The recent clarification by RBI on NPA recognition and stricter upgrade norms at the end of the day will lead to a rise in NPAs, Crisil said. The impact of the new RBI norms on unsecured loans is expected to be in the range of 1.5-3.0% for NPAs, 1.0-3.0% for MSME finance and 1.0-2.0% for vehicle finance. The impact is expected to be less for home loan NPAs and is estimated to be between 0.25-1.25%m, 0.25-1% for dole loans and 0.25-1.0% for wholesale finance. Overall, CRISIL expects GNPA to increase by 25-300 bps, depending on the asset class, due to the new recognition norms.
In terms of asset quality, changes in RBI’s NPA recognition criteria will have implications on a daily due date basis instead of month-end. Typically, NBFCs accelerate collection activity between the due date and the end of the month, thereby reducing their dues by the end of the month. However, this flexibility is no longer available under the new norms. As a result, a significant proportion of loans in the 60-90 days bucket may slip into the 90 days overdue bucket and hence should be recognized as NPA.
However, the increase in GNPA due to the revised recognition norms will largely have an accounting effect as the credit profile of the borrowers is not expected to deteriorate, given the recovery in the economy. As a result, the final loan losses are not expected to change significantly. “With GDP expected to grow at 9.5% this fiscal, improving macroeconomic environment augurs well for the asset quality of NBFCs,” Crisil said.
Gurpreet Chhatwal, Managing Director, Crisil Ratings said, “Many NBFCs have created high liquidity, capital and provisioning buffers in the recent past.” This, along with the improvement in economic activity, places them in a comfortable position to capitalize on the opportunities for growth. However, competition from banks will intensify. Asset quality concerns have also emerged due to recent regulatory clarifications and uncertainty over the performance of the restructured ledger. Net-net, the growth will be driven by NBFCs with strong parentage and better funding access in the two largest segments – home loan and vehicle finance. ,
Crisil said it would watch for the impact of the new Omron version on the pandemic. “The Omicron version is seeing the risk of a third wave through bears. The current analysis by CRISIL Ratings does not factor in further material disruption due to another COVID-19 wave,” CRISIL said.
With GDP expected to grow at 9.5% in the current fiscal, the improving macroeconomic environment augurs well for the asset quality of NBFCs.