12 June 2019: New Reserve Bank of India norms on debt restructuring are likely to hit the profitability of already distressed non-banking financial companies (NBFCs).
The guidelines mandate lenders to keep additional provisioning of 20% if a resolution plan is not implemented within 210 days from the date of default and 35% if not implemented within 365 days of default. This move to include NBFCs along with banks in the circular comes at a time when these firms are reworking their growth strategy in the wake of a liquidity crisis.
The new RBI circular does not give any additional advantage or benefit to NBFCs, said Raman Aggarwal, chairman, Finance Industry Development Council (FIDC), an industry body for NBFCs. “Even if a borrower is paying to an NBFC but has defaulted with a bank the NBFC gets roped into signing the ICA (inter-creditor agreement) and be part of the resolution plan.
Further, in such cases, the NBFC’s role shall be highly subdued since their share in the overall value would be below 75%. So, we may land up in a situation where NBFCs may be forced to follow the resolution process (RP) failing which additional provisioning may be required. As such, this does not add value to the entire recovery process of NBFCs,” Aggarwal said.
FIDC is also looking to make a representation to the RBI as it believes the new circular reduces flexibility for these firms in resolving the stressed assets.
“The NBFC business model is different from banks. They are more on the ground, they are specialized institutions with specialized skills,” said Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance Ltd.
“We are trying to decipher the rationale behind the move to include NBFCs in a general circular. NBFC exposure in a loan consortium will be very limited. Putting everyone in a general basket will affect the NBFCs because their NPAs will also increase. They will have to wait along with larger banks and will not be able to find quick solutions,” Kanoria added.
Just three weeks ago, RBI had also come out with draft liquidity norms for NBFCs, proposing liquidity buffers for these firms. RBI said it planned to implement liquidity coverage ratio (LCR) at NBFCs in a phased manner over four years starting April 2020, setting aside 60% of NBFCs’ net cash outflows, as envisaged in the initial phase, in high-quality liquid assets such as government securities.
Analysts say these norms put together could affect margins and returns in the medium term. They also believe that loan book growth of NBFCs, which slowed down to an average of 13.5-14% during FY19, could deteriorate further.
“The sector could grow 11-14% compared to 20% during FY15-18. But NBFCs and HFCs with AAA rating representing over 40% of NBFC credit and 60% of HFC credit respectively, as per our estimates, should not face funding constraints. With top 20 NBFCs (out of 220) representing 70% of credit, consolidation of long tail is likely,” said equity research firm Jefferies in a report dated 10 June, in a research conducted before the release of new norms.