The recent clarification by the Reserve Bank of India on non-performing advances (NPA) may increase non-banking financial companies' (NBFC) bad loans by one-third, says a report.
Last month, the RBI had provided clarification on income recognition asset classification and provisioning (IRAC) norms for banks, NBFCs and All-India Financial Institutions.
The clarification included classification of special mention account (SMA) and NPA on a day-end position basis and upgrade from an NPA to standard category only after clearance of all outstanding overdues.
'The RBI's clarification on non-performing advances accounting is likely to increase NPAs by around one-third for non-banking finance companies,' domestic rating agency India Ratings and Research said in a report on Friday.
However, the impact on provisioning could be modest, given NBFCs are using Indian Accounting Standards (IND-AS) and generally for higher rated NBFCs, provision policy is more conservative than IRAC requirements.
The report said the RBI circular also calls for daily stamping of accounts to count the number of days they are overdues instead of a monthly or quarterly stamping.
This again would result in an accelerated pace of NPA recognition for accounts, it said.
NBFC borrowers, typically where there is cash collection, pay their overdues generally with some delays.
Accounts can get into the NPA category just for a day's delay in paying the instalments and once it gets categorised as an NPA it will not be able to become standard unless all the arrears are cleared, the report said.
'So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time,' India Ratings and Research said.
'Both these accounting treatments would result in higher headline numbers for NBFCs,' pointed out India Ratings and Research.
It may so happen that NBFCs would disclose NPA numbers as per IRAC norms and stage 3 numbers as per Ind-As separately in their disclosures, India Ratings and Research said.