Central Bank of India unlikely to accept shadow bank’s claims for bad debt relief

MUMBAI (Reuters) – India’s central bank is unlikely to grant “shadow banks” exemptions from the entry into force of tougher rules on bad loans, sources told Reuters, essentially ending a benefit that non-bank financial companies had on standard banks.

The Non-Banking Financial Companies (NBFCs) have asked the Reserve Bank of India to exempt small loans from the rules taking effect next month which are in line with those applicable to banks.

India had 10,000 shadow banks in March 2021, the latest RBI data available, with assets of 54 trillion rupees ($680 billion) or about a quarter of that of the banking sector. Several of the largest shadow banks are publicly traded.

Under the new standards, shadow banks will have to recognize bad debts on a daily basis, rather than monthly, as some currently do. Non-performing loans can only be reclassified as performing loans after borrowers have paid all arrears.

“We meet regularly with the RBI and have asked for several easings which they have refused,” said an industry source who attended those meetings with the central bank.

The central bank did not immediately respond to a request for comment.

The shadow banks wanted loans of up to 20 million rupees ($250,000) exempt, according to a document reviewed by Reuters, and also asked for some accounting requirements to be eased and an extension to comply with the new rules.

“We expect that with the new regulations, NBFCs at all levels should see an 80 to 100 basis point increase in bad debts,” said the head of a shadow bank, who asked not to be named . “Some companies could see an increase of up to 200 basis points.”

That could increase some institutions’ bad debts enough to subject them to additional regulatory requirements and force them to set aside more cash to provision non-performing loans, industry executives say.

The shadow banks had also asked the RBI to lower the threshold for bad debts for which they would not need court approval to take control of the securities pledged on the loan, manage them or sell them to recover the contributions.

“Besides the short-term rise in bad debts, if NBFCs do not strengthen their collection practices and enforce customer discipline, it can lead to high stressed loans for a long period of time, which will have a significant impact. on their balance sheet,” the analyst said. Anil Gupta at the ICRA rating agency.

Arguing that their smaller average loan size put them at a disadvantage compared to banks, shadow banks in July applied for such permission, under the Securitization and Reconstruction of Financial Assets and Enforcement of Collateral Act, for loans more than 100,000 rupees ($1,250), up from the current 2 million rupees, according to a document seen by Reuters.

But the RBI is likely to reject this request as well, the sources said.

($1 = 79.5625 Indian rupees)

(Reporting by Nupur Anand; Editing by William Mallard)

Copyright 2022 Thomson Reuters.

Ruth R. Culp