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RBI has published a working group report on regulating NBFCs. Overall,
we see the proposed regulations as negative for the NBFC space as they
would push up provisioning costs. In the medium term, NBFCs with strong
business model (SHTF, MMFS) should not be materially affected, but
capital-market-related NBFCs may have to rethink their business model.
Key regulations: (1) Tier-1 capital requirement of 12%. (2) NPA
recognition and provisioning similar to banks – NPA recognition in 90
days vs 180 days earlier. (3) Risk weights on Commercial RE and
capital markets increased for non-bank sponsored NBFCs. (4) Govt.
NBFC to comply with NBFC guidelines vs exemptions earlier.
Impact on Auto NBFCs (Shriram and MMFS): New regulations
propose 12% tier-1 capital and NPA recognition and provision similar to
banks. We do not see higher Tier-1 as an issue, as rating agencies
mandate a much higher level of capital. NPA recognition at 90 days vs
180 days currently will push up provisioning costs and NPL ratios, and
negatively affect ROAs and ROEs, although a high level of provision
coverage on B/S for some companies may provide some offset. Over the
long term, the system may adjust to the new system and borrowers may
be more disciplined about repayments, but we expect initial bumpiness.
Government NBFCs (PFC/REC) have been exempt from certain
NBFC regulations (provisioning) and the working group proposes to
bridge the same. This would require them to make general provisioning,
which would be a one-time hit to earnings and capital.
Impact on capital market financing: Higher risk weights and a lower
quantum of exposure in line with capital market exposure for banks
would have an impact on capital market financing businesses. We expect
a material impact on NBFC arms of brokerages. With its high proportion
of loan against shares, Kotak prime may also be affected.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI has published a working group report on regulating NBFCs. Overall,
we see the proposed regulations as negative for the NBFC space as they
would push up provisioning costs. In the medium term, NBFCs with strong
business model (SHTF, MMFS) should not be materially affected, but
capital-market-related NBFCs may have to rethink their business model.
Key regulations: (1) Tier-1 capital requirement of 12%. (2) NPA
recognition and provisioning similar to banks – NPA recognition in 90
days vs 180 days earlier. (3) Risk weights on Commercial RE and
capital markets increased for non-bank sponsored NBFCs. (4) Govt.
NBFC to comply with NBFC guidelines vs exemptions earlier.
Impact on Auto NBFCs (Shriram and MMFS): New regulations
propose 12% tier-1 capital and NPA recognition and provision similar to
banks. We do not see higher Tier-1 as an issue, as rating agencies
mandate a much higher level of capital. NPA recognition at 90 days vs
180 days currently will push up provisioning costs and NPL ratios, and
negatively affect ROAs and ROEs, although a high level of provision
coverage on B/S for some companies may provide some offset. Over the
long term, the system may adjust to the new system and borrowers may
be more disciplined about repayments, but we expect initial bumpiness.
Government NBFCs (PFC/REC) have been exempt from certain
NBFC regulations (provisioning) and the working group proposes to
bridge the same. This would require them to make general provisioning,
which would be a one-time hit to earnings and capital.
Impact on capital market financing: Higher risk weights and a lower
quantum of exposure in line with capital market exposure for banks
would have an impact on capital market financing businesses. We expect
a material impact on NBFC arms of brokerages. With its high proportion
of loan against shares, Kotak prime may also be affected.
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