Non-banking finance companies (NBFCs) will benefit from the enhanced corporate governance and disclosures standards and tightened liquidity management requirements proposed recently by the Reserve Bank of India (RBI). A limited financial impact on NBFCs is expected from the proposed revisions in asset classification and provisioning norms and higher tier 1 capital ratio requirements, said India Ratings, a Fitch group company.
The proposed enhancements in corporate governance standards will improve investor confidence and could enhance access to capital markets, in particular for large NBFCs that are subject to most of these stricter requirements. The draft guidelines include stricter rules on appointment, continued eligibility and responsibilities of directors and comprehensive disclosures requirements on asset quality, asset-liability profile and off-balance sheet exposures, among others, India Ratings said.
It is seen that high core capital ratios at NBFCs as a key requirement in view of their high concentrations on both asset and liability sides. There won?t be any significant impact on the operating performance of the requirement of a minimum tier I capital ratio of 10% (current requirement of 7.5% for retail finance NBFCs). This is because the weighted average tier 1 capital ratio was around 14% at the eight major retail finance NBFCs at end-March 2012 and over 10% at nearly all the agency rated NBFCs, India Ratings said.
The proposed regulatory requirement of holding high-quality liquid assets/investments to cover liquidity gaps in the 1-30 day bucket will increase creditor comfort, in view of the largely wholesale funding profile of NBFCs.
