MSME, microfinance, unsecured loans to be worst hit by new NPA norms for NBFCs: Crisil

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microfinance, unsecured loans, npa, nbfcs, crisil, rbi, msme

Micro finance, MSME and unsecured loans are expected to be worst hot by RBI’s new NPA recognition norms for NBFCs according to ratings firm


. While home loans and gold loans will be the least impacted, the ratings firm said.

Recent clarifications by the RBI on day-end NPA recognition and stricter upgrade norms will lead to an increase in reported NPAs, Crisil said. Impact of the new RBI norms on unsecured loans NPA is expected to be in the range of 1.5-3.0%, for MSME finance it is expected to be in the range of 1.0-3.0% and 1.0-2.0% for vehicle finance. The impact is expected to be muted for Home loans NPA and is estimated between 0.25-1.25%m, 0.25-1% for dold loans and 0.25-1.0% for wholesale finance. Overall, Crisil expects GNPAs to increase by 25-300 bps based on asset class because of the new recognition norm.

In terms of asset quality, the change in the RBI’s NPA recognition norm to a daily due-date basis instead of the month-end will have implications. Typically, NBFCs ramp up collection activity between the due date and the month-end because of which their overdues reduce by the end of the month. However, this flexibility is no longer available under the new norms. As a result, a significant proportion of loans in the 60-90 days bucket may slip into the `over’ 90 days overdue bucket and will hence have to be recognised as NPAs.

However, the increase in GNPAs because of the revised recognition norms will be largely an accounting impact because, given the improving economy, the credit profiles of borrowers are not expected to deteriorate. Consequently, ultimate credit losses are not expected to change significantly. “With GDP expected to grow by 9.5% this fiscal, improvement in macro economic environment bodes well for the asset quality of NBFCs” Crisil said.

“Many NBFCs have built higher liquidity, capital and provisioning buffers in the recent past” said Gurpreet Chhatwal, managing director, Crisil Ratings. “That, combined with improving economic activity, puts them in a comfortable position to capitalise on growth opportunities. However, competition from banks will intensify. Asset quality worries have also manifested due to recent regulatory clarifications, and uncertainty over the performance of the restructured book. Net-net, growth will be driven by NBFCs with strong parentage and better funding access in the two largest segments — home loans and vehicle finance.”

Crisil said that it would be watching out for the impact of the new omicron variant on the pandemic.” Risk of a third wave via the Omicron variant bears watching. Current analysis by CRISIL Ratings doesn’t factor in further material disruption due to another Covid-19 wave” Crisil said.

With GDP expected to grow by 9.5% this fiscal, improvement in macro economic environment bodes well for the asset quality of NBFCs.

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