Photographer: Karen Dias/Bloomberg

FSR: Up To 12% NBFCs May Fail To Meet Minimum Capital Norms If Bad Loans Rise 

A moderate rise in gross bad loans of non-bank lenders has lowered their capital buffers and should the trend continue, they may be unable to meet minimum capital requirements, according to the Reserve Bank of India.

Gross non-performing assets of non-banking financial companies rose to 6.1 percent in September compared with 5.8 percent in March, according to the central bank’s Financial Stability Report. Capital adequacy ratio declined to 21 percent from 22.8 percent during the period.

Defaults in repayments by Infrastructure Finance & Leasing Services Ltd. and its subsidiaries in September led to concerns of a slowdown in growth for NBFCs in the second half of the year. The fear stemmed from tight liquidity conditions followed by a trust deficit due to the defaults. NBFCs are required to maintain a minimum capital of not less than 15 percent of their aggregate risk-weighted assets.

According to RBI’s assessment:

  • An increase of 0.5 standard deviation in bad loans could lead to capital buffer ratio falling to 20.6 percent.
  • If it rose by three standard deviations, the fall could be steeper to 14.7 percent.
  • If gross NPAs rose by 0.5 or one standard deviation, 8 percent of individual non-bank lenders will fail to comply with minimum capital requirements of 15 percent.
  • 12 percent will be non-compliant if gross NPAs rose by 3 standard deviations.

Despite the moderate rise in non-performing loans, non-bank lenders’ saw their aggregate balance sheet size rise by 17.2 percent year-on-year to Rs 26 lakh crore as of September, according to the RBI’s report. While borrowings grew by 17.2 percent in September 2018 on an annual basis, loans and advances of the NBFC sector increased 16.3 percent during the period.