NBFCs’ capital adequacy will decline if asset quality drops
MUMBAI: The capital adequacy, or capital to risk-weighted assets ratio (CRAR), at NBFCs will fall 250 basis points to 20.4 per cent in case asset quality were to worsen, according to the Financial Stability Report of the Reserve Bank of India.
The banking regulator carried out stress tests on credit risk of NBFCs, including both deposit taking and non-deposit taking and systemically important entities. There were 11,402 non-banking financial companies registered with the regulator, of which 156 were accepting deposits, according to the FSR. There were 249 systemically important non-deposit accepting NBFCs.
The stress test for the year ended March 2018 was done under three scenarios - GNPA increases by 0.5 standard deviation (SD), 1 SD and 3 SD, respectively. The results showed that in the first scenario, the sector’s CRAR declines from 22.9 per cent to 21.6 per cent. In the second scenario, it falls to 21.3 per cen, and in the third, to 20.4 per cent.
Stress tests on individual NBFCs showed that around 10 per cent of the companies will not be able to comply with the minimum regulatory CRAR norm in case of extreme deviations. Prudential norms require NBFCs to maintain minimum capital adequacy and provisioning norms along with reporting requirements.
Capital adequacy at NBFCs increased to 22.9 per cent from 22.0 per cent in the last financial year. This is above the stipulated minimum capital consisting of Tier-I and Tier-II capital, of not less than 15 per cent of their aggregate risk-weighted assets. From April 1, 2017, NBFCs are required to maintain minimum Tier 1 capital of 10 per cent.
During the last financial year, asset quality of the NBFC sector improved, with gross NPA as a percentage of total advances declining to 5.8 per cent from 6.1 per cent in 2016-17. This is when the NPA recognition norms of NBFCs are aligned with those of banks.
“As on 2017-18, it might be expected that such convergence of norms would result in the GNPA ratio for the sector showing an increase,” said the FSR. “However, owing to upgradation of significant portfolio of assets classified as NPA in 2016-17 as also due to asset growth, the ratio has marginally declined.”
While the banking sector showed deterioration in profitability and asset quality, NBFCs saw all parameters improve during the last financial year ended March 31, 2018. With 11 public sector banks under prompt corrective action, NBFCs expanded their books, growing loans and advances by 21.2 per cent against 14.6 per cent in 2016-17.
Net profit increased by 30.8 per cent in 2017-18 against loss of 14.4 per cent a year ago. Similarly, return on assets was 1.9 per cent in 2017-18 as compared with 1.6 per cent in 2016-17.
The banking regulator carried out stress tests on credit risk of NBFCs, including both deposit taking and non-deposit taking and systemically important entities. There were 11,402 non-banking financial companies registered with the regulator, of which 156 were accepting deposits, according to the FSR. There were 249 systemically important non-deposit accepting NBFCs.
The stress test for the year ended March 2018 was done under three scenarios - GNPA increases by 0.5 standard deviation (SD), 1 SD and 3 SD, respectively. The results showed that in the first scenario, the sector’s CRAR declines from 22.9 per cent to 21.6 per cent. In the second scenario, it falls to 21.3 per cen, and in the third, to 20.4 per cent.
Stress tests on individual NBFCs showed that around 10 per cent of the companies will not be able to comply with the minimum regulatory CRAR norm in case of extreme deviations. Prudential norms require NBFCs to maintain minimum capital adequacy and provisioning norms along with reporting requirements.
Capital adequacy at NBFCs increased to 22.9 per cent from 22.0 per cent in the last financial year. This is above the stipulated minimum capital consisting of Tier-I and Tier-II capital, of not less than 15 per cent of their aggregate risk-weighted assets. From April 1, 2017, NBFCs are required to maintain minimum Tier 1 capital of 10 per cent.
During the last financial year, asset quality of the NBFC sector improved, with gross NPA as a percentage of total advances declining to 5.8 per cent from 6.1 per cent in 2016-17. This is when the NPA recognition norms of NBFCs are aligned with those of banks.
“As on 2017-18, it might be expected that such convergence of norms would result in the GNPA ratio for the sector showing an increase,” said the FSR. “However, owing to upgradation of significant portfolio of assets classified as NPA in 2016-17 as also due to asset growth, the ratio has marginally declined.”
While the banking sector showed deterioration in profitability and asset quality, NBFCs saw all parameters improve during the last financial year ended March 31, 2018. With 11 public sector banks under prompt corrective action, NBFCs expanded their books, growing loans and advances by 21.2 per cent against 14.6 per cent in 2016-17.
Net profit increased by 30.8 per cent in 2017-18 against loss of 14.4 per cent a year ago. Similarly, return on assets was 1.9 per cent in 2017-18 as compared with 1.6 per cent in 2016-17.