In its eighth Financial Stability Report (FSR), Reserve Bank of India highlighted that Non Banking Financial Companies (NBFCs) were better placed than banks in terms of capital requirement and ability to withstand the pressure of bad loans. Going by the report, which incorporates the findings of a stress test conducted on the sector, the NBFCs have a higher level of capital adequacy or capital to risk-weighted assets ratio at 23.5% compared with 15% (comprising both tier-I and tier-II capital) mandated by the RBI.
The test, which was carried out for the period ended September, was based on two parameters, i.e. a doubling of gross non-performing assets or bad loans and a five-fold spike from the actual levels. In the first case, the capital ratio fell 1.1 percentage points to 22.4% and in the second, it dropped 4.9 percentage points to 18.6%, but still remained 3.6 percentage points higher than the benchmark. Thus, with this it was concluded that even though NBFCs fell short of provisioning under both scenarios, the impact on CRAR (capital-to-risk asset ratio) was negligible.
As per RBI’s mandate, banks are required to maintain a minimum CRAR of 9%, while the ratio for NBFCs is 15%. Rising pile of bad loans has eroded the capital base of the lenders over the past few years as they are supposed to make provision for bad loans. According to an estimate, gross bad loans of 40 listed banks rose 37% year-on-year to Rs 2.3 lakh crore at the end of September, while gross bad loan ratio for non-deposit taking NBFCs stood at 3.5% on September 30, 2013, against 3.1% a year ago.
The test, which was carried out for the period ended September, was based on two parameters, i.e. a doubling of gross non-performing assets or bad loans and a five-fold spike from the actual levels. In the first case, the capital ratio fell 1.1 percentage points to 22.4% and in the second, it dropped 4.9 percentage points to 18.6%, but still remained 3.6 percentage points higher than the benchmark. Thus, with this it was concluded that even though NBFCs fell short of provisioning under both scenarios, the impact on CRAR (capital-to-risk asset ratio) was negligible.
As per RBI’s mandate, banks are required to maintain a minimum CRAR of 9%, while the ratio for NBFCs is 15%. Rising pile of bad loans has eroded the capital base of the lenders over the past few years as they are supposed to make provision for bad loans. According to an estimate, gross bad loans of 40 listed banks rose 37% year-on-year to Rs 2.3 lakh crore at the end of September, while gross bad loan ratio for non-deposit taking NBFCs stood at 3.5% on September 30, 2013, against 3.1% a year ago.
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