RBI rejects NBFCs’ plea to relax prudential asset quality norms

The central bank told the NBFC lobby group Finance Industry Development Council (FIDC) that it intends to impose uniform prudential asset quality norms on all lending institutions and the demand for leeway can’t be accepted.

“We express our inability to accede to your request for granting forbearance from the prudential norms,” the RBI said in its December 13 letter to the FIDC.

The stricter rules are likely to swell non-performing assets (NPAs) at NBFC by as much as 300 basis points by the end of the fiscal year, said experts tracking the sector. Total NPAs in the NBFC sector were at 6.4% of their exposure at the end of March this year, the RBI said.

NPAs for Top 30 NBFCs at Over ₹84,000 crore

NPAs for the top 30 NBFCs, including housing finance companies, stood at around ₹84,000 crore at the end of September, according to a senior official at ICRA Ratings.

In a circular issued on November 12, the RBI directed all lenders including NBFCs to recognise bad loans if overdue for more than 90 days and upgrade such accounts only after the full overdue amount is cleared. Banks have been following this rule.

NBFCs, especially the smaller ones, often deviate from this and upgrade NPA accounts to standard even if they get partial payments.

“The circular clarifies the regulatory intent behind the existing prudential norms so that there is uniformity in implementation of the same, across all lending institutions,” RBI said in the letter.

“All lending institutions shall ensure compliance to the instructions.”

ET has reviewed a copy of the letter.

The central bank didn’t respond to queries.

The FIDC had said strict application of the RBI rules would squeeze NBFCs.

“They would end up breaching covenants with banks and other lenders thus adding to the liquidity crunch already being faced by them,” the FIDC had said in its representation to RBI. Higher NPAs may make many non-bank lenders ineligible for paying dividends, which could turn away investors, it had said. Smaller NBFCs would also need to strengthen capital to make additional provisions.

NBFCs had been lobbying for a relaxation, arguing that their borrowers, mostly small and medium-sized enterprises, are totally dependent upon the cycle of payment from users of their services or buyers of their products.

“The sudden disruptive changes in regulations would not only adversely impact their borrowers but have also placed them in a negative perspective from the viewpoint of their lenders and investors,” the FIDC had said.

Total NPAs in the NBFC sector were at 6.4% of their exposure at the end of March this year, according to the RBI, which put the sector’s total loans and advances at ₹17.3 lakh crore.