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Impact Of Transition To Indian Accounting Standards On NBFCs

Housing finance companies are best placed to face the transition to the new accounting standards applicable to non-banking finance companies in the ongoing financial year. The corporate lenders, however, are likely to be adversely affected.

That’s according to a Motilal Oswal report. NBFCs will have to compute their first quarter results under the Indian Accounting Standards, the global accounting practice that they are mandated to adopt. It’s on a par with International Financial Reporting Standards.

What Are The Major Changes?

The migration is likely to impact revenue recognition, interest expenses, employee cost, loan loss provisioning, securitisation, investment valuation, recognition of deferred tax liability or deferred tax asset, consolidation of entities, employee benefits and income tax in the NBFC sector.

Besides, accounting changes related to business combinations and consolidation would be required. This may affect earnings and net worth of companies.

Major changes and their impact on key metrics for NBFCs:

  • Transition may lead to temporary deferral of revenue recognition and lead to lower operating profit.
  • Deferral of loan processing expenses over the entire loan duration (deferral of cost recognition) will lead to expansion of operating profit.
  • Requires early recognition of provisioning for bad loans.
  • ESOPs could increase employee costs.
  • Increase in tax expense as minimum alternate tax on unrealised investment mark-to-market gains will become applicable under the new norms.
  • Recognition of securitised loan assets will have an impact on the return on assets ratio.

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What It Means For The First-Quarter Earnings

Companies having zero-coupon bonds, structured debt, preference shares, higher share of lumpy fees and higher ESOP cost will be adversely impacted.

Housing Finance Companies:

  • Expected to see a benefit in the form of provisioning and reversal of deferred tax liability.
  • Most large housing finance companies carry additional/contingent provisioning on balance sheet.
  • Direct sales agencies expense amortisation and a reduction in credit cost are added benefits.
  • Companies in the affordable housing segment with a limited track record and a higher share of fee income may be impacted.

Corporate Financers

  • May witness higher provisioning, deferment of fee income and a rise in employee expenses.

Vehicle Financers

  • Securitisation activity and provisioning may be impacted.

Impact On Specific Companies

Bajaj Finance

  • Will have to amortise fee income over the life of the contract against being accounted on receipt basis currently. This can lead to lower operating profit.
  • Upfront booking of gain on securitisation will push up earnings.

Dewan Housing Finance

  • It has incrementally higher share of off-balance sheet transactions through the assignment route. Upfronting of income on assignments under Ind-AS will boost earnings.

HDFC and Indiabulls Housing Finance

  • Change in the accounting for interest on structured bonds and upfronting of income on assignments will impact reported net interest income.

L&T Finance Holdings

  • Motilal Oswal expects Rs 1,500-1,600 crore of provisions on corporate loans to be upfronted.

Mahindra & Mahindra Financial Services

  • It is expected to benefit from amortisation of loan origination expenses that it accounts upfront currently.
  • With the NBFC carrying a meaningful provision coverage ratio and collateral, analysts believe the impact under expected credit loss norms may not be very high.

Shriram Transport Finance

  • The impact under expected credit loss norms may not be high with the NBFC having a provision coverage ratio of 70 percent.

(The impact is compiled from reports by Morgan Stanley and Motilal Oswal)

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