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Non-Banking Financial Companies (NBFC ha!e rapidl" emerged as an important segment o# the Indian #inancial
s"stem. $oreo!er% NBFCs ass&me signi#icance in the small b&siness segment as the" primaril" cater to the credit
re'&irements o# the &norganised sector s&ch as wholesale ( retail traders% small-scale ind&stries and small
borrowers at the local le!el. NBFC is a heterogeneo&s gro&p o# #inancial instit&tions% per#orming a wide range o#
acti!ities like hire-p&rchase #inance% !ehicle #inancing% e'&ipment lease #inance% personal loans% working capital
loans% cons&mer loans% ho&sing loans% loans against shares and in!estment% etc. NBFCs are broadl" di!ided into
three categories namel" (i NBFCs accepting deposits #rom banks (NBFC-)* (ii NBFCs not accepting/holding
p&blic deposits (NBFC-N)* and (iii core in!estment companies (i.e. those ac'&iring share/sec&rities o# their
gro&p/holding/s&bsidiar" companies to the e+tent o# not less than ,-. o# total assets and which do not accept
p&blic deposits.
/he segment has witnessed considerable growth in the last #ew "ears and is now being recognised as
complementar" to the banking sector d&e to implementation o# inno!ati!e marketing strategies% introd&ction o#
tailor-made prod&cts% c&stomer-oriented ser!ices% attracti!e rates o# ret&rn on deposits and simpli#ied proced&res%
etc.
0hile the #&nctions o# NBFCs are 1&st like banks% there are #ew di##erences between both the instit&tions. /hese
are: (i NBFC cannot accept demand deposits* (ii NBFC is not part o# the pa"ment and settlement s"stem as well
as it cannot iss&e che'&es drawn on itsel# and (iii deposit ins&rance #acilit" o# )eposit Ins&rance ( Credit
2&arantee Corporation is not a!ailable #or NBFC depositors &nlike in the case o# banks.
Regulatory Framework
/he 3BI 4ct was amended in 5,,6 to pro!ide #or comprehensi!e reg&lator" #ramework #or NBFCs. 4s per the 3BI
(4mendment 4ct 5,,6% the 3BI can iss&e directions to NBFCs ( its7 a&ditors% prohibit deposit acceptance and
alienation o# assets b" NBFCs and initiate action #or winding &p o# NBFCs. /he new reg&lations pro!ide:
Comp&lsor" registration #or all NBFCs% irrespecti!e o# their holding o# p&blic deposits% #or commencing and
carr"ing on b&siness o# a non-b&siness #inancial instit&tion
/he amended act also classi#ied NBFCs into three broad categories i NBFCs accepting p&blic deposits* ii
NBFCs not accepting/holding p&blic deposits* and iii core in!estment companies (i.e. those ac'&iring
shares/sec&rities o# their gro&p/holding/s&bsidiar" companies to the e+tent o# not less than ,-. o# total
assets and which do not accept p&blic deposits.
$inim&m entr" point net-worth o# 3s 2.8 million which was s&bse'&entl" re!ised &pwards to 3s 2- million
)eposit mobilisation linked to net-worth% b&siness acti!ities and credit rating
$aintenance o# 52.8. o# their deposits in li'&id assets
Creation o# a 3eser!e F&nd and trans#er o# 2-. o# pro#it a#ter ta+ b&t be#ore di!idend to the #&nd
Ceiling on ma+im&m rate o# interest that NBFCs can pa" on their p&blic deposits
NBFCs with an asset si9e o# at least 3s 5 billion or a deposit base o# at least 3s 2-- million are re'&ired to
ha!e 4sset-:iabilit" $anagement s"stems and constit&te an 4sset-:iabilit" $anagement Committee
F&rther% in order to monitor the #inancial health and pr&dential #&nctioning o# NBFCs% the 3BI iss&ed directions
regarding acceptance o# deposits% pr&dential norms like capital ade'&ac"% income recognition% asset classi#ication
pro!isioning #or bad and do&bt#&l assets% e+pos&re norms and other meas&res. For Instance% capital to risk-
weighted assets ratio (C343 norms were made applicable to NBFCs in 5,,;. 4s per the C343 norms% e!er"
deposit taking NBFC is re'&ired to maintain a minim&m capital% consisting o# /ier I and /ier II capital% o# not less
than 52. (58. in case o# &nrated deposit-taking loan in!estment companies o# its aggregate risk-weighted
assets and o# risk-ad1&sted !al&e o# o##-balance sheet items. Besides% be#ore 2---% the pr&dential norms
applicable to banking sector and NBFCs were not &ni#orm. 0ithin the NBFC sector also% the pr&dential norms
applicable to deposit taking NBFCs were more stringent than those #or non deposit taking NBFCs. Since 2---%
the 3BI has initiated meas&res to red&ce the scope o# <reg&lator" arbitrage7 between banks% NBFCs-) ()eposit
taking NBFCs and NBFCs-N) (Non-)eposit taking NBFCs.
/he reg&lator" #ramework has &ndergone signi#icant change in the last #ew "ears. /he reg&lator" policies% which
mostl" #oc&sed on NBFCs-) &ntil past #ew "ears% are now pa"ing increasing attention to NBFCs-N) as well. /he
change in reg&lator" stance is largel" d&e to a signi#icant increase in both the n&mber and balance sheet si9e o#
NBFCs-N) segment that ga!e rise to s"stemic concerns. In !iew o# these de!elopments% NBFCs-N) with assets
si9e o# 3s 5 bn and abo!e were classi#ied as s"stemicall" important NBFCs (NBFCs-N)-SI and were s&b1ected
to <limited norms ( reg&lations7 s&ch as C343 and e+pos&re norms prescribed b" the 3BI. /he C343 #or these
companies has been set at 52. since $arch =5% 2--, and has been raised to 58. &pto $arch =5% 2-5-.
Trends & Progress of the NBFCs Business
Since late 5,;-s &p to mid 5,,-s% the n&mber o# NBFCs increased s&bstantiall" on the back o# eas" access o#
#&nds #rom capital market I>?s and deposits #rom the p&blic. In 5,;5% there were 6%-@= NBFCs. /he n&mber went
&p to 2A%--, in 5,,- and there were as man" as 88%,,8 NBFCs b" 5,,8. /he high deposit rates o##ered b"
NBFCs led in!estors to in!est their #&nds in NBFCs. /he deposit base o# the NBFCs grew at an a!erage rate o#
;;.@. per ann&m between the period 4pr-,5 to $ar-,6. Bowe!er% strong growth in NBFCs co&ld not be
s&stained as in the late 5,,-s se!eral loans granted b" the NBFCs t&rned stick"% leading some o# the large
NBFCs to de#a&lt in repa"ment to their depositors. /his led the 3BI to introd&ce stringent g&idelines in 5,,6-,;
which hampered the abilit" o# NBFC7s to raise deposits. Banks also became war" o# lending to NBFCs% which
translated into high cost o# #&nds #or NBFCs. $oreo!er% increasing competition #rom the banking s"stem that was
opened &p #or pri!ate sector banks in earl" 5,,-s a##ected the NBFCs b&siness. 2i!en these de!elopments%
man" NBFCs with asset base in e+cess o# 3s 5 billion had to e+it their operations. NBFCs% howe!er% reco!ered
#rom this phase and witnessed strong growth d&ring 2-----2.
Current cenario of the NBFCs
Business
In recent "ears% the n&mber o# NBFCs
once again has beg&n to decline on
acco&nt o# high cost o# #&nds% intense
competition with the banking sector and
increase in consolidation acti!it". /he
total n&mber o# NBFCs2 registered with
the 3BI declined b" -.8. ("-o-" to
52%6A- as at end-C&ne 2--,. /he
n&mber o# deposit taking NBFCs
(NBFCs-) also #ell sharpl" #rom 65- as
at end-C&ne 2--= to ==@ as at end-C&ne
2--,% primaril" d&e to the e+it o# man"
NBFCs #rom deposit taking acti!ities.
0ith the n&mber o# NBFCs-) declining
s&bstantiall"% the p&blic deposits held b"
NBFCs-) witnessed a sharp
contraction. F&rther% the decline in p&blic deposits held b" NBFCs is indicati!e o# shi#t in the pattern o# reso&rced
raised b" NBFCs. Since last #ew "ears% NBFCs ha!e pre#erred to raise their #&nds thro&gh bank loans/debent&res
as against p&blic deposits. 4s a res&lt% the ratio o# p&blic deposits o# NBFCs to the aggregate deposits o# SCBs
#ell to -.8=. as at end-$arch 2--, as against -.6=. as at end-$arch 2--;.
/he data re!eals that amongst !ario&s categories o# NBFCs% p&blic deposits held b" e'&ipment leasing
companies and loan companies registered signi#icant decline o# 6-.@. ("-o-" and A=.=. ("-o-" respecti!el"
d&ring FD-,. /his is mainl" beca&se o# reclassi#ication o# some o# these companies as asset #inance companies.
Concomitantl"% p&blic deposits o# asset #inance companies increased b" 56.8. ("-o-" d&ring FD-,.
0hile p&blic deposits o# NBFCs ranged
#rom less than 3s 8 mn to abo!e 3s 8--
mn% almost @-.,. o# NBFCs held p&blic
deposits which amo&nted to less than
3s 8 mn. F&rther% e+cept the deposit-
class <more than 3s 5-- mn ( &p to 3s
2-- mn7 and <3s 2-- mn ( &p to 3s 8--
mn7% the deposits held b" NBFCs in all
deposit-gro&ps declined d&ring FD-,.
/otal assets/liabilities o# NBFCs
(e+cl&ding 3NBCs registered a growth
o# 5.=. ("-o-" d&ring FD-, as against
8=.@. ("-o-" d&ring the pre!io&s #iscal.
/he signi#icant moderation in growth o#
assets can largel" be attrib&ted to the
decline in assets o# loan companies.
4mong NBFC gro&p% asset #inance companies (4FCs held the largest share in total assets/liabilities (6-.=..
4FCs contin&ed to witness considerable rise in assets d&ring FD-, primaril" d&e to reclassi#ication o# NBFCs that
was initiated in )ecember 2--@ and the process o# which is still contin&ing. 4ssets o# loan companies% on the
other hand% declined d&ring FD-, a#ter registering a s&bstantial growth d&ring FD-; #ollowing the restoration o#
IFCI :td and /FCI :td #rom FI categor" to loan categor" o# NBFCs. 4ssets o# e'&ipment leasing companies
contin&ed to decline s&bse'&ent to reclassi#ication o# NBFCs.
F&rther% the asset holding pattern remained highl" skewed in FD-,% with 1&st A.A. o# NBFCs with asset si9e o#
<abo!e 3s 8 bn7 holding almost ,8.;. o# total asset !al&e o# all NBFCs.
Borrowings
=
% which has emerged as a ma1or so&rce o# #&nds #or NBFCs% registered growth o# ,.=. ("-o-" as at
end-$arch 2--,. 0hile borrowings b" e'&ipment leasing companies and loan companies declined% those b"
asset #inance companies and hire p&rchase companies witnessed an increase d&ring FD-,. F&rther% borrowings
#rom banks ( #inancial instit&tions witnessed a signi#icant rise o# 2,.=. ("-o-" as at end-$arch 2--,. /he
borrowings #rom the 2o!ernment which had registered a sharp growth d&ring FD-; d&e to incl&sion o# IFCI :td
and /FCI :td into NBFC categor"% declined b" 25.A. ("-o-" as at end-$arch 2--,.
Financial Performance of NBFCs
?perations o# NBFCs% which witnessed sharp contraction d&ring FD-A d&e to a decline in reso&rce mobilisation%
impro!ed therea#ter. )&ring FD-;% tho&gh e+pendit&re witnessed an increase o# A8.A.% rise in both #&nd based
income and #ee based income led to signi#icant growth in operating pro#its (2@=.2. "-o-" d&ring FD-; and net
pro#its (2,;.=. "-o-" d&ring FD-;. )espite the !olatile domestic #inancial markets% #inancial per#ormance o#
NBFCs in terms o# income and net pro#its remained modest. E+pendit&re witnessed some deceleration in growth
d&ring FD-,. Bowe!er% the pace at which the e+pendit&re increased d&ring FD-, was higher than that #or income%
in t&rn leading to a 2.2. ("-o-" decline in operating pro#it. Net pro#it% on the other hand% registered a moderate
growth mainl" d&e to lower pro!isioning #or ta+. 2i!en the moderation in income% the cost to income ratio
deteriorated to 6A.5. d&ring FD-, #rom @;.,. d&ring FD-;.
2ross N>4 as well as net N>4 (as percentage o# gross ad!ances ( net ad!ances respecti!el" contin&ed to
decline d&ring 2--6--;. 4mong NBFC gro&p% gross N>4 as percentage o# gross ad!ances o# e'&ipment leasing (
hire p&rchase companies increased d&ring FD-; on acco&nt o# reclassi#ication o# NBFCs.
In contrast to the trend d&ring the last #ew "ears% 2ross N>4 ratio increased to 2.6. d&ring FD-, #rom 2.5.
d&ring FD-;. Net N>4 remained negati!e with pro!isions e+ceeding N>4 at end-$arch 2--,. 4mongst the NBFC
segments% there was a sharp impro!ement in the asset '&alit" (as re#lected in !ario&s categories o# N>4s o#
e'&ipment leasing companies while asset '&alit" o# hire p&rchase companies witnessed sharp deterioration
d&ring FD-, as compared against the pre!io&s "ear.
In case o# capital ade'&ac" ratio% the
n&mber o# NBFCs with less than the
minim&m reg&lator" Capital to risk-
weighted a!erage ratio (C343 o# 52.
declined to , at end-$arch 2--, as
against A6 as at end-$arch 2--;.
F&rther% at end-$arch 2--,% almost
,8.6. o# NBFCs had C343 o# 52. or
more as compared with ;8.@. o#
NBFCs d&ring the corresponding period
o# the pre!io&s #inancial "ear. /his
indicates that compliance with C343
re'&irement has impro!ed in FD-,.
/he ratio o# p&blic deposits to net owned
#&nd
A
(N?F #or all categories o# NBFC
remained &nchanged at -.2. as at end-
$arch 2--, #rom the corresponding
period o# the pre!io&s #inancial "ear. 4mong NBFC gro&p% while the ratio o# p&blic deposits to N?F #or loan
companies and hire p&rchase companies declined d&ring FD-,% that o# remaining categories registered a
marginal increase.
!m"act of #lobal Financial Crisis on NBFCs
/he deepening o# global #inancial crisis in 2--; led to dr"ing &p o# e+ternal ro&te o# #inancing #or the Indian
corporate sector. F&rther% with rising risk a!ersion among international in!estors% there was a s&bstantial o&t#low
o# #oreign #&nds #rom domestic e'&it" markets% making it di##ic&lt #or companies to raise #&nds domesticall". 2i!en
the tight li'&idit" conditions% companies redeemed their in!estments in m&t&al #&nds to #inance their own #&nding
needs. /he wa!e o# redemptions was witnessed in m&t&al #&nds which in t&rn a##ected NBFCs segment as
m&t&al #&nds is the ma1or so&rce o# debt #inancing #or NBFCs.
F&rther% with the deteriorating credit en!ironment% NBFCs pro!iding &nsec&red personal loans and cons&mer
#inance witnessed rise in their non per#orming assets. /he impact o# slowing domestic demand was primaril" #elt
in a&tomobile sector. /he demand #or !ehicle #inance (especiall"% commercial !ehicle% two-wheeler ( three
wheeler #inance witnessed s&bstantial decline. /his co&pled with increased le!els o# asset '&alit" slippages%
ha!e ad!ersel" impacted pro#itabilit" o# NBFC sector in FD-,.
2i!en the worsening li'&idit" conditions o# NBFCs% the 3BI anno&nced a slew o# li'&idit" a&gmentation meas&res
which incl&de:
i. NBFCs-N)-SI were permitted as a temporar" meas&re to raise short-term #oreign c&rrenc" borrowings
&nder the appro!al ro&te s&b1ect to #&l#illment o# certain conditions. /he reso&rces raised were to be &sed
onl" #or re#inancing o# short-term liabilities and not #or creation o# #resh assets. It was also ad!ised that the
ma+im&m amo&nt sho&ld not e+ceed 8-. o# the N?F or FSG 5- mn (or its e'&i!alent% whiche!er was
higher. Ele!en companies were granted permission &nder the #acilit" to borrow #&nds to the t&ne o# FSG
;=A.,8 mn pl&s #oreign c&rrenc" e'&i!alent o# 3s 58.@@ bn (not a!ailed o# o&t o# which se!en ha!e
borrowed so #ar to the e+tent o# FSG @A8.8; mn.
ii. Banks were permitted% on a temporar" basis% to a!ail o# li'&idit" s&pport &nder the :4F window thro&gh
rela+ation in maintenance o# S:3 to the e+tent o# &p to 5.8. o# their N)/:% e+cl&si!el" #or meeting the
#&nding re'&irements o# NBFCs and m&t&al #&nds.
iii. /he risk weight on banks7 e+pos&re to NBFCs-N)-SI was red&ced to 5--. #rom 528. irrespecti!e o#
credit rating% while e+pos&re to 4sset Finance Companies which attracted risk weight o# 58-. was also
red&ced to 5--..
i!. NBFCs-N)-SI were permitted to a&gment their capital #&nds b" iss&e o# >erpet&al )ebt Instr&ments.
!. )e#erred the proposed increase in the C343 to be maintained b" NBFCs-N)-SI to 52. and s&bse'&entl"
to 58. b" one "ear% i.e. 52. b" $arch =5% 2-5- and 58. b" $arch =5% 2-55.
!i. >ro!ided direct lending #acilit" as a :ender o# :ast 3esort (:?:3 where 3BI lends to NBFCs-N)-SI
against their rated C>s thro&gh a S>H b" s&bscribing to its bonds. /he #acilit" was operationalised in
Can&ar" 2--, thro&gh an S>H called <I)BI S4SF /r&st7 to pro!ide li'&idit" s&pport against in!estment
grade paper o# NBFCs% s&b1ect to #&l#illment o# certain conditions. It was designed as a :?:3 #acilit" to
#acilitate an orderl" downsi9ing o# balance sheet o# #inanciall" so&nd NBFCs which #aced short term
temporar" li'&idit" re'&irement. /he #acilit" has been a!ailed b" onl" one NBFC so #ar which has drawn 3s
5-.A- bn &nder the scheme and there is no o&tstanding balance as on date.
/he slew o# meas&res anno&nced b" the 3BI co&pled with red&ction in ke" polic" interest rates% res&lted in
grad&al impro!ement in domestic li'&idit" conditions% in t&rn pro!iding some s&pport to the NBFCs segment.
In the past #ew months% domestic and e+ternal #inancing conditions ha!e witnessed a considerable impro!ement.
4lso% there has been some res&mption o# #oreign capital in#lows in the domestic e'&it" market. :i'&idit"
conditions ha!e remained com#ortable as indicated b" easing o# call mone" rates and increased reco&rse o#
banks to re!erse repo window. In !iew o# the a#orementioned de!elopments% the 3BI in it7s I2 FD5- re!iew o#
monetar" polic" withdrew some li'&idit" boosting meas&res that were introd&ced as a part o# monetar" stim&l&s
in FD-,. /he special term repo #acilit" #or SCBs% #or #&nding to NBFCs% m&t&al #&nds% and ho&sing #inance
companies was terminated. In addition to this% the 3BI initiated #ew reg&lator" meas&res with regards to the
NBFCs. /hese incl&de:
Introd&ction o# a categor" o# NBFCs as <in#rastr&ct&re NBFCs7% de#ined as entities which hold minim&m o#
68. o# their total assets #or #inancing in#rastr&ct&re pro1ects.
:inking the risk weights o# banks7 e+pos&re to in#rastr&ct&re NBFCs to the credit rating assigned to the
NBFC b" e+ternal credit assessment instit&tions (EC4Is.
Challenges & Future $utlook
0hile NBFCs ha!e witnessed s&bstantial growth o!er the "ears% there are #ew areas o# concern which need to be
addressed. For instance% while NBFCs ha!e en1o"ed an edge o!er banks in semi-&rban ( r&ral markets where
banking network is not "et strong% the" ha!e limited spread in &rban markets. Nonetheless% in recent "ears%
NBFCs ha!e beg&n to create niches #or themsel!es that are o#ten neglected b" banks. /hese primaril" incl&de
pro!iding #inance to non-salaried indi!id&als% traders% transporters% stock brokers% etc.
In the past #ew "ears% the increased competition #rom banks in the retail #inance segment has led to e+cess
di!ersi#ication b" NBFCS #rom their core b&siness acti!ities. /he sector has witnessed introd&ction o# !ario&s
inno!ati!e prod&cts s&ch as &sed !ehicles #inancing% small personal loans% three-wheeler #inancing% I>?
#inancing% #inance #or t"res ( #&el% asset management% m&t&al #&nd distrib&tion and ins&rance ad!isor"% etc.
Besides% NBFCs are aspiring to emerge as a one-stop shop #or all #inancial ser!ices.
NBFCs ha!e also !ent&red into riskier segments s&ch as &nsec&red loans% p&rchase #inance #or &sed commercial
!ehicles% capital market lending% etc. $oreo!er% NBFC7s c&stomer pro#ile is concentrated on the sel#-emplo"ed
segment. /he earlier mentioned #actors increase their risk pro#ile which co&ld ha!e ad!erse impact on the
#inancial health o# NBFCs.
4ltho&gh some impro!ement has been witnessed in a&to sales in last #ew months% the demand #or !ehicle #inance
is likel" to remain s&bd&ed. Besides% gi!en the signi#icant slowdown in the Indian econom"% NBFCs were
enco&ntering str&ct&ral challenges s&ch as increased re#inancing risk% short-term asset-liabilit" mismatch leading
to decelerating growth and declining margins. /his is e+pected to ha!e a bearing on the pro#itabilit" o# NBFCs in
the medi&m term.
2i!en that growth in !ehicle #inance might remain low in the medi&m term% NBFCs are e+pected to #oc&s on r&ral
and semi-&rban markets. Credit re'&irements o# r&ral pop&lation are primaril" met b" banks #rom organised sector
or local mone" lenders. /ho&gh% in recent "ears there has been some penetration o# NBFCs in this segment% the
market still remains largel" &ntapped. /here is a large section o# r&ral pop&lation which does not ha!e access to
credit either beca&se o# their inabilit" to meet the lending co!enants o# banks or d&e to high interest rates o# local
mone" lenders. /his pro!ides a h&ge opport&nit" #or NBFC sector to spread their b&siness in the r&ral ( semi-
&rban markets.
5
4s per the 3BI 4ct% NBFC is de#ined as: i a #inancial instit&tion which is a compan"* ii a non-banking instit&tion
which is a compan" and which has as its principal b&siness the recei!ing o# deposits% &nder an" scheme or
arrangement or in an" other manner% or lending in an" manner* iii s&ch other non-banking instit&tion or class o#
s&ch instit&tions% as the bank ma"% with the pre!io&s appro!al o# the Central 2o!ernment and b" noti#ication in the
?##icial 2a9ette.
2
/otal n&mber o# NBFCs consists o# NBFCs-)% 3NBCs% m&t&al bene#it companies% miscellaneo&s non-banking
companies and nidhi companies.
=
Borrowings b" NBFCs incl&de borrowing #rom banks ( #inancial instit&tions and b" wa" o# bonds ( debent&res
and other reso&rces s&ch as mone" borrowed #rom other companies% &nsec&red loans #rom directors/promoters%
commercial paper% borrowings #rom m&t&al #&nds and an" other t"pe o# #&nds which are not treated as p&blic
deposits.
A
Net owned #&nd (N?F o# NBFC is the aggregate o# paid &p capital and #ree reser!es% less the amo&nt o#
acc&m&lated losses% de#erred re!en&e e+pendit&re ( other intangible assets% i# an"% and ad1&sted b" in!estments
in shares% loans ( ad!ances to i s&bsidiaries% ii companies in the same gro&p% and iii other NBFCs (in e+cess o#
5-. o# owned #&nd