Announcing a revised framework for non-banking financial companies (NBFCs), the Reserve Bank of India on Monday raised their minimum net owned funds limit while capping deposit acceptance and aligning bad loan norms with banks.
Among important norms laid out in the framework, all NBFCs will have to take a certificate of registration for continuing business and they must have net-owned funds of at least Rs 1 crore by 2016 and Rs 2 crore by 2017.
In an interview to CNBC-TV18, Ramesh Iyer, MD, M&M Financial Services, said the company’s current NPA recognition is at 150 days and that the move is unlikely to have an impact on their market share for now. He expects quality of assets in book to go up over a period of time.
Below is the transcript of Ramesh Iyer’s interview to CNBC-TV18’s Sumaira Abidi and Reema TendulkarReema: Can you walk us through what the impact will be on your company on the back of the RBI tightening guidelines?A: The new guidelines which have come about which talks of 2016 going upto 150 days in terms of provision then goes to 120 days and then finally goes to 90 days. So the current balance sheet will runoff by that period of time. So one has to only look at any new business that will start doing from this stage, how do we start bringing in these new regulations into place and start preparing ourselves. So in our case particularly we already have 150 days norm for our book. So definitely for next one year we don’t see much impact. But you do need little more aggressive provisions going forward in the new portfolio that you will inherit and to be in line with what RBI is talking of 90 days by 2018.
Sumaira: When the bad loan limit is brought down to say five months next year and four months thereafter, what will be the likely impact on your NPLs, incremental impact over there?A: From the current book point of view we will have no impact because we are already on 150 days, we have prepared ourselves for this already. So any new loan that we will take in, if we start preparing ourselves, if we start making provision of 120 days instead of waiting for 150 days, then you can ready yourself from a new book perspective. So the good news is that there is sufficient time given so it doesn’t have an impact on your current book immediately. But what one should also realise is that these kinds of assets do go through cyclic impact and customers also need extra time. For example a tractor loan, we would have preferred that products like tractor etc also are treated like the way banks benefit on these kind of seasonal impact and things like that and not treat them like any normal asset. So in one bad season if there is going to be non-payment but you have to treat it like any other asset and you will need to make a provision which is what we are doing today. But 150-120 days is different from 90 days because one cycle would mean one-two quarters.
Reema: Now that the arbitrage between Non-bank financial companies (NBFCs) as well as banks has been effectively closed out, do you expect increased competition in this particular segment that you all cater to, will your market share come down for NBFCs in general?
A: If you look at it the arbitrage is closed down on the provision side and therefore why should the market share be impacted. Infact we would all become more careful in our lending in terms of our ability to recover will be enhanced, may be all of us will open more branches, be more close to customer. So quality of asset in the book over a period of time will for sure go up but we would have clearly preferred that when the arbitrage has been shrunk by this method also the risk weightage benefit should have be given to NBFC. Today the NBFC assets are 100 percent risk weightage product whereas there is an underlying collateral as an asset class which has a resell price and therefore clearly there should have been a risk weightage considered, that is one. Two is the provisions don’t qualify for tax payment for NBFCs concerned. We have to pay tax even on the provided amount and the income reversed. One would have preferred that even that should be taken up and that was there in the draft guidelines tax benefit should be given to NBFCs like given to the banks. So we would expect that by the time these regulations comes into its place in one year from now and three years by the time it reaches the 90 days norm, there would be enough dialogues that would take place with the regulator and I am reasonably sure that they will have clear open mind to listen to our point of view also on these guidelines and its impact. Some suitable actions were initiated.
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