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NBFCs fret over RBI proposals

Non-banking finance companies (NBFCs) are upset over new regulatory recommendations from a Reserve Bank of India panel that wants them to increase their cash cushion by redefining what constitutes a substandard loan. Tough for truckers

india Updated: Aug 31, 2011 22:58 IST
Manu P Toms

Non-banking finance companies (NBFCs) are upset over new regulatory recommendations from a Reserve Bank of India panel that wants them to increase their cash cushion by redefining what constitutes a substandard loan.

If the RBI working group's suggestion to make asset classification norms similar to banks is implemented, NBFCs will have to classify loans that involve due payments of more than 90 days as "substandard" and make provisioning of 15% with respect to their assets.

What this could mean is that a greater share of loans will be seen as non-performing assets (NPA) - triggering a squeeze on the firms' funds, harsher methods to recover loans or interest and a loss of business, say the NBFCs. They add they might have to charge higher rates.http://www.hindustantimes.com/images/HTPopups/310811/01_09_biz2.jpg

"We give loans to mostly the un-banked people such as truck drivers who want to buy second-hand trucks. Most of them are first time customers. They have no collateral and no repayment track record. And banks do not fund them. From those customers' point of view, stricter norms will make things difficult," said R.Sridhar, Managing Director, Shriram Transport Finance Corporation.

"For banks 90 days (to classify a loan as substandard) is okay. But, for NBFCs what is reasonable is 180 days," added Sridhar, whose company extends 400,000 loans a year for pre-owned trucks.

"Ninety days mean we have to start acting after 30 days of overdue. This will change recovery practices," Sridhar said.

N. Sivaraman, president, L&T Finance, said unorganised sector customers need a different approach. "For example, small contractors may not be very regular in repayment. It does not mean they default," he said.

Ramesh Iyer, managing director, Mahindra Financial Services Ltd, said the new norms for vehicle loans suggest legal support for recovery and income tax benefits, which might balance the tough cushioning norms.