The proposed guidelines by the Reserve Bank for the non-banking finance companies (NBFCs) are likely to impact the profitability of these entities by 15-20 basis points (0.15-0.20%) in medium-term, according to a research report by the rating agency ICRA.
"...The higher tier-I capital requirement could translate into a decline of around 115 basis points in the sectors' return on equity (ROE)," the report said. As per the proposed guidelines, the NBFCs have to recognise a loan as NPA if it is not serviced for 90 days from the present 180 days. It also proposes to implement 10 per cent capital adequacy ratio (CAR) norm for most of the NBFCs. "While this is in general a positive step, some NBFCs offering products with annual or quarterly repayments may find their asset quality turn volatile because of this change," it said.
The report also added that further increase in tier-I capital as well as risk weights for some other asset classes would reduce the leveraging capacity of NBFCs compared to banks. The research firm also said lack of access to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) as well as any liquidity back-up would continue to weigh on the performance of NBFCs.
Referring to liquidity management, the report said it may increase the cost of doing business for NBFCs. It, however, added that enhanced disclosures are positive for the NBFCs. According to the proposed guidelines, NBFCs have to seek prior approval from RBI in case of change in shareholding by 25 per cent or above, and appointment of chief executive officer in a NBFC with a asset size of more than Rs 1,000 crore, among others.
READ MORE ON non-banking finance companies, NBFC, Reserve Bank, ICRA, NPA, return on equity, ROE, capital adequacy ratio, CAR, NBFC
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