Moneycontrol Bureau
After demonetisation, a lot of borrowers, especially smaller ones, have been finding it difficult to pay their dues or instalments on time. Hence, in a relief to them, the Reserve Bank of India on Monday relaxed norms, saying it has decided to provide an additional 60 days to lenders to convert standard assets into substandard assets.
Earlier the recognition period for converting standard assets into substandard assets (bad loans) was 90-120 days. With the current relaxation of norms, the period has been increased to 150-180 days. It is applicable only for loan repayment instalments due from November 1 to December 31, 2016.
The relaxation is applicable only for those accounts that have a loan amount of Rs 1 crore or less taken for working capital requirements, agriculture, business, personal, housing etc and sanctioned by banks to NBFC (MFI), NBFCs, housing finance companies, and PACs and by state cooperative banks to district central co-operative banks (DCCBs) and also by DCCBs.
The dispensation does not apply to migration of accounts from substandard to other categories of NPAs.
What does it mean? Morgan Stanley says non-performing loans to the extent they arise from demonetisation are likely to get postponed to Q4FY17 or thereafter. Q3FY17 earnings are thus likely to get impacted more by lower loan growth rather than higher provisioning and interest income reversals.
Overall it is good for non-banking finance companies or housing finance companies, which deal more in smaller ticket size of Rs 1 crore or less.
According to Bank of America Merrill Lynch (BoAML), almost all of the vehicle finance and a lot of the home finance businesses, which sit with non-banks (and also retail banks) will see major relief. This is a timely action by the RBI.
Micro-small loans, which make up around 15 percent of system bank loans, have an average ticket size of around Rs 5 lakh. Most agriculture loans will also qualify, given an average ticket size of around Rs 1 lakh. Finally, all retail loans (excluding home loans) will also have a smaller ticket size. In effect, around 60-70 percent of the loan book should be covered by this reprieve, BoAML says.
Nomura also says this is overall positive for the system in the near term as it takes care of the transitory impact. The impact will be greater for NBFCs (like M&M Financial, Shriram Transport Finance etc) as their share of granular loans is higher. But the deferment is only for November-December 2016 dues and not a full deferment of dues.
"A borrower who fails to pay his first commercial vehicle instalment due mid-November 2016 would have become 90 days overdue in mid-February 2016. With this 60-day deferment, this account will now only turn NPAs in April 2016 (150 days) assuming no payment is made. But in mid-April 2016, this account will not only have to pay the November 16 dues (in 150 days) but also the January-2017 dues (90 days) as this relaxation applies only to November-December 2016 cashflows," Nomura explains.
JP Morgan says this will positively impact SME/business banking segment due to their volatile nature of cash flows and will also be beneficial for the commercial vehicle or loan against property segment. This will help banks/NBFCs to cushion the asset quality stress primarily in the low ticket value loans, which were vulnerable due to the liquidity squeeze.
The brokerage house continued to prefer retail private banks and would buy these on any significant correction. Top picks are HDFC Bank, IndusInd Bank and Yes Bank.
After demonetisation, NBFCs or other lenders already saw a correction of 20-30 percent in stock prices and that resulted in reasonable valuations.
RBI says after demonetisation, banks' gross inflows or deposits (till November 18) amounted to Rs 5.4 lakh crore and of which, exchange and deposit withdrawals amounted to Rs 1.35 lakh crore.
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