KOLKATA: The shift in accounting norms for non-banking finance companies could see the net worth of many companies fall by as much as 10%, but big players with diversified loan books and higher share of collateralised lending will be in a better position when it comes to earnings, analysts said.
The new Indian Accounting Standards (Ind-AS) is applicable to NBFCs including housing finance companies from April 1, 2018 and they will have to set aside higher amount as provision impacting their bottom line. Their loan-loss provisioning will now have to be made on expected credit loss (ECL) model, based on past trends and judgement of individual entities.
“It poses the risk of destabilising the financial system as it can potentially dilute provisioning on NPAs, and upfront income on loan portfolio sell down or securitization,” said a chief executive of a large housing finance company.
The new norm will be applicable to banks from April 1, 2019. For NBFC, players with net worth over Rs 500 crore have been told to follow this from the first quarter of this fiscal. The market is unsure about the likely impact of the transition on earnings of NBFCs.
“We believe net impact of other key changes will be within 10% of net worth. Within various players, mortgage financiers with better historical experience of credit cost and well collateralised business model will have neutral impact,” Edelweiss said in a note.
“Our assessment suggests higher impact on players like Capital First. HFCs will witness adverse impact on profit and loss due to recognition of interest on zero coupon bonds in income statement,” it said.
Under ECL framework, companies having adequately collateralised lending & higher coverage such as HFCs will have limited impact. For stage-1 assets, which include standard assets, provisioning requirement will be higher than general provisioning,” Edelweiss said.
There will be changes in securitisation which will now be considered on-book (not a true sale) and call for higher provisioning while direct assignment will be off-book, with income being recognised upfront.