NBFC -RBI notification on standard assets provision:: Anand Rathi

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Non Banking Finance Companies
RBI notification on standard assets provision
The Reserve Bank of India (RBI), in its notification dated 17 Jan
’11, has directed all NBFCs to make a general provision for
0.25% of the outstanding standard assets. The notification aims
to create adequate financial buffer for protecting NBFCs from an
economic downturn; hence, it is beneficial for the sector in the
long term. We expect short-term impact on earnings of Shriram
Transport. IDFC is well placed with a provision buffer of 1.2% of
standard assets. M&M Financials is likely to see negligible
impact (provision buffer of ~0.2%). We await clarity regarding
applicability to government-owned NBFCs, Rural Electrification
Corporation (REC) and Power Finance Corporation (PFC).

 Provision of 0.25% on standard assets. The RBI, in its
notification dated 17 Jan ’11 (Notification No.207/03.02.002
/2010-11), has directed all NBFCs to make a general provision for
0.25% of the outstanding standard assets. All NBFCs (deposit
accepting/non-deposit accepting or holding) are covered under
the notification. The notification is silent on the time limit within
which NBFCs are required to comply with the provision norms.
 Provisions admitted as tier-2 capital. The RBI has further
stated that the provisions for standard assets should neither be
reckoned for arriving at net NPAs nor be netted-off from gross
advances. The provisions are required to be shown separately as
‘Contingent Provisions against Standard Assets’ in the balance
sheet and allowed to be admitted as tier-2 capital.
 Beneficial for sector in the long-term. Higher loan growth and
lower provisioning by NBFCs over the past few years has
compelled the RBI to issue the aforementioned notification. The
RBI in its guideline said that the move was taken to “counter
cyclicality and to ensure that NBFCs create a financial buffer to
protect them from the effect of economic downturns”.
 Short-term impact on earnings. Among our coverage NBFCs,
we expect short-term impact on earnings of Shriram Transport.
IDFC is well placed with provision buffer of 1.2% of standard
assets. M&M Financial Services has a buffer of ~0.2% of standard
assets; hence, earnings impact is likely to be negligible. We await
clarity as regards applicability to government-owned NBFCs, REC
and PFC.