Since the introduction of new asset quality standards last November that brought shadow banks and housing financiers on par with banks, housing finance companies’ gross bad loans have increased by 70 basis points (bps ) even as their portfolio quality has improved, according to a report.
The bad debt pile is expected to stabilize by the end of this quarter, Crisil Ratings said in the report.
The Reserve Bank of India (RBI) had, on November 12, 2021, introduced stricter asset quality reporting standards for all lenders, which caused housing financiers and non-bank financial companies (NBFCs) to equality with commercial banks.
Although the new standards were to be implemented by December 31, 2021, by all; earlier this week, the monetary authority extended the deadline for NBFCs and housing finance companies (HFCs) to September 30, 2022.
While affordable housing companies saw a 140 basis point increase in gross non-performing assets, other housing finance companies saw their gross NPAs rise to 3.3% as of December 31, 2021, from 3% in September. 2021. This is mainly due to the November 12, 2021 circular on the recognition and calculation of NPAs, rather than a true asset quality haircut, Crisil Ratings said in the report on Thursday.
Without it, their gross NPAs would have been 2.6% in December, meaning the new standards had a 70 basis point impact on their overall asset quality, he added.
Crisil studied 35 HFCs representing 95% of the industry’s assets under management.
In other words, without the rule change, the quality of their portfolio over a quarter and on a comparable basis would have shown an improvement of 40 basis points.
The RBI on February 15, 2022 postponed the implementation of the revised standards for NPA upgrades to September 30, 2022, from December 31, 2021. However, this is unlikely to have much impact as the most HFCs have already moved to the new way of calculating and are well positioned to improve their gross NPA ratio to three percent by the end of this fiscal year.
Both RBI clarifications, on daily account stamping and NPA upgrades on interest repayment, have had an impact on HFCs. However, the magnitude of the impact differs by asset class and borrower segment, he noted.
He pointed out that those with relatively more vulnerable customer profiles, a higher proportion of affordable home loans, self-employed borrowers and/or property loans were more affected.
Krishnan Sitaraman, senior director and deputy director of ratings at Crisil Ratings, said affordable housing finance companies have seen an impact 140 basis points higher on average due to the revised recognition standards, as their borrowers tend to have limited financial flexibility and volatile cash flow and therefore have higher bounce rates.
Additionally, most cannot repay all of their arrears at once, which could lead to stickier gross non-performing assets (GNPAs) in the segment, he added.
HFCs, on the other hand, attempt to change borrower behavior and reduce additional slippages. However, this will lead to increased operational intensity as they strengthen their collection efforts.
Crisil Ratings director Subha Sri Narayanan said that since many HFCs have already switched to the new standards, they are unlikely to revert to the previous regime, a flexibility now available until September 2022 after the clarification of the RBI on February 15.
Because the increase in reported GNPAs for many of them is not significant and is more of an accounting impact than an economic one, Narayanan said.
Required provisioning levels were also not materially affected as HFCs generally follow Indian accounting standards, where provisioning levels are generally higher compared to IRACP requirements.
Assuming they don’t take advantage of this waiver, the sector’s overall ARPGs are expected to stand at 3% by March 2022, Narayanan said, adding that the asset quality of HFCs is expected to remain better than that of other NBFCs. .
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