Icra Nbfc Report Feb '04
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Transcript of Icra Nbfc Report Feb '04
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Industry Comment Non-Banking F inan cial Compan y
www.icraindia.com 2 of 22
Contacts:
Vineet Nigam ManagerRajeev Thakur Research HeadAmul Gogna Executive Director &
Chief of Information and Grading Service
Date February 2004
Copyright, ICRA Limited, 26 Kasturba Gandhi Marg, New Delhi 110001
None of the information contained in this publication may be copied, otherwise reproduced, repackaged, furthertransmitted, disseminated, redistributed, or resold, or stored for subsequent use for any such purpose, in whole or in part,in any form or manner or by means whatsoever, by any person without ICRAs prior written permission.All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reasonable.Although reasonable care has been taken to ensure that the information herein is true, such information is provided as iswithout any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as tothe accuracy, timeliness or completeness of any such information. All information contained herein must be construedsolely as statements of opinion and ICRA shall not be liable for any losses incurred by users from any use of thispublication or its contents.
In the course of work, ICRA may have rec eived information from companies being rated or graded. However, thispublication does not contain any confidential information obtained by ICRA in the process of rating or grading. Thispublication contains data/information available only in the public domain or available through secondary sources.
Opinions expressed in this publication are not an indication of prospective rating/grading for any instruments to be issued
by any of the companies concerned.
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TABL E OF CONTENTS
En vironmen t Analysis: Port er's Model................................................................................4Str uctu re of th e Indu str y....................................................................................................5Key Issu es Fa cing th e Player s ............................................................................................6
High Degree of Competit ion .................................................. ..........................................6Slowdown in Growth .................................................... ...................................................8 Policy Reform s .................................................... ....................................................... .....9Compet ition from SCBs ................................................ ................................................. 11Depositor Pr otection ..................................................... ................................................. 13
Tren ds in Pr oduction, Consu mption, Price, Capa city Ut ilisat ion .......................................14Bus ines s Pr ofile .................................................. ....................................................... ...14Type-wise Profile of th e NBFC Sector ....................................................... ..................... 14Region -Wise Pr ofile................................... ........................................................ ............ 14Asset Profile (excl. RNBCs) ................................................... ........................................ 15Pu blic Deposits (PDs) Pr ofile ................................................. ........................................ 15Region -Wise Pr ofile of PDs .................................................... ........................................ 15Mat ur ity Pa tt ern of PDs (excl. RNBCs).........................................................................15Interest Rate Pattern of PDs (excl. RNBCs)...................................................................16
Borrowing Profile (excl. RNBCs)....................................................................................16Indu str y Concentr at ion by Assets (excl. RNBCs) ...........................................................16Indu str y Concent ra tion by Deposits (excl. RNBCs)........................................................17Indu str y Concentr at ion by NOF (excl. RNBCs) .............................................................17
DEMAND SUP PLY POSI TION ................................................ ........................................ 17Liabilities Profile...........................................................................................................17Len din g Pr ofile ................................................... ....................................................... ...19
REVIEW OF PE RFORMANCE ........................................................................................19NE W PRO J ECT S ................................................... ....................................................... ...21OUTLOOK ................................................... ........................................................ ............ 21
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ENVIRONMENT ANA LYSIS: PORTER'S MODEL
T h r e a t o f Su b s t i t u t e s :
Medium t o H igh
As a financial intermediary, NBFCs
face competition from scheduledcommercial banks (SCBs) and capital
markets. Non-Banking Financial
Companies (NBFCs) offer a wide
variety of finan cial services an d play an
important role in providing credit. Ascompared with many SCBs, they have
an ability to take quicker decisions, but
face the disadvantage of higher cost of
funds.
In t e r -F i rm Riva l ry : Med ium
Although the number of players is
high, firms have different clientele
based on their borrowing costs, and
size of business
Bar r i e r s t o en t r y : Med ium
Certificate of registration (CoR)
from RBI necessar y
Minimum net owned funds (NOF)
for registration Rs. 20 million fornew NBF Cs seeking gra nt of CoR on
or after April 21, 1999.
Stringent regulatory supervision by
the RBI.
B a r g a i n i n g P o w e r o f
Sup pl iers : Medium
Reduced dependence on depositsand increased borrowings from
banks/financial institutions.
Better rated NBFCs face little
const ra int in borrowings.
B a r g a i n i n g P o w e r o f
Buyer s : Medium
The major portion of theassets of NBFCs continue to
be in Hire Purchase
(HP)/Equipmen t Leasing (EL).
Asset quality deteriorated in
the late-1990s, before
recovering in recent year s.
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STRUCTURE OF THE INDUSTRY
In ter ms of th e Section 45I(f) (rea d with Section 45I(c)) of th e Reserve Ba nk of Ind ia (RBI)
Act, 1934, as amended in 1997, the principal business of NBFCs is that of receiving
deposits, or that of a financial institution (FI), such as, lending, investment in securities,hire purchase (HP) finance or equipment leasing (EL). As shown in table below, NBFCs in
India are a combination of heterogeneous entities.
Types o f N B FC s
EntityEntity Principal BusinessPrincipal Business
Equipment leasing company
(ELC)
Equipmen t leasin g or finan cing of such activity.
Hire purchase finance company
(HPC)
Hire purchase transactions or financing of such transactions.
Invest men t compa ny (IC) Acquisit ion of securit ies; includes prim ar y dealer s which, inter alia,
deal in underwriting and market-making for government securities.
Loan compa ny (LC) Providing fina nce by ma king loans or advan ces, or otherwise for an y
activity other than its own; excludes EL/HP/Housing Finance
Companies (HFCs).Residuary non-banking company
(RNBC)
Receiving deposits under any scheme or arrangement, by whatever
name called, in one lump-sum or in installments by way of
contributions or subscriptions or by sale of units or certificates or
other instruments, or in any manner. These companies do not belong
to any of th e categories as sta ted a bove.
In terms of relative importance of various activities financed by NBFCs, loans and
intercorporate deposits (ICDs) is the largest activity, accounting for 34.4% of their total
assets at end-March 2002 (the latest period for which detailed financial data is available
for the entire NBFC sector), followed by HP (33.1%), investments (10.9%), EL (7.8%), and
bills (1.7%). The latest period for which detailed financial data is available for the entire
NBFC sector is for FY2002. However, ICRA has analysed a sample of 17 NBFCs
(hereinafter referred to as sample companies), each with an asset base exceeding Rs. 2,000
million. These include large NBFCs such as Sundaram Finance, Tata Finance, Ashok
Leyland Finance, Cholamandalam, SREI, etc. Wherever relevant, an analysis of their
results for FY2003 has been carried out. These 17 companies comprise 8 companies with
an asset base of Rs. 2-5 billion, 4 with an asset base of Rs. 5-10 billion, 2 with an asset base
of Rs. 10-20 billion, and 3 with an asset base exceeding Rs. 20 billion.
In t erms of public deposit (PD) takin g activities, Residua ry Non -Bank ing Compan ies
(RNBCs)1, which h ave certa in similarities with banks in ter ms of their asset composition,
held 68.5% of the PDs of NBFCs at end-March 2002, followed by HPCs (19.7%), and
LCs/ICs (5.5%). For the NBFC sector as a whole, the PDs of NBFCs (with PDs of Rs. 200
million and above) accounted for 1.1% of broad liquidity (L 3) in India at end-June 2003,
which comprised the monetary and liquid liabilities of the banking sector, post office bank,
FIs, and NBFCs. However, the share of NBFCs has declined from 1.35% at end-March2001.
1 RNBCs are a class of NBFCs which cannot be classified as any of the following NBFCs-EL, HP, loan andinvestments, n idhi, chit fund -but tap PDs by offering various schemes, similar t o recurring deposit schemes of
banks.
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P D s o f N B F C s a n d t h e i r s h a r e o f L3
As of endAs of end Mar.Mar.
20012001
JuneJune
20012001
Sep.Sep.
20020011
Dec.Dec.
20012001
Mar.Mar.
20022002
JuneJune
20022002
Sep.Sep.
20022002
Dec.Dec.
20022002
Mar.Mar.
20032003
JuneJune
20032003
Deposits-Rs.
billion
175.32 179.10 179.90 176.23 194.25 197.64 186.62 192.64 195.73 195.73
Sha re of L3 1.36% 1.31% 1.29% 1.23% 1.31% 1.24% 1.15% 1.15% 1.13% 1.08%
Although significantly smaller than scheduled commercial banks (SCBs), NBFCs are
regarded as one of the major institutional purveyors of credit in India. Traditionally, both
banks and NBFCs have predominantly extended short-term credit. NBFCs have displayed
flexibility in meeting the credit needs of specific sectors like EL, HP, housing finance and
consumer finance, where gaps between the demand and supply of funds have been high
and where SCBs were earlier not easily accessible to borrowers. NBFCs in India offer a
wide variety of financial services and play an important role in providing credit to the
unorganised sector and to small borrowers at the local level. As compared with many
SCBs, they h ave an ability to t ake qu icker decisions, assume great er r isks, and customise
their services an d charges more a ccording to the n eeds of the clients. This ena bles them t o
build up a clientele that ranges from small borrowers to established corporates. By
employing innovative marketing strategies and devising tailor-made products, NBFCshave also been able to build up a clientele base among the depositors, mop up public
savings and command large resources. Consequently, the share of non-bank deposits in
household sector savings in financial assets, increased from 3.1% in FY1981 to 10.6% in
FY1996. In 1998, the definition of PDs was for the first time contemplated as distinct from
regulated deposits and as such, the figures thereafter are not comparable with those
before. Nevertheless, at end-March 2002, non-bank deposits accounted for 2.9% of the
fina ncial assets of th e household sector in In dia.
While NBFCs ha ve often been leaders in finan cial innovat ions, th ere ha ve been instan ces
of unsustainability, often on account of high rates of interest on their PDs and periodic
bankruptcies. The rising importance of this segment has thus resulted in increased
regulat ory atten tion and focused su pervisory scrutiny in t he inter ests of fina ncial stability
and depositor protection.
KEY ISSUES FACING THE PLA YERS
Hig h De g re e o f Co mp e t i t i o n
The NBFC sector is characterised by the large number of NBFCs, as well as the
heterogeneous nature of these entities. Of 910 NBFCs at end-March 2002, there were 463
HPCs, accounting for 50.9% of NBFCs, followed by ILCs (231), ELCs (56), RNBCs (5), and
others (155). The five RNBCs accounted for 31.7% of the outstanding assets of Rs. 582.90
billion of the NBFCs a t en d-March 2002. Fur th er, as th e ta ble below shows, RNBCs had a
mar ket sh are of 68.5% of the PDs held by NBFCs at end-March 2002. The ma rket shar e of
RNBCs in total PDs has increased in line with long-term trends. Among other types of
NBFCs, ELCs have witnessed a decline in number of companies and PDs. However, ILCs
have witnessed an increase in both nu mber of companies and P Ds held by them.
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M a r k e t S h a r e I n d i c a t o r s o f N BF C s
Share of total NBFCsShare of total NBFCs Share of PDsShare of PDs
March 31 2000 2001 2002 2000 2001 2002
EL 5.6 5.9 6.2 5.3 8.0 3.5
HP 46.3 47.9 50.9 21.1 20.2 19.7
IL 18.7 17.3 25.4 13.0 4.3 5.5
RNBC s 0.9 0.7 0.5 56.9 64.3 68.5
Other NBFCs 28.6 28.1 17.0 3.7 3.1 2.8
TotalTotal 100100 100100 100100 100100 100100 100100
As of end-December 2003, the RBI had granted permission to only 641 NBFCs for
accepting PDs, as compared with 710 at end-June 2003, and 784 at end-June 2002. The
nu mber of PD-acceptin g compa nies h as came down becaus e of conversion to non -PD-
accepting activities. All NBFCs holding PDs whose CoRs have been either rejected or
cancelled have to continue repaying the deposits on due dates and dispose off their
financial assets within three years from the date of application/cancellation of the
certificate or convert th emselves into non -banking non -finan cial compan ies. In recent
years, th ere ha s been a fall in th e nu mber of operat ing NBFCs reflecting mergers, closuresand cancellation of licenses. The number of NBFCs declined from 1,536 at end-March 1999
to 905 at end-March 2002.
The NBFC sector is chara cterised by a lar ge number of compan ies with a sma ll asset base,
and a few companies with large asset sizes. At end-March 2002, just 5 RNBCs accounted
for 31.7% of the total assets, and 68.5% of PDs of all NBFCs. Excluding RNBCs, at end-
March 2002, just 4.8% of the total number of NBFCs held 88.8% of the total assets of
NBFCs. By comparison, an estimated 95.2% of the total number of NBFCs held just 11.2%
of the assets of the NBFCs. An estimated 85% of NBFCs control only 3.8% of the total
assets. Further, there has been increased concentration in the sector with the smaller
players being weeded out. In recent years, while larger NBFCs have witnessed growth in
assets, the smaller size NBFCs are reporting declining market shares. While smaller
NBFCs often specialise in addressing local credit needs, their large number continues topose a regulat ory cha llenge for the RBI.
Size -w ise D i s t r ibu t ion o f Asse t s o f N B FC s ( exc lud in g R N B C s)(ercentages)
Share of total NBFCsShare of total NBFCs
(excl.. RNBCs)(excl.. RNBCs)
Share of AssetsShare of Assets
(excl. RNBCs)(excl. RNBCs)
Growth in AssetsGrowth in Assets
March 31 2000 2001 2002 2000 2001 2002 2000 2001 2002
Less th an Rs. 2.5 million 8.2 6.4 5.6 0.0 0.0 0.0 -73.9 -10.9 -28.6
Rs. 2.5-5 million 9.5 9.3 9.7 0.1 0.1 0.1 -26.0 -3.7 -5.7
Rs. 5-20 million 39.9 39.9 42.3 1.1 1.1 1.0 41.3 -3.1 -1.2
Rs. 20-100 million 26.7 28.7 27.3 2.9 3.2 2.7 18.8 4.5 -9.8
Rs. 100-500 million 9.0 9.1 8.2 4.8 5.3 4.0 12.9 3.1 -19.5
Rs. 500-1,000 million 1.6 1.5 2.1 2.8 2.7 3.4 -34.8 -8.6 31.6
Rs. 1,000-5,000 million 2.8 2.9 2.5 19.6 18.9 15.0 -3.7 -8.9 -16.4
Above Rs. 5,000 million 2.2 2.1 2.2 68.8 68.7 73.8 19.2 -6.1 13.8
TotalTotal 100.0100.0 100.0100.0 100.0100.0 100.0100.0 100.0100.0 100.0100.0 11.211.2 --5.95.9 5.85.8
Reflecting the increased market share of larger NBFCs, while there were only 25 NBFCs
(excluding RNBCs) with a PD base exceeding Rs. 500 million, these 25 NBFCs accounted
for 59.4% of the PDs of all NBFCs (excl. RNBCs). By comparison, there has been a
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significan t redu ction in sma ller NBFCsboth in terms of number of entities an d qua nt um
of PDs. While the number of NBFCs (excl. RNBCs) with PDs of less than Rs. 500 million
declined from 968 at end-March 2000 to 880 at end-March 2002, their share of PDs
declined fr om 47.1% to 40.6%.
Size -w ise D i s t r ibu t ion o f PD s o f N BFC s ( exc lud in g R N B C s)(ercentages)
Share of total NBFCsShare of total NBFCs
(excl. RNBCs)(excl. RNBCs)
Share of PDsShare of PDs
(excl. RNBCs)(excl. RNBCs)
Growth in PDsGrowth in PDs
March 31 2000 2001 2002 2000 2001 2002 2000 2001 2002
Less th an Rs. 2.5 million 20.6 23.1 23.6 4.7 12.5 18.9 -39.3 104.4 38.8
Rs. 2.5-5 million 36.1 35.5 33.1 2.3 2.9 2.2 68.1 -3.2 -31.9
Rs. 5-20 million 31.5 31.3 32.9 4.4 10.7 6.1 -66.0 90.7 -47.8
Rs. 20-100 million 4.3 3.5 3.3 2.4 1.5 1.3 -23.6 -53.5 -14.9
Rs. 100-500 million 4.6 3.8 4.2 33.3 12.0 12.1 31.6 -72.0 -7.6
Rs. 500-1,000 million 0.9 1.2 1.2 10.5 14.3 14.3 -31.0 5.3 -8.4
Rs. 1,000-5,000 million 1.9 1.4 1.5 42.4 35.6 45.2 -17.6 -34.9 16.6
Above Rs. 5,000 million 0.0 0.1 0.0 0.0 10.5 0.0 NA NA NA
TotalTotal 100.0100.0 100.0100.0 100.0100.0 100.0100.0 100.0100.0 100.0100.0 --14.814.8 --22.522.5 --8.28.2
With a view to reinforcing financial stability, the RBI's supervisory framework lays special
emphasis on the sufficiency of NOF of NBFCs to restrict excessive leveraging. While the
larger NBFCs ha ve witnessed some improvements in NOFs, an d NOFs a s percent of PDs,
the financial position of the smaller NBFCs has deteriorated. Excluding RNBCs, just 25
out of 905 NBFCs a ccount ed for 94.6% of the NOFs of all NBF Cs. By compar ison, th e NOF
position of smaller NBFCs h as det eriorat edNBFCs with NOFs of less th an Rs. 2.5
million had a cumulative negative NOF of Rs. 13.51 billion at end-March 2002, as
compared with negative NOF of Rs. 2.15 billion at end-March 2000. A major concern
continues to be that the NOF was negative for a large number of the reporting NBFCs
(excluding RNBCs) holding 18.9% of PDs as at end-March 2002.
Size -w ise D i s t r ibu t ion o f N O Fs o f N BFC s ( exc lud ing R N B C s)(Percentages, except as specified)
Share of total NBFCsShare of total NBFCs
(excl. RNBCs)(excl. RNBCs)
Share of NOFsShare of NOFs
(excl. RNBCs)(excl. RNBCs)
PDs as multiple of NOFPDs as multiple of NOF
March 31 2000 2001 2002 2000 2001 2002 2000 2001 2002
Less th an Rs. 2.5 million 20.6 23.1 23.6 -3.2 -16.8 -31.6 -1.83 -0.94 -0.83
Rs. 2.5-5 million 36.1 35.5 33.1 1.7 2.3 2.4 1.67 1.62 1.24
Rs. 5-20 million 31.5 31.3 32.9 7.5 9.7 11.2 0.72 1.39 0.76
Rs. 20-100 million 4.3 3.5 3.3 4.4 4.4 4.8 0.69 0.42 0.39
Rs. 100-500 million 4.6 3.8 4.2 15.9 15.1 18.7 2.62 1.00 0.90
Rs. 500-1,000 million 0.9 1.2 1.2 9.4 15.7 1 8.7 1.40 1.15 1.06
Rs. 1,000-5,000 million 1.9 1.4 1.5 64.2 59.8 75.9 0.83 0.75 0.83
Above Rs. 5,000 million 0.0 0.1 0.0 0.0 9.8 0.0 NA 1.36 NA
TotalTotal 100.0100.0 100.0100.0 100.0100.0 100.0100.0 100.0100.0 100.0100.0 1.251.25 1.261.26 1.391.39
S l o w d o w n i n G r o w t h
Although NBFCs in India have existed for a long time, they shot into prominence from the
late-1980s. This rapid expan sion was dr iven by the s cope creat ed by th e process of fina ncial
liberalisation in fresh avenues of operations in areas, such as, HP, EL, housing, and
investment. The r apid growth of the NBFCs sector can also be attr ibuted to other factors.
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NBFCs were historically subjected to a relatively lower degree of regulation vis--vis
bank s. Secondly, the h igher ra tes of retu rn on deposits offered by NBFCs ena bled them t o
attract a large base of small savers. Added to these was the fact that the operations of
NBFCs were characterised by several distinctive features viz., no entry barriers, limited
fixed assets and no holding of inventories-all of which led to a proliferation of NBFCs.
During 1991-98, the total assets of NBFCs increased at a Compounded Annual Growth
Rate (CAGR) of 36.7%. The deposits of NBFCs as a proportion of bank deposits increasedsharply from 0.8% during FY1986-90 to 9.5% in FY1997. Customer orientation,
concentration in the main financial centres and the attractive rates of return offered by
them were some of the r easons for t heir r apid growth. However, since 1997, a combina tion
of economic slowdown, loss of investor confidence, and tightening of regulations, has
resulted in the weeding out of many NBFCs with insufficient capital base. The number of
NBFCs has declined from 1,547 at end-March 1999 to 910 at end-March 2002. Till 1997,
although NBFCs were regulated by the RBI, the focus was mainly on the liability side. In
1997, the RBI was conferred with extensive powers for regulation and supervision of
NBFCs (discussed below). Becau se of regula tion an d weeding out of man y NBFCs, th e tota l
PDs of NBFCs have declined from Rs. 238.20 billion at end-March 1998 to Rs. 188.22
billion at end-March 2002. The total PDs of 17 sample companies declined 13.6% during
FY2003 to Rs. 17.95 billion.
Among NBFCs, because of the unfavourable operating environment for the EL and HP
business du ring th e last few years, th e business volumes of compa nies in th ese businesses
has also declined. While the PDs of EL companies declined from Rs. 19.62 billion at end-
March 1998 to Rs. 6.68 billion at end-March 2002, the PDs of HP companies also declined
from Rs. 39.38 billion t o Rs. 37.09 billion.
In terms of distribution of assets, there has been a significant shift in asset deployment
away from the traditional business of EL/HP towards loans, ICDs and investments. While
the share of EL/HP in total assets declined from 42.9% at end-March 2000 to 41% at end-
March 2002, th e sha re of loans, ICDs, and investm ent s increas ed from 70.4% to 78.4%.
Po l i c y Re fo rmsThe NBFCs are governed by the RBI. The NBFCs are governed by various norms and
guidelines announced by the RBI. Till 1997, although NBFCs were regulated by the RBI,
the focus was mainly on the liability side. The regulatory framework for NBFCs had been
in existence since 1963 under the provisions of Chapter III B of the RBI Act and the
Directions issued thereunder. However, the powers vested with the RBI were very limited
in that it could regulate only the (a) limits upto which, (b) manner in which, and (c)
conditions subject to which the deposits could be accepted by NBFCs depending upon the
classification based on their principal business.
As these powers were not adequate from the point of view of regulation of NBFCs, it was
necessary to st rength en t he legislat ive framework relat ing to regulat ory powers of the RBI.
This view was also supported by various Working Groups, which examined the functionan d workin g of th e NBFC sector. Several measu res were initia ted by th e RBI in th e light of
the recommendations of the various Working Groups. In July 1996, the RBI introduced
liberalisation/rationalisation measures for NBFCs which were registered, rated and were
complying with the pruden tial norms. Under these m easur es, the eligible compan ies were
given freedom to determine their own rate of interest on deposits, accept
unr estricted/increased amount of deposits a nd maint ain lower level of liquid a ssets. At th e
same time, having regard to the recommendations of the Shah Working Group and the
observations made by the Joint Parliamentary Committee in 1992, the RBI prepared and
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forwarded to the Government of India (GoI) a comprehensive draft legislation in 1994,
which was promulgated as an Ordinance by the GoI in January 1997 and subsequently
replaced by an Act in March 1997. Accordingly, the Reserve Bank of India (Amendment)
Act enacted in 1997 conferred extensive powers on the RBI for regulation and supervision
of NBFCs. Among the various measures introduced have been:
q Compulsory registration of NBFCs engaged in financial intermediation and
prescription of minimum level of net owned funds (NOF)compulsory for NBFCs toapply to the RBI for a certificate of registration (CoR). The minimum NOF for
registration was stipulated at Rs. 2.5 million for the then existing NBFCs and Rs. 20
million for new NBFCs seeking grant of CoR on or after April 21, 1999. The three-year
period provided in the RBI (Amendment) Act, 1997 for the NBFCs to attain the
minimum NOF necessary for registration expired on January 9, 2000. The further
th ree-year period grant ed by the RBI, at its discretion, also came t o a close on J an uar y
9, 2003;
q Maintenance of certain percentage of liquid assetsNBFCs have to invest in
unencumbered approved securities, valued at a price not exceeding current market
price, an amount which, at the close of business on any day, shall be between 5-25% of
the PDs outstanding at the close of business on the last working day of the second
preceding quarter ;
q Creation of reserve fund and transfer thereto every year not less than 20% of netprofits to reser ve fun d;
q Ceiling on quantum of PDs(a) Loan and investment companies (1.5 times NOF if the
company has NOF of Rs. 2.5 million, minimum investment grade (MIG) credit rating,
complies with a ll the pr uden tial n orms and ha s capital a dequacy rat io or CAR of 15%);
(b) EL/HP companies: if company has NOF of Rs. 2.5 million and complies with all the
prudential norms4 times NOF with MIG credit rating and CAR of 12%; 1.5 times
NOF with out MIG credit r at ing but CAR of 15% and above;
q CAR12% for ELCs/HPCs with MIG credit rating; 12% for RNBCs; 15% for
ELCs/HPCs with out MIG credit r at ing; 15% for ILCs;
q Non-performing assets (NPAs) recognition normsLoans and Advances: Upto 6
months and 30 days past due period (past due period done away with effect from March
31, 2003); EL/HP: 12 month s;
q Credit exposure norms;
q Ceiling on interest rate on PDs11% per annum on domestic deposits, no
gifts/incentives on PDs: interest rate on non-resident external (NRE) capped at 25
basis points above th e LIBOR/SWAP ra tes for US dollar of the corresponding m at ur ity
on fresh repat riable NRE deposits;
q Restriction on PDsFor accepting PDs, an NBFC must have at least a MIG credit
rating; failing which it must be engaged in EL/HP, or be a RNBC. NBFCs/RNBCs
cannot accept demand deposits; Maturity periods for PDs is 12-60 months for NBFCs;
12-84 mont hs for RNBCs.
The RBI has been continually strengthening the supervisory framework for NBFCs to
ensure sound and healthy functioning, and avoid excessive risk taking. The degree of
super vision is ba sed on t he following th ree criter ia, viz., a) size of the NBF C, b) th e type of
activity performed, and c) the acceptance (or otherwise) of PDs. The RBI's supervisory
framework r ests on a four -pronged st ra tegy encompa ssin g the following, viz., a) on-sit e
inspection, based on Capital, Assets, Management, Earnings, Liquidity, and Systems and
Procedures (CAMELS), b) off-site monitoring, c) market intelligence, and d) exception
reports of statutory auditors of NBFCs.
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C o m p et i t i o n f r o m S CB s
With SCBs also offering the same spectrum of services as NBFCs, apart from other
un iquely bank ing services, the distinction between SCBs an d NBFCs is na rrowing. On th e
liabilities side, after a n increase in bu siness t ill th e mid-1990s, NBFCs now face increased
competition from SCBs. Banks and PD-accepting NBFCs compete for deposits. Besides,
banks and NBFCs are also competing sources of funds in certain sections of the credit
markets. Even though SCBs offer much lower interest rates on deposits, their deposits
have increased at a m uch faster rat e in recent years, as compar ed with NBFCs.
I n d i c a t o r s o f C o m p e t i t i o n b e t w e e n S C B s a n d N B F C s
At March 31At March 31 19981998 19991999 20002000 20012001 20022002 20032003
Asset sRs. bi l l ion
SCBs 79,572 95,037 11,100 12,952 15,364 16,989
NBFCs 455 470 513 539 583 NA
NBFCs as % of asset s of SCBs 5.7 5.0 4.6 4.2 3.8 NA
Deposit sRs. bi l l ion
SCBs 6,441 7,708 9,003 10,552 12,059 13,559
NBFCs 238 204 193 181 188 196
NBFCs as % of deposits of SCBs 3.7 2.7 2.1 1.7 1.6 1.4
Because NBFCs can not accept P Ds of less th an 1-year m atu rity, bank deposits score h igher
than NBFCs on the liquidity account, and continue to retain their dominance in the
portfolio of househ old fina ncial sa vings. Near ly 53.4% of outst an ding dep osits of SCBs at
end-March 2003 were for a maturity of less than 1 year, as compared with 54.5% at end-
Mar ch 2002. By compar ison, only 25% of the out sta ndin g PDs of the N BFCs (excl. RNBCs)
at end-March 2002 were for maturity of less than 1-year. The interest rate offered by
NBFCs is much higher than by SCBs. Overall the cost of funds is higher for NBFCs than
for SCBs. While the NBFCs reported financial expenditure of 8.3% of total assets, SCBs
reported a decline in inter est expenditur e, as percent of assetsfrom 5.7% dur ing FY2002
to 5.5% during FY2003.
After th e securities scam of 1992, bank deposit mobilisation increased, as a greater par t of
the household sector sa vings start ed to move from t he st ock ma rket s to th e bank ing sector.
By contrast, the disturbing developments in the NBFC sector during the mid-1990s,
tightening of supervision, and closur es ha ve resulted in NBFCs comma nding a lower sha re
of both deposits and financial assets of the household sector. Public/regulated NBFC
deposits, as a percent of gross domestic product (GDP) declined from 1.2% during FY1999
to 0.7% during FY2003. Over the same period, bank deposits outstanding, as percent of
GDP, increased from 40.5% to 50.1%. The pattern of household financial savings also
indicates a continued preference of households for relatively safer instruments (bank
deposits, insurance, provident and pension funds, and small savings).
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C o m p o s i t i o n o f F i n a n c i a l a s s e t s o f t h e h o u s e h o l d s e c t o r
FYFY CurrencyCurrency BankBank
DepositsDeposits
NonNon--
BankingBanking
DepositsDeposits
LifeLife
InsuranceInsurance
ProvidenProvident/t/
PensionPension
fundsfunds
Claims onClaims on
Govt.Govt.
Shares &Shares &
DebenturesDebentures
OthersOthers
1992 12.0 26.2 3.3 10.3 18.4 7.1 10.0 12.7
1993 8.2 36.7 7.5 8.9 18.4 4.8 10.2 5.2
1994 12.2 33.1 10.6 8.7 16.7 6.3 9.2 3.2
1995 10.9 38.4 7.9 7.8 14.7 9.1 9.3 1.9
1996 13.3 32.1 10.6 11.2 18.0 7.7 7.1 0.0
1997 8.6 32.1 16.4 10.2 19.2 7.4 4.2 1.9
1998 7.4 43.1 3.9 11.3 18.8 12.9 2.6 -0.1
1999 10.5 38.3 3.8 11.3 22.4 13.6 2.5 -2.4
2000 8.7 34.7 3.7 12.0 22.6 12.1 6.4 -0.1
2001 6.9 36.9 4.8 13.3 21.3 15.2 2.8 -1.1
2002 9.7 37.8 2.9 14.2 18.0 17.1 3.0 -2.8
Notwith stan ding the increased competition between ban ks an d NBFCs, and t he dominance
of SCBs, there are areas of operational convergence due to their engagement in similar
types of activities in the broad product space of deposit mobilisation and lending. A critical
issue for regulation and supervision is the desirable degree of regulatory convergence
between banks and NBFCs. It is in this context that the RBI's regulatory framework for
NBFCs, largely follows th e regula tions for ba nk s but also differs in a nu mber of cases.
K e y R e g u l a t o r y N or m s fo r B a n k s a n d N B F C s
ParticularsParticulars BankBank NBFCNBFC
Minimum capital/ Net
Owned Fun d
Minimum capital requirements of Rs.
2,000 million, to be raised to Rs. 3,000million within three years of operation, in
case of new banks. P romoters minimu m
contr ibution is 49% of the pa id-up capital.
Net owned fund of not less than Rs. 20
million is a pre-requisit e for gra nt of CoR forcommen cing th e business of a non-banking
finan cial institut ion.
Statutory Liquidity
Requirement
Maintain in India, in either, (i) cash, (ii)
gold (at up to current market price), (iii)
unencumbered approved securities valuedat a price specified by the RBI, or (iv) net
balances in current accounts with
nationalised banks in India, at close of
business on any day, an amount not less
than 25% of total of demand and timeliabilities in India on fortnightly basis, or
such other percentage not exceeding 40%,
as th e RBI, by wa y of notice, specifies from
time to time.
To maintain in India in unencumbered
approved securities, valued at current
market price, an amount at the close ofbusiness on any day which shall not be less
than 15% of the PDs outstanding as at the
last working day of the second preceding
quarter.
Cash Reserve Ratio Applicable. No such requ iremen t.
Reserve Fu nd Applicable. Tran sfer out of the profit ofeach year before dividend is declared, to
such reserve fund a sum, not less than 20%
of such profit.
Sam e as in the case of bank s.
Prior approval of RBIfor appointment of the
ma na ging directors.
Necessary. Applicable in case ofamendment to the t erms an d conditions of
the appointment of managing directors,etc.
No such requirement .
Control over
appointmen t of auditors
Prior appr oval of the RBI for a ppointm ent,
re-appointment or removal of the auditor
required.
No such requirement for NBFCs. These
companies have freedom to appoint their
au ditors as per th e Compa nies Act, 1956.
Deposit direct ions Acceptance of deposits from th e public,repayable on demand, allowed. Interest
rat e pa yable on saving account s prescribed
by the Reserve Bank .
Detailed directions on acceptance of PDsrelating to, inter alia, minimum eligibility
criteria, quantum, minimum and maximum
period, rat e of interest, a nd a dvertisement.
C ontd
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ParticularsParticulars BankBank NBFCNBFC
Deposit insura nce Deposits insured by the Deposit Insur ance
and Credit Guar ant ee Corporat ion of India
up to Rs.0.1 million for each depositor in
respect of his/her deposit in an insuredbank in the sam e capacity and in the same
right.
PDs a re u ninsu red a nd n o official agency
guarantees the payment of principal or the
interest on such PDs.
Refinan ce facility The RBI ma y grant refinance,rediscounting facilities and demand loans. No such provision in the RBI Act, 1934.
Powers ofamalgamation, and
scheme of arrangement
The RBI has powers to san ction schemes ofamalgamation, reconstruction, and
arrangement approved by the requisite
majority of shareholders of the bank.
No such provision.
Winding up proceedings Special provisions for winding up of a
banking company under certain
circumstances.
Winding up, subject to th e genera l provisions
cont ained in t he Compan ies Act, 1956.
However, there are differences in regulation of SCBs and NBFCs reflecting their unique
characteristics and the fundamental differences in their operations. As compared with
SCBs, the regulations are relatively more stringent in case of PD-accepting NBFCs in
order t o protect d epositors inter est. Since NBFCs ar e not dir ectly par t of the pr ocess of
credit creation, r eserve requirement s a pply exclusively to banks. F inally, as NBFCs h avesometimes promised unsu staina ble return s to investors, th ere is a ceiling on rat es offered
on NBFC deposits t o avoid such pa st experiences.
In response to the increased competition from SCBs, one NBFCKotak Mahindrahas
recently converted into a SCB. Conversion of NBFC into SCBs has many positive aspects.
At present, statutory constraints on raising cheap retail deposits (maturity should not be
less than 1 year) have mean t t hat NBFCs have found it difficult t o protect int erest
mar gins, putt ing pressur e on profita bility. With conversion into a bank , NBFCs could h ave
access to short-term retail deposits, which would significantly reduce their funding costs. A
universal bank would also be expected to provide the full range of banking products to its
customers, from small loans for retail individuals to project financing for big corporates
and multinationals.
D ep o s i t o r P r o t ec t i o n
Unlike deposits with SCBs (insured upto Rs. 0.1 million), deposits placed with NBFCs are
not insured, and there is no guarantee of repayment of principal and/or payment of
interest. In recent years, the RBI has initiated several measures for the benefit of
depositors, especially given the large number and varying size of various NBFCs. These
measures include:
q Upgrading legal recourse, by pursuing the enactment of legislation for protection of
interest of depositors in financial establishments;
q Greater transparency, through an extensive publicity campaign using the print and
electronic media to educate the depositors;
q Enhancing the effectiveness of supervision, by conducting training programmes for
personnel/executives of NBFCs in order to familiarise them with the objectives, genesis
an d focus of th e RBI's regula tions; seminars for t he civil and police personn el of the
State Governments; and training programmes/seminars for auditors to familiarise
them with th e directions a nd r egulations of the RBI as a pplicable to the NBFCs a s also
the directions applicable to statutory auditors of the NBFCs;
q Reinforcing int er -regu lat or co-ordina tion by holding meetings with oth er regu lat ors
like the Registrars of Companies, Department of Company Affairs of the Central
Governm ent as well as t he civil and police officials of th e Sta te Governmen ts.
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TRENDS IN PRODUCTION, CONSUMPTION, PRICE, CAPA CITYUTILISATION
Since the NBFCs are not categorised under manufacturing sector, these trends are not
available. However, fina ncial indicators relevant for a finan cial int ermediary a re pr esentedbelow:
B u s i n e s s P r o f i l e
(Rs. m illion, except nu mber of reporting compa nies)
At endAt end--MarchMarch 19981998 19991999 20002000 20012001 20022002
Num ber of report ing Compan ies 1,429 1,547 1,005 981 910
Total Assets 455,081 470,485 513,243 538,780 582,900
PDs 238,205 204,289 193,417 180,840 188,220
Net Owned Fund s 84,645 91,183 62,229 49,430 43,830
Of whic h RNBCs
Num ber of report ing Compan ies 9 11 9 7 5
Total Assets 107,183 110,805 113,173 162,440 184,580
PDs 102,487 106,443 110,038 116,250 128,890
Net Owned Fu nds -1,085 -6,664 -4,428 -1,790 1,110
Of which other NBFCs
Num ber of report ing Compan ies 1,420 1,536 996 974 905
Total Assets 347,897 359,680 400,070 376,340 398,320
PDs 135,717 97,847 83,380 64,590 59,330
Net Owned Fu nds 85,730 97,847 66,657 51,220 42,720
Ty p e -w is e P ro f i l e o f t h e NBFC Sec to r Number o f companies
At en d-Mar ch 2000 2001 2002
Equipmen t Leasing (ELC) 56 58 56
Hire Pu rchase (HPC) 465 470 463Investm ent s an d Loans (ILC) 188 170 231
RNBCs 9 7 5
Others 287 276 155
T o t a l 1,005 981 910
R eg i o n - W i s e P r o f i l e
(Num ber of com panies)
As at endAs at end--MarchMarch 20002000 20012001 20022002
OthersOthers RNBCsRNBCs TotalTotal OthersOthers RNBCsRNBCs TotalTotal OthersOthers RNBCsRNBCs TotalTotal
North 251 251 253 253 271 271
North -East 3 1 4 0 3 3
Ea st 26 6 32 21 3 24 18 3 21Central 122 2 124 123 3 126 92 2 94
West 86 86 81 81 70 70
South 508 508 496 1 497 451 451
TotalTotal 996996 99 1,0051,005 974974 77 981981 905905 55 910910
Mumba i 68 68 62 62 52 52
Chennai 340 340 349 349 317 317
Kolkat a 23 5 28 20 3 23 18 3 21
Delh i 90 90 114 114 111 111
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Asse t Pro f i le (exc l . RNBCs)
(Rs. million, except percentages)
As at endAs at end--MarchMarch 20002000 20012001 20022002
AmountAmount % of total% of total AmountAmount % of total% of total AmountAmount % of total% of total
Loans & ICD 105,614 26.4 102,710 27.3 137,100 34.4Investm ents 55,787 13.9 43,440 11.5 43,340 10.9
HP 120,168 30.0 128,870 34.2 132,020 33.1
Equipmen t & Leasing 51,467 12.9 46,810 12.4 31,120 7.8
Bills 12,801 3.2 7,880 2.1 6,730 1.7
Others 54,234 13.6 46,630 12.4 48,020 12.1
Total 400,070 100 376,340 100 398,330 100
Pu b l i c De p o s i t s (PDs ) P ro f i l e
(Rs. m illion, except percentages)
At end-March 2000 % 2001 % 2002 %
ELC 10,212 5.3 14,500 8.0 6,680 3.5
HP C 40,835 21.1 36,590 20.2 37,090 19.7
ILC 25,175 13.0 7,850 4.3 10,290 5.5
RNBC s 110,038 56.9 116,250 64.3 128,890 68.5
Others 7,158 3.7 5,640 3.1 5,280 2.8
Total 193,417 100 180,830 100 188,230 100
Reg io n -Wis e P ro f i l e o f PDs
(Rs. million)
As at endAs at end--MarchMarch 20002000 20012001 20022002
OthersOthers RNBCsRNBCs TotalTotal OthersOthers RNBCsRNBCs TotalTotal OthersOthers RNBCsRNBCs TotalTotalNorth 5,290 0 5,290 5,750 0 5,750 5,540 0 5,540
North -East 15 56 70 0 0 0 40 0 40
Ea st 20,664 75,066 95,731 2,900 76,420 79,320 2,390 78,120 80,510
Central 1,318 34,916 36,234 1,250 39,800 41,050 1,300 50,770 52,070
West 24,412 24,412 20,410 20,410 14,670 14,670
South 31,681 31,681 34,280 40 34,320 35,380 35,380
TotalTotal 83,38083,380 110,038110,038 193,418193,418 64,59064,590 116,260116,260 180,850180,850 59,32059,320 128,890128,890 188,210188,210
Mum bai 23,812 0 23,812 20,110 0 20,110 14,450 0 14,450
Chennai 25,776 0 25,776 29,180 0 29,180 31,830 0 31,830
Kolkat a 20,619 74,467 95,085 2,870 76,420 79,290 2,390 78,120 80,510
Delh i 4,527 0 4,527 4,920 0 4,920 4,600 0 4,600
Ma tu r i t y Pa t te rn o f PDs (e x c l . RNBCs )
(Rs. m illion, except percentages)
At endAt end--MarchMarch 20002000 20012001 20022002
AmountAmount %% AmountAmount %% AmountAmount %%
Less th an 1 year 13,235 15.9 17,210 26.6 14,830 25.0
1-2 year s 16,159 19.4 17,410 27.0 14,190 23.9
2-3 year s 24,625 29.5 20,380 31.5 21,980 37.0
3-5 year s 12,185 14.6 8,420 13.0 7,790 13.1
More th an 5 years 17,176 20.6 1,180 1.8 540 0.9
TotalTotal 83,38083,380 100100 64,60064,600 100100 59,33059,330 100100
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In te res t Ra te Pa t te rn o f PDs (exc l . RNBCs)
(Rs. million, except percentages)
At endAt end--MarchMarch 20002000 20012001 20022002
AmountAmount %% AmountAmount %% AmountAmount %%
Upt o 10% 524 0.5 230 0.3 1,180 1.810-12% 875 0.9 5,885 7.1 14,040 21.7
12-14% 23,367 23.9 37,021 44.4 27,590 42.7
14-16% 36,627 37.4 28,808 34.6 15,330 23.7
More th an 16% 36,454 37.3 11,436 13.7 6,460 10.0
TotalTotal 97,84797,847 100100 83,38083,380 100100 64,60064,600 100100
Bo r ro w in g P ro f i l e (e x c l . RNBCs )
(Rs. m illion, except percentages)
At endAt end--MarchMarch 20020000 20012001 20022002
AmountAmount %% AmountAmount %% AmountAmount %%
Central/State Government s 26,036 11.6 30,410 13.5 33,530 14.0
Foreign 6,013 2.7 6,700 3.0 6,700 2.8
In te r-corpora te borrowings 18,427 8.2 28,660 12.7 19,960 8.3
Issue of secured or convertible
debentures
33,488 14.9 37,580 16.7 41,800 17.4
Ba nk s 56,328 25.1 65,450 29.0 79,180 33.0
FIs 13,845 6.2 16,940 7.5 15,460 6.4
CP 5,544 2.5 6,270 2.8 7,810 3.3
Others 64,802 28.9 33,580 14.9 35,550 14.8
TotalTotal 224,484224,484 100100 225,590225,590 100100 239,990239,990 100100
I n d u s t r y Co n c e n t ra t i o n b y As s e ts (e x c l . RNBCs )
At endAt end--MarchMarch 20002000 20012001 20022002
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
Less tha n Rs. 2.5 million 82 79 62 70 51 50
Rs. 2.5-5 million 95 364 91 350 88 330
Rs. 5-20 million 397 4,343 389 4,210 383 4,160
Rs. 20-100 million 266 11,420 280 11,930 247 10,760
Rs. 100-500 million 90 19,211 89 19,810 74 15,940
Rs. 500-1,000 million 16 11,144 15 10,190 19 13,410
Rs. 1,000-5,000 million 28 78,252 28 71,300 23 59,620
Above Rs. 5,000 million 22 275,257 20 258,480 20 294,060
TotalTotal 996996 400,070400,070 974974 376,340376,340 905905 398,330398,330
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I n d u s t r y Co n c e n t ra t i o n b y De p o s i t s (e x c l . RNBCs )
At endAt end--MarchMarch 20002000 20012001 20022002
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
No ofNo of
companiescompanies
AmountAmount
(Rs. million(Rs. million))
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
Less tha n Rs. 2.5 million 205 3,948 225 8,070 214 11,200Rs. 2.5-5 million 360 1,942 346 1,880 300 1,280
Rs. 5-20 million 314 3,629 305 6,920 298 3,610
Rs. 20-100 million 43 2,021 34 940 30 800
Rs. 100-500 million 46 27,732 37 7,770 38 7,180
Rs. 500-1,000 million 9 8,776 12 9,240 11 8,460
Rs. 1,000-5,000 million 19 35,332 14 22,990 14 26,800
Above Rs. 5,000 million 1 6,790
Total 996 83,380 974 64,600 905 59,330
I n d u s t r y Co n c e n t ra t i o n b y NOF (e x c l . RNBCs )
At endAt end--MarchMarch 20002000 20012001 20022002
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
No ofNo of
companiescompanies
AmountAmount
(Rs. million)(Rs. million)
Less th an Rs. 2.5 million 205 -2,152 225 -8,590 214 -13,510
Rs. 2.5-5 million 360 1,162 346 1,160 300 1,030
Rs. 5-20 million 314 5,020 305 4,980 298 4,770
Rs. 20-100 million 43 2,941 34 2,240 30 2,040
Rs. 100-500 million 46 10,602 37 7,750 38 7,980
Rs. 500-1,000 million 9 6,284 12 8,040 11 7,980
Rs. 1,000-5,000 million 19 42,800 14 30,630 14 32,430
Above Rs. 5,000 million 1 5,010
TotalTotal 996996 66,65766,657 974974 51,22051,220 905905 42,72042,720
DEMAND SUPPLY POSITION
L i a b i l i t i e s P r o f i l e
In recent year s, the operat ions of NBFCs have witn essed significant changes especially on
the liability side. Although the definition of PDs of NBFCs has been revised and no strict
comparison is possible between deposits of NBFCs before and after 1998, there are clear
indications of a sharp decline in the relative importance of NBFC deposits, as compared
with ba nk dep osits. There ha ve also been considera ble cha nges in th e shar e of differen t
types of NBFCs in total P Ds held by them. While the sha res of RNBCs and H PCs increased
significantly, those of ILCs declined. RNBCs were the only category of NBFCs whose PD
increased in absolute terms between 1998 and 2002. In future, with reduced ceiling on
interest rates on PDs, the importance of PDs in their sources of funds is expected to decline
considerably. The share of PDs in total loans for the 17 sample companies has declined
from 38.6% dur ing FY1999 to 19.2% dur ing FY2002, and t o 17% dur ing F Y2003.
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Sha re o f PD s in t o t a l l i ab i l i t i e s of NB FC s
March 2000March 2000 March 2001March 2001 March 2002March 2002
RNBCsRNBCs OthersOthers TotalTotal RNBCsRNBCs OthersOthers TotalTotal RNBCsRNBCs OthersOthers TotalTotal
97.2% 20.8% 37.7% 71.6% 17.2% 33.6% 69.8% 14.9% 32.3%
As th e shar e of PDs h as declined, other s ources of funds , especially borr owing from bank s,
mar ket borrowings, borr owings from th e Government and inter -corporat e borrowings ha veemerged as major sources of funding for NBFCs. Borrowings from banks have increased
significantly in recent yearsfrom Rs. 60.38 billion (26.7% of borrowings) at end-March
1999 to Rs. 79.18 billion (33% of borrowings) at end-March 2002. However, there has been
a decline in int er -corpora te borrowing, which ha s been compen sat ed by an increa se in other
sources, such as securitised commercial paper (CP). Capital markets could also have an
increasingly important role in an environment of declining PDs. Borrowings from banks
have been facilitated by various RBI guidelines. During FY2003, the RBI directed that all
new loan s gran ted by ban ks to NBFCs for t he pu rpose of on -lending to SSI sectors would
be reckoned for priority sector lending. Lending by SCBs to NBFCs for on-lending to
agriculture is also included in priority sector lending. Earlier, banks were precluded from
financing investments of NBFCs in other companies and ICDs/loans in other companies.
The position has been reviewed and banks have been advised that Special Purpose
Vehicles (SPVs) which comply with th e certa in conditions would not be tr eat ed as
investment companies an d t herefore would not be considered as NBFCs.
S o u r c e s o f B o r r o w i n g s o f N BF C s ( e x c lu d i n g R N B C s )(Percent of borrowin gs)
As at endAs at end--MarchMarch 19981998 19991999 20002000 20012001 20022002
Central/State Government s 10.7 12.1 11.6 13.5 14.0
Foreign 1.7 2.8 2.7 3.0 2.8
In te r-corpora te borrowings 11.2 13.6 8.2 12.7 8.3
Issu e of secured or convert ible debent ur es 12.0 17.7 14.9 16.7 17.4
Ban ks 33.6 26.7 25.1 29.0 33.0
FIs 12.4 6.8 6.2 7.5 6.4
CP 0.7 2.1 2.5 2.8 3.3Others 17.7 18.3 28.9 14.9 14.8
TotalTotal 100100 100100 100100 100100 100100
As a result of changes in t he financing patt ern of NBFCs, their dependen ce on h igher cost
of funds has increased. High cost of funds could induce NBFCs into excessive risk-taking
and may, thereby, result in adverse selection. While NBFCs may not have much control
over the cost of funds, they can improve their profitability by operating more efficiently.
The operating cost of NBFCs as a group have increased in the recent years. In fact, their
operating cost a re h igher th an tha t of even co-operat ive banks.
The deposit maturity structure and interest rate structure of NBFCs has continued to
soften over the past few years, reflecting the declining interest rate environment and
reduction in ceiling for deposit rates. The ceiling on annual interest rates on PDs payable
by NBFCs reduced from 16% to 14% effective April 1, 2001; to 12.5% effective November 1,
2001; and to 11% effective March 4, 2003. The reduction in ceiling on interest rates was in
consona nce with easy liquidit y conditions ema na tin g from str ong capita l flows on th e
supply side and poor credit off-take on the demand side. The share of PDs with annual
interest rate of 12% and above has declined from 98.6% at end-March 1999 to 76.4% at
end-March 2001, and to 59.4% at end-March 2002. While there has been a gradual
repayment of the high-cost PDs accepted by NBFCs, the overhang of deposits, contracted at
14% an d above, remains s ubst an tial at 20.1% of total PDs. This high int erest r at e, by and
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large, also reflects the risk premium NBFCs typically pay vis--vis bank deposits. At the
same time, higher deposit rates further affect their commercial viability in a scenario of
falling inter est ra tes.
P D M a t u r i t y a n d I n t e r e s t R a t e S t r u c t u r e o f N B F C s (e x c lu d i n g R N BC s )(Percent of PDs)
As at endAs at end--MarchMarch 19981998 19991999 20002000 20012001 20022002Maturity StructureMaturity Structure
Less th an 1 year 19.8 17.3 15.9 26.6 25.0
1-2 year s 29.8 29.7 19.4 27.0 23.9
2-3 year s 27.5 29.6 29.5 31.5 37.0
3-5 year s 21.2 21.7 14.6 13.0 13.1
More th an 5 years 1.6 1.7 20.6 1.8 0.9
TotalTotal 100100 100100 100100 100100 100100
Interest Rate Structure (% per annum)
Upt o 10% 1.1 0.5 0.3 1.8 6.0
10-12% 1.3 0.9 7.1 21.7 34.6
12-14% 9.6 23.9 44.4 42.7 39.2
14-16% 48.9 37.4 34.6 23.7 14.0
More th an 16% 39.2 37.3 13.7 10.0 6.1
TotTotalal 100100 100100 100100 100100 100100
L e n d i n g P r o f i l e
The major portion of the assets of NBFCs (excluding RNBCs) continue to be in the form of
their specialised areas of HP and EL. However, the share of HP/EL in total assets has
declined from 42.9% at end-March 2000 to 41% at end-March 2002. There has a shift in
asset deployment towards loans and ICDs reflecting the slowdown in economic activity and
changes in taxat ion.
Information regarding the extent of NPAs in the NBFC sector is not available on a
consistent basis. However, according to th e limited informa tion available, the asset qualityof NBFCs det eriorat ed in th e late-1990s, before recovering in r ecent year s.
N P A s a s p e r c e n t o f c r e d i t e x p o s u r e o f N B F C s
MarchMarch
19981998
MarchMarch
19991999
MarchMarch
20002000
MarchMarch
20012001
MarchMarch
20022002
SeSeptemberptember
20022002
Gross NPAs 11.4 10.2 9.9 11.5 10.6 9.7
Net NPAs 6.7 7.0 9.5 5.6 3.9 4.3
REVIEW OF PERFORMANCE
The profitability analysis of the NBFCs (excl. RNBCs) indicates that this segment recorded
losses during FY2001 and FY2002, as the decline in financial expenditure was less than
the decline in both fund-based and fee-based income. The decline in fund income was
particularly steep in recent yearswith decline of 4.7% during FY2002, and 16.7% during
FY2001. The Net operating income (NOI)comprising income minus interest
expenditureof NBFCs has declined in recent years because of the significant decline in
fund-based income caused by lower interest rates, and lower HP/EL business. However,
interest expenditure has declined at a lower rate, mainly because of the longer maturity
period of PDs. The share of outstanding PDs exceeding 2 years increased from 46.3% at
end-March 2001 to 51.1% at end-March 2002. As percent of average assets, while fund-
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based in come declined from 16.58% dur ing FY2000 to 13.52% dur ing FY2001, an d to
12.92% during FY2002, interest costs have tended to be sticky. Interest expenditure as
percent of avera ge asset s declined from 9.71% during F Y2000 to 8.76% dur ing FY2001, an d
to 8.51% during FY2002. Total expenditure fell less sharply as operating expenditure and
ta x provisions ha ve tended t o be sticky. Becau se of lower NOI, th e profita bility position h as
showed signs of deterioration in recent years. However, net losses declined from Rs. 3.25
billion during FY2001 to Rs. 2.12 billion during FY2002, because of a limited decline inoperating expenditure. The losses during FY2001 and FY2002 were contributed to a large
extent by the huge losses suffered by Apple Finance and Tata Finance. Operating costs of
NBFCs continue to be higher than those of SCBs.
T r e n d s i n F i n a n c i a l P e r f o r m a n c e o f N B F C s (e x c l. R N B Cs )
Rs. millionRs. million % of average assets% of average assets
FYFY 20002000 20012001 20022002 20002000 20012001 20022002Fu nd based Income 62,990 52,470 50,050 16.58% 13.52% 12.92%
Non-fund based income 4,710 3,720 3,520 1.24% 0.96% 0.91%
Total Income 67,700 56,190 53,570 17.82% 14.47% 13.83%
Finan cial Expenditure 36,870 34,000 32,970 9.71% 8.76% 8.51%
Operating & Other Expenditure 26,760 23,410 20,240 7.04% 6.03% 5.23%
Total Expendi ture 63,630 57,410 53,210 16.75% 14.79% 13.74%
Operating Profit 4,070 -1,220 360 1.07% -0.31% 0.09%
Tax P rovisions 2,700 2,030 2,480 0.71% 0.52% 0.64%
Net Profit 1,370 -3,250 -2,120 0.36% -0.84% -0.55%
Assets 400,070 376,340 398,320
An analysis of the financial performance of the 17 sample companies indicates an improved
fina ncial performa nce dur ing FY2003. Net operating in come (NOI) as per cent of avera ge
assets increased because of significant decline in interest costs. As a result, the 17
companies reported a combined net profit of Rs. 2,264 million during FY2003, as compared
with a net loss of Rs. 671 million d ur ing FY2002.
T r e n d s i n F i n a n c ia l P e r f o r m a n c e o f s a m p l e c o m p a n i e sRs. millionRs. million % of average assets% of average assets
FYFY 20012001 20022002 20032003 20012001 20022002 20032003
Total Income 27,658 26,152 27,301 18.60% 16.47% 16.14%
Finan cial Expenditure 13,432 13,582 13,160 9.03% 8.56% 7.78%
Operating & Other Expenditure 15,572 12,892 10,849 10.47% 8.12% 6.41%
Total ExpenditureTotal Expenditure 29,00529,005 26,47426,474 24,00924,009 19.51%19.51% 16.68%16.68% 14.19%14.19%
Operating Profit -1,347 -322 3,292 -0.91% -0.20% 1.95%
Pr ovisions 554 349 1,028 0.37% 0.22% 0.61%
Net Profit -1,901 -671 2,264 -1.28% -0.42% 1.34%
Assets 153,227 164,259 174,020
The balance sheets of the NBFCs have been strengthening in recent years in response toprudential norms. In terms of CAR, only 43 NBFCs (incl. RNBCs) reported a CAR of less
than 12% at end-March 2002, as compared with 61 at end-March 2001, and 88 at end-
March 1999. Further, NPAs in gross and net terms, as a percentage of credit exposure,
have also been declining.
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C AR of r ep or t ing N B FC s
NBFC CategoryNBFC Category CAR Range (%)CAR Range (%)
Less thanLess than
1010
1010--1212 1212--1515 1515--2020 2020--3030 Above 30Above 30 TotalTotal
March 2000
ELCs 7 0 1 3 12 23 46
HP Cs 11 0 3 31 52 253 350ILCs 12 1 3 8 16 159 199
RNBCs 2 0 0 0 1 1 4
TotalTotal 3232 11 77 4242 8181 436436 599599
March 2001
ELCs 9 1 1 4 8 30 53
HP Cs 22 1 5 29 58 313 428
ILCs 23 2 2 5 15 180 227
RNBCs 2 1 0 0 1 2 6
Total 56 5 8 38 82 525 714
March 2002
ELCs 10 0 1 4 9 32 56
HP Cs 17 0 8 32 54 334 445
ILCs 15 0 1 9 11 121 157RNBCs 1 0 0 1 1 2 5
TotalTotal 4343 00 1010 4646 7575 489489 663663
NEW PROJECTS
Not Applicable
OUTLOOK
Unt il the ear ly 1990s, NBFCs grew rapidly, but t here was no regulation of th eir asset side.
However, the financial sector reforms of the late-1990s have brought their asset side alsound er t he r egulation of the RBI. The aggregate a ssets of the NBFC sector increased a t a 3-
year CAGR of 7.4% to Rs. 582.90 billion at end-March 2002. Because of the change in tax
environment, while th e tr aditional business of EL/HP is expected t o grow at a slower pace
in the future; loans, investments and ICDs are expected to increase at a faster rate in the
futur e. The EL/HP in dust ry ha s been adversely impacted by th e service tax imposed in the
Union Bu dget 2001-02.
G row th R a t e in N B FC ' s (exc l . R N B C ) as se t sby typ e o f ac t iv i ty an d s i ze o f N B FC
Type of ActivityType of Activity By size of assetsBy size of assets
GrowthGrowth
(FY2002)(FY2002)
33--yearyear
CAGRCAGR
GrowthGrowth
(FY2002)(FY2002)
33--yearyear
CAGRCAGR
Loans & ICD 33.5% 85.2% Less th an Rs. 2.5 million -28.6% -45.1%
Invest men ts -0.2% -0.1% Rs. 2.5-5 million -5.7% -12.4%
HP 2.4% 0.2% Rs. 5-20 m illion -1.2% 10.6%
Equ ipmen t & Leas ing -33.5% -0.6% Rs. 20-100 million -9.8% 3.8%
Bills -14.6% -15.0% Rs. 100-500 million -19.5% -2.1%
Others 3.0% -26.4% Rs. 500-1,000 million 31.6% -7.8%
Rs. 1,000-5,000 million -16.4% -9.8%
Above Rs. 5,000 million 13.8% 8.4%
TotalTotal 5.8%5.8% 3.5%3.5% 5.8%5.8% 3.5%3.5%
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The business of asset reconstruction is also likely to emerge in the NBFC sector following
the passage of the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (SARFAESI). Many NBFCs have sought to minimise the
impa ct of declining lending ra tes by focusing on higher -yielding segmen ts su ch as light
commercial vehicles (LCVs) and two-wheeler financing.
Reflecting the weeding out of many smaller NBFCs, the financially sound larger NBFCs
are expected to register higher growth in business. Although the NBFC sector (including
RNBCs) report ed an asset growth of 8.2% dur ing FY2002, the a sset growth was h igher for
NBFCs with asset base exceeding Rs. 5 billion. During FY2003, the asset base of the 17
companies in the ICRA sample increased 5.9% to Rs. 174 billion. Following a 5.4% decline
in income during FY2002, the income of the 17 companies also increased 4.4% during
FY2003 to Rs. 27.30 billion.
In response to the increased competition from SCBs, one NBFCKotak Mahindrahas
recently converted into a SCB. Conversion of NBFC into SCBs has many positive aspects.
At present, statutory constraints on raising cheap retail deposits (maturity should not be
less than 1 year) have meant that NBFCs have found it difficult to protect interest
mar gins, putt ing pressur e on profita bility. With conversion into a bank , NBFCs could h aveaccess to short-term retail deposits, which would significantly reduce their funding costs. A
universal bank would also be expected to provide the full range of banking products to its
customers, from small loans for retail individuals to project financing for big corporates
and multinationals.
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