The Reserve Bank of India’s (RBI) guidelines on asset category-wise standard asset provisioning announced on Monday are not expected to be onerous for most non-banking financial companies (NBFCs) in the Upper Layer (NBFC-UL)1 as their provisioning is comfortably high.
These NBFCs comply with Indian Accounting Standards (Ind AS) for preparation of financial statements. Typically, provisioning under Gross Stage 1 and Gross Stage 2 here is higher compared with the RBI’s Income Recognition, Asset Classification and Provisioning (IRACP) norms.
The guidelines for provisioning are to be maintained for standard assets by NBFC-ULs. These have been specified by category of assets financed, and ranges from 0.25% to 1% (see annexure). For a specific category of housing loans, say those extended at teaser rates, the provisioning rate is higher at 2%.
The guidelines will be effective from October 1, 2022.
Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, “Most large NBFCs follow Ind AS and also had significantly increased their provisioning buffer since March 2019. Hence, they are well placed to meet the new RBI guidelines. The aggregate Gross Stage 1 and Gross Stage 2 provisioning maintained by leading NBFCs range from 1.4% to 3.9%. Similarly, for most housing finance companies, it ranges from 0.8% to 1.8%.”
The guidelines are a follow-up to the scale-based regulation that the RBI had issued on October 22, 2021. This would also take effect from October 1, 2022. According to this, the regulatory structure for NBFCs will comprise four layers based on size, activity, and perceived riskiness.
These are base, middle, upper and top layers. This top layer is unlikely to see any company at present.
NBFC-ULs for which these provisioning guidelines are applicable will be those carrying potentially large systemic spillover risks that could impact financial stability.
Overall, around 25-30 NBFCs are expected to be classified as NBFC-UL.
Annexure:
NBFCs classified as NBFC-UL are to maintain provisions in respect of ‘standard’ assets at the following rates for the funded amount outstanding: