icra nbfc report feb '04

8/6/2019 Icra Nbfc Report Feb '04

1/23


2/23

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.


3/23



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


4/23



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.


5/23



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.


6/23



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.


7/23



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


8/23



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 PDsShare of PDs


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 NOFsShare of NOFs


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.


9/23



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


10/23



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.


11/23



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).


12/23



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


13/23



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.


14/23



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


15/23



Asse t Pro f i le (exc l . RNBCs)

(Rs. million, except percentages)


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)


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 )


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


16/23



In te res t Ra te Pa t te rn o f PDs (exc l . RNBCs)

(Rs. million, except percentages)



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 )




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 )


No ofNo of

companiescompanies

AmountAmount

(Rs. million)(Rs. million)

No ofNo of

companiescompanies

AmountAmount


No ofNo of

companiescompanies

AmountAmount


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


17/23



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 )


No ofNo of

companiescompanies

AmountAmount


No ofNo of

companiescompanies

AmountAmount

(Rs. million(Rs. million))

No ofNo of

companiescompanies

AmountAmount


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 )


No ofNo of

companiescompanies

AmountAmount


No ofNo of

companiescompanies

AmountAmount


No ofNo of

companiescompanies

AmountAmount


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.


18/23



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


19/23



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-


20/23



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.


21/23



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%


22/23



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.


23/23

icra nbfc report feb '04

Documents