42 NBFCs, housing finance companies increased their provisioning under Indian accounting: EY report – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/banking/finance/42-nbfcs-housing-finance-companies-increased-their-provisioning-under-indian-accounting-ey-report/articleshow/79719909.cmsSynopsis

The report noted an increase in Expected Credit Loss (ECL) allowance by 33% and an overall increase in provision coverage rate by 26% as at 31 March 2020 compared to the year ended 31 March 2019. The EY Study, , ‘Expected credit loss analysis for non-banking financial companies’ also shows that companies reported a COVID-19 impact comprising 19% of the ECL allowance as at 31 March 2020.

Mumbai: Some of the top non banking finance companies and housing finance companies have seen a jump in the way they provision for some of the future uncertainties due to Covid pandemic, an EY report said.

42 NBFCs (including HFCs) noted a COVID-19 impact comprising 19% of the ECL allowance for the year ended 31 March 2020, the report said.

The report noted an increase in Expected Credit Loss (ECL) allowance by 33% and an overall increase in provision coverage rate by 26% as at 31 March 2020 compared to the year ended 31 March 2019. The EY Study, , ‘Expected credit loss analysis for non-banking financial companies’ also shows that companies reported a COVID-19 impact comprising 19% of the ECL allowance as at 31 March 2020.

Under the Indian accounting standards (Ind-AS) expected credit loss (ECL), is ascertained based on the expectations of future credit losses, rather than incurred losses followed under GAAP (generally accepted accounting principles)

“The increase in ECL allowance seems to be largely attributable to the impact of COVID-19 and other macro-economic factors. Provision coverage rate has also seen an increase primarily in consumer, MSME and auto, housing finance and micro-finance companies,” said Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services (FAAS) EY India.

While NBFCs are struggling to predict and manage credit risk amidst the pandemic, it has become imperative for them to have a strong risk management framework. Some of the factors that NBFCs may consider in risk management are assessment of creditworthiness of the borrower, mitigation of credit risk by reviewing value of collaterals on a regular basis and regular back-testing.

A uditors and company executives had told ET earlier that higher provisioning may be necessary as the Covid-19 pandemic-induced sharp slowdown would have increased difficulties for these businesses already hit by the ongoing slowdown. In many cases auditors have asked companies to provide up to 50% failing which they will be forced to qualify the accounts.

This will however apply only to loan accounts that had fallen behind on payments in January and February and would not apply to delayed or non-payment of loans in the moratorium period between March and May. The Reserve Bank of India had asked lenders to provide upto 10% for bad loans in this period with 5% split up in the January-March and April-June quarters.

NBFCs follow Indian Accounting Standards or Ind-As and will have to provide for all the potential bad loans even if it’s way above what the central bank has prescribed. Under Ind-AS, auditors are required to make a judgment call on each loan portfolio even if the borrower is not a defaulter, and decide how much has to be provisioned.

Some industry leaders have even welcomed the move stating that it will be better for the industry long-term.

EY research team performed a review of the standalone financial statements for the year ended 31 March 2020, in comparison to year ended 31 March 2019 of 42 companies. (28 NBFCs and 14 HFCs) to evaluate the change in ECL allowance and expense change in provision coverage rates, the magnitude of the COVID-19 impact and other key parameters. The analysis highlighted that there has been an overall increase in gross loans of NBFCs by 7.63%, and HFCs by 2.44%. There was an increase in ECL allowance on stage 1 and stage 2 by 56% as against 25% increase in ECL allowance on stage 3 assets. The ECL expense has increased by 219% for the year ended 31 March 2020 as compared to year ended 31 March 2019. Also, the companies reported a COVID-19 impact of 32% of the ECL expense for the year ended 31 March 2020. The cost of risk ratio has increased by 202%.

“As NBFCs gear up for financial results for the coming quarters as well as the year end, they will have to consider the impact of these challenges on the economy, additional insights on the economic impact of the pandemic and several regulatory developments as a part of stimulus packages provided by the government. ECL estimates may have to be revised in the wake of these developments. Given the inherent level of uncertainty and sensitivity of judgements and estimates, disclosures of the key assumptions used, and judgements made in estimating ECL are particularly important,” said Jigar Parikh, Partner, Financial Accounting Advisory Services (FAAS) EY India.

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