NBFCs: RBI prescribes standard asset provisions to create long-term buffer:: Kotak Securities

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NBFCs -India
NBFCs: RBI prescribes standard asset provisions to create long-term buffer. The
RBI has prescribed standard asset provisions of 0.25% for NBFCs. Notably, most NBFCs
have been growing at a brisk pace over the past few quarters, reporting low slippages
and making negligible provisions. As such, the standard asset provisions would augur
well over the long term even as earnings decline. We find a near-term impact on PFC
and REC’s earnings though it is not clear if the guidelines are applicable to
Government-owned NBFCs.


RBI notification on standard assets
RBI has prescribed provisions of 0.25% for standard assets of deposit accepting and non-deposit
accepting NBFCs. The guidelines will be applicable with immediate effect and hence we expect a
significant one-time impact on 4QFY11 earnings. As in the case of banks, these provisions cannot
be clubbed with specific provisions that provide a buffer to gross NPLs.
More relaxed than norms for banks
The NPL recognition and provisioning norms for NBFCs are relaxed as compared to the banking
sector likely due to a focus on the niche segments of NBFCs wherein delinquencies tend to be high
(though eventual losses may be lower). Banks currently need to make provisions of 0.4% of
standard assets (for most assets classes); thus the new standard asset provision norm is also more
relaxed for NBFCs.
Standard asset provisions will create a buffer
The NBFC sector, has been growing at a rapid pace (20-25%+) across asset classes (auto,
infrastructure, gold loans, microfinance). Strong economic conditions have supported good asset
quality performance. Most companies follow the regulatory guidelines (which are somewhat
relaxed) and have not created significant provisioning buffers. As such, the standard asset
provisioning requirement will help normalize earnings to some extent.
IDFC well placed
IDFC and Mahindra Finance follow more stringent guidelines amongst NBFCs under coverage.
While the NPL recognition criteria for Mahindra Finance are more stringent, IDFC makes standard
asset provisions at 0.7% of gross disbursements and currently has a buffer of about Rs6 bn as
compared the requirement of about Rs1.2 bn.
It is not clear if the guidelines will be applicable to PFC (and REC) as the current NBFC guidelines
are not applicable to Government-owned NBFCs. However, PFC and REC have also been
categorized as ‘infrastructure NBFCs’ and need to follow other guidelines (like minimum capital
adequacy etc) applicable to ‘infrastructure NBFC’.
PFC and REC has been growing at 22-28% CAGR over the past 3-4 years but have made
negligible provisions as they have maintained good collection efficiency despite poor financial
health of state utilities. Standard asset provisions will clearly be prudential in the backdrop of the
poor financial health of these utilities. PFC will likely need to make provisions of Rs2.5 bn i.e. 33%
of 4QFY11E PBT while REC will need to make provisions of Rs2.2 bn i.e. 23% of 4QFY11E PBT.