if an account needs to be upgraded from an NPA account to standard, then all the arrears should be paid. It is not allowed to do part payment.
What is the reason behind these rules? It is for harmonization. It means the same set of rules should be applicable for both banks as well as Non-Banking Financial Companies.
Will it increase a one-time rise in GNPA for some NBFCs? Experts say that when firms apply the rule of “once an NPA is always NPA”, then upgrade shouldn’t be an issue. It is because the fundamental rule is the same as guided by the Reserve Bank of India.
There may be an impact on the daily admission of the NPA problem and npa management. However, it would be marginal.
The industry has complained in general
Why has the industry complained? It is because there is a difference. Take the example of securitized loans. When banks buy these loans from NBFCs, they are supposed to uncover some practices that are followed by NBFCs, but not by banks.
For instance, there is a quarter-end rule. It gives 180 days sometimes. Supposed a loan comes due in the first week of April, then from the end of June, they technically get 90 days.
But now it has been clarified that the 90-days period will be from the due date of the loan.
Similarly, there is an issue if the cheque gets bounced. When the cheque is presented, the person doesn’t have a balance towards the end of the quarter. So, the cheque gets bounced. But the bounce impact happens at the beginning of the next quarter. Technically, it is not an NPA. Such cases have been found in certain audits also.
The new rules will stop the misreporting of NPAs. Since the rule is applicable from March 2022, we will have to wait to see its impact till the next year.
According to financial analysts, it is a good measure by RBI but they do not find it a game-changer. It will have a one-time impact. It has been done when there is a phase of economic recovery and the time frame given to NBFCs to come around was March 2022. Thus, they think that it will have some impact on the industry and npa management.
Conclusion
The recent regulations are a step in the direction of regulating the financial sector in India. Since the regulatory framework is to bridge the gap between banks and NBFCs, it will certainly bring a change in the situation of NPA. At least, it will check the uncontrolled growth of multiple types of NBFCs that have mushroomed in India over the last few years.