11/17/2014 NBFC governance and transparency: Reserve Bank takes a step forward | The Indian Express | Page 99

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As the RBI has tightened the systemic loopholes in the NBFC sector, the ultimate beneficiaries will be depositorsand investors. Thinkstock

Written by George Mathew | Posted: November 17, 2014 2:18 am | Updated: November 17, 2014 11:02 am

Three years after a panel headed by former Reserve Bank of India deputy governor

Usha Thorat proposed stringent norms for non-banking financial companies, the RBI

has finally acted. The central bank has implemented higher capital requirements,

regulatory alignment with banks, enhanced disclosure requirements and tighter

corporate governance norms — all measures that will strengthen the NBFC sector

structurally and safeguard the interests of customers and investors.

True, the latest RBI measures will impact profitability and asset quality of NBFCs in the

short term, but they will bring in more transparency and improve NBFCs ability to

withstand asset quality shocks in the long run, analysts and rating companies say.

As the RBI has tightened the systemic loopholes in the NBFC sector, the ultimate

beneficiaries will be depositors and investors. The revised guidelines prescribe

material enhancement in disclosure levels for large NBFCs and several changes in

corporate governance practices. These are largely in line with some of the norms

applicable to banks. Better transparency and corporate governance will reduce

information risk and will enhance stakeholder confidence in the NBFC sector.

The central bank has reduced the limit on deposit acceptance to 1.5 times of Owned

Funds from 4 times of Owned Funds for deposit-taking asset financing companies and

made mandatory investment grade credit rating for accepting public deposits.

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11/17/2014 NBFC governance and transparency: Reserve Bank takes a step forward | The Indian Express | Page 99

http://indianexpress.com/article/business/economy/nbfc-governance-and-transparency-reserve-bank-takes-a-step-forward/99/ 2/4

“Mandatory investment grade credit rating helps to safeguard depositors. The limit on

deposits improves safety for public depositors. However, majority of deposit taking

NBFCs are already compliant,” said a study by Care Ratings.

It says governance and disclosure norms will improve corporate governance and

accountability of systemically important NBFCs and improve transparency. It will also

ensure the availability of important information to investors who were short-changed

on many occasions due to lack of transparency and inadequate flow of information.

The RBI has ensured checks and balances for NBFCs which collect deposits and

important non-deposit taking NBFCs. Deposit taking NBFCs (NBFC-D) with deposits over

Rs 20 crore should constitute an audit committee, a nomination committee to ascertain

the fit and proper status of directors and the risk management committee.

Non-deposit taking NBFCs (NBFC-ND) with assets of Rs 50 crore and above should

constitute an audit committee, while NBFC-ND with asset over Rs100 crore should

constitute a nomination committee and risk management committee in addition to the

audit committee. NBFC-D with deposits over Rs 50 crore should rotate the partners in

the statutory audit firm, once in every three years.

NPAs set to touch R29,600 crore

Banks will take a hit following the changes in norms governing non-performing assets

(NPAs) and provisioning of NBFCs. The RBI has tightened the NPA recognition and

provisioning norms for NBFCs so as to bring them on a par with those applicable for

banks. Gross NPAs are set to rise from Rs 16,650 crore to Rs 29,600 crore in the wake of

the tightening of the norms.

Crisil says the revised regulatory framework will slice around 40 basis points (100 basis

points equal 1 percentage point) of their profitability gradually over the next four years

till March 31, 2018. That is because their provisioning will increase with the recognition

norm for non-performing assets (NPAs) made more stringent to 90 days past due from

180 days earlier.

ICRA estimates that retail NBFCs covering 63 per cent of total managed advances (Rs

3,70,000 crore as on June 30) classify NPAs on the basis of the existing 180-day norm,

while NBFCs with 20 per cent advances are already on the 90-day norm. Thus the

change in norm is likely to lead to a rise in the reported gross NPA percentage from 4.5

per cent as on June 30, 2014 to 6-8 per cent once the norms are fully implemented,

thereby increasing incremental credit provisioning.

However, over the medium term, delinquencies could settle at a lower level as NBFCs

realign their monitoring and recovery systems to the 90-day format and as the

operating environment improves, alleviating the pressure on the credit profiles of

borrowers

“NBFCs will re-calibrate their business models and intensify collection efforts in the

early-delinquency buckets to reduce NPAs, however, the profile of their borrowers and

the nature of the underlying product categories may limit any such improvement on a

structural basis,” said Pawan Agrawal, Senior Director, CRISIL Ratings.

Further, the RBI has hiked the standard asset provisioning from 0.25 per cent to 0.40

per cent in a phased manner by end March 2018. “This may impact earnings by 5 per

cent in the short term, but strengthen the balance sheet over the longer term. Clarity on

regulations will ease headwinds on NBFC valuations. With clarity on the regulatory

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11/17/2014 NBFC governance and transparency: Reserve Bank takes a step forward | The Indian Express | Page 99

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stance with respect to capital adequacy and asset quality, we see limited downside risk

to NBFC valuations,” said an analyst with Anand Rathi Financial.

While the RBI has brought NBFCs in line with banks, it has not included provisions

granting NBFC access to SARFAESI Act, which has been used effectively by banks to

expedite recovery and has also served to improve credit behaviour.

Further, while banks can raise short-term funds from the RBI through the repo

window, NBFCs do not enjoy any such benefits. The risk weights prescribed for retail

assets such as vehicle loans, home loans and gold loans are lower for banks than for

NBFCs. While banks’ balance sheets are more diversified, the credit and market risk on

specific asset classes may be similar for both banks and NBFCs.

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11/17/2014 NBFC governance and transparency: Reserve Bank takes a step forward | The Indian Express | Page 99

http://indianexpress.com/article/business/economy/nbfc-governance-and-transparency-reserve-bank-takes-a-step-forward/99/ 4/4

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