NBFCs and Fis

Non-Banking Financial Companies (NBFCs)

NBFCs are a broad category of financial institutions other than commercial banks. NFBCs operate largely in vehicle financing, hire purchase, lease, personal loans, working capital loans, consumer loans, housing loans, loans against shares, investments, distribution of financial products, etc. The heterogeneous sector of NBFC is broadly catogorised as (i) NBFC-Deposit taking (NBFC-D) and (ii) NBFCs-Non-Deposit taking (NBFC-ND) (iii) Residuary non-banking finance companies (RNBCs) - deposit taking companies of different character. Among NBFCs-ND, companies with asset size of Rs. 1bn and more have been categorised as systemically important (NBFC-ND-SI). NBFC-D and NBFCs-ND-SI are further classified under three categories: Asset Finance Company (AFC), Investment Company (IC), and Loan Company (LC). New category that was recently added is Infrastructure Finance Company (IFC), as called Core Investment Company (CIC). Over the years, NBFCs have become a crucial part of the Indian financial system and they form around 11% of the assets of the total financial system. NBFCs have emerged an important intermediary for financing and have provided strong competition to banks and financial institutions. Although banks have access to low-cost funds; however, NBFCs are reducing dependence on public deposits and RBI too is supportive of the move. The regulatory and supervisory framework for NBFCs has been continuously strengthened in order to ensure their strong and healthy functioning and limit excessive risk-taking practices and protect the interests of the deposit holders Total number of NBFC declined marginally yet total assets and Net owned funds registered an increase
Size and Growth of NBFCs

16,000 14,000 12,000 Numbers 10,000 8,000 6,000

1,400
1,200 1,000

Rs bn
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

800 600

4,000
2,000 0

400
200 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total assets Net owned funds

No of COs registered with RBI

No of reporting companies

Source:RBI and D&B Research

Over the years, NBFCs have become a crucial part of the Indian financial system. As of March 2011, the total number of NBFCs registered with RBI stands at 12,409, down from 12,630 in 2010. This reduction in numbers is largely due to closure and merger of weak companies and conversion of deposit-taking companies into nondeposit-taking companies. However, the size of total assets of NBFCs has grown more than 100% to Rs 1,169 bn as at end-2011. Net owned funds of NBFCs too have grown from Rs 49 bn in 2001 to 180 bn in 2011.

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Bank borrowing and debentures remains prominent source of funding

Funding source of NBFC sector

10,000 8,000 Rs bn 6,000 4,000 2,000

0
2005-06 Owned Funds Public Deposit 2009-10 Bank Borrowings 2010-11

Debentures
Others

Commercial papers

Inter Corporate Borrowings

Source:RBI and D&B Research

Funding source of NBFCs comprise debentures, bank borrowings, public deposits, and commercial papers. The above chart indicates that bank borrowings constitute an important source of funds for NBFCs. Hence, NBFCs-ND-SI are significant from the systemic point of view as they also access public funds indirectly through commercial papers, debentures and inter-corporate deposits, apart from bank finance. Although NBFC-NDSIs bank-driven liability profile causes indirect exposure to depositors and concentration of funding, a limit on banks lending to NBFC sector runs the risk of curtailing growth of the economy. Exposure of NBFCs to sensitive sectors as part of financial diversification too presents potential risks. Ratio of Public deposit to owned funds increased marginally
Sources of Funds Application of Funds

80 70 60 Rs bn 40
Rs bn

50

30
20 10 0 Owned Funds Public deposit FY10 FY11 Borrowings

90 80 70 60 50 40 30 20 10 0
Loans and advances SLR Investments FY10 FY11 Non SLR Investments

Source:RBI and D&B Research

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During FY11, total assets/liabilities of NBFC-D expanded 11.90%. As of end-March 2011, more than twothirds of the total assets of the NBFCs-D sector were held by asset finance companies. Component-wise, the advances accounted for a predominant share of the total assets, followed by investment. Hire purchase and loans and advances of NBFC-D increased 20.0% and 31.5% respectively during FY11 compared with FY10. Borrowings that are a major source of funding grew at 8.95% and public deposits that are subjected to credit rating continued to show an increasing trend with growth of 43.48%.Total Investments grew 14.08% mainly due to SLR investments, which grew at 40%. The ratio of public deposit to owned funds improved marginally and stands at 23.69% versus 17.61% earlier.
Financial performance NBFC D Rs In mn Total Income Operating Profit(PBT) Net Profit(PAT) Total Assets Ratios in % Income as % of total assets NP as % of total assets Cost to Income Ratio
Source: RBI

NDSI Rs 1000 mn & above FY11 151,960 42,630 28,610 1,05,4310 14.40 2.70 72.00 FY10 609,320 17,323 122,310 5,888,060 10.30 2.10 71.57 FY11 716,960 21,578 156,190 7,303,660 9.80 2.10 69.90 FY10

RNBC FY11 11,590 1,530 910 114,660 10.11 0.79 86.80 19,460 5,460 3,820 179,200 10.86 2.13 71.94

FY10 136,150 25,770 14,820 942,120 14.50 1.60 81.10

Leverage ratio of NBFC NDSI increased for FY11

Sources of Funds Application of Funds
500 450 400 350 300 250 200 150 100 50 0 Loans & Advances Investments Hire Purchase Assets FY11

200 180 160 140 120 100 80 60 40 20 0

Rs bn

Owned Funds Debentures

Borrowings from Banks & FI

FY10
Source:RBI and D&B Research

FY11

Rs bn

FY10

The balance sheets of NBFC-NDSI as at end-FY11 stood at Rs 1,054bn as against Rs 942bn, indicating 10.64% growth. This rise is mainly due to a sharp increase in bank borrowings, debentures and commercial papers. Secured borrowing constitutes a major source of borrowings, which grew 55% during FY11. The leverage ratio of the entire NBFCs-ND-SI sector increased to 2.93% during FY11. On the deployment side, loans and advances continue to constitute the largest share followed by Investments and hire purchase. During FY11, loans and advances grew 31.50% whereas hire purchase assets grew 20%.

XXXVI

Financial performance demonstrated an upsurge

Financial performance NBFC D Rs In mn Total Income Operating Profit(PBT) Net Profit(PAT) Total Assets Ratios in % Income as % of total assets NP as % of total assets Cost to Income Ratio
Source:RBI and D&B Research

NDSI 100 cr & above FY10 609 17 122 5,888 10.30 2.10 71.57 42 29 1,05,4 14.40 2.70 72.00 FY11 717, 21 156 7,303 9.80 2.10 69.90 FY10 152

RNBC FY11 19 5 3 179 10.86 2.13 71.94 11 1 0.9 114 10.11 0.79 86.80

FY10 136 25 15 942 14.50 1.60 81.10

FY11

The financial performance of NBFCD demonstrated an upsurge with TI growth of 11.61%, mainly coming from fund-based income, which grew at 12% and formed majority of the TI. In addition, expenditure declined marginally, resulting into almost double-digit growth in operating and net profit. Expenditure as a percentage to average total assets declined marginally during FY11 whereas income as a percentage to average total assets was more or less flat, resulting in an increase in net profit to total average assets (RoA) ratio of NBFCs-D. NBFC NDSIs also performed well as reflected in TI growth of 17.67% and operating and net profit growth of 24.56% and 27.70% respectively. RoA for the same period remained constant. The TI of RNBCs declined sharply by 40.44% exceeding the decline in total expenditure and leading to significant fall in operating and net profit by more than 70%. Capital to risk weighted ratio remained strong
Capital Adequacy Ratio of NBFC D 2010-11 AFC Less than 12% A) Less than 9% B) More than 9% and up to 12% More than 12% and up to 15% More than 15% and up to 20% More than 20% and up to 30% Above 30% Total
Source:RBI and D&B Research

LC 1 1 0 1 5 19 1 1 0 2 3 3 27 36

Total 2 2 0 3 8 22 169 204

142 168

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Capital Adequacy Ratio of NBFC-NDSIs 2010-11 AFC Less than 12% More than 12% and up to 15% More than 15% and up to 20% More than 20% and up to 30% Above 30% Total
Source:RBI and D&B Research

IFC 7 4 4 15 1 1 1 3

IC 4 3 3 9 127 146

LC 2 1 22 19 66 110

Total 6 4 33 33 198 274

Capital Adequacy Ratio (CAR) of the NBFC sector is higher at 15% compared with 12% for banks. Over the years, the NBFC sector has undergone a fair degree of consolidation leading to the emergence of companies having larger asset size. Capital adequacy norms that were mandatory for NBFC Ds were made applicable to NBFC- NDSIs too in 2007, considering their growing importance in the segment and to ensure their sound development. As of end-March 2011, 199 out of 204 NDFC -Ds had CAR of more than 15% whereas in March 2010, 271 out of 275 NDFC Ds had CAR of 15%. In case of NBFC-NDSIs 264 companies out of 274 had CAR of more than 15%, indicating availability of capital for further expansion.
NPA ratio of NBFC D 2009 Gross NPA to Credit Exposure Net NPA to Credit Exposure
#: Provision exceeds NPA. Source: RBI

2010 1.3 # #

2011 0.7 #

2.0

NPA ratio of NBFC NDSIs 2009 Gross NPA to Gross Advances Net NPA to Net Advances Gross NPA to Total Assets Net NPA to Total Assets
Source: RBI

2010 2.8 1.2 2.0 0.9

2011 1.8 0.7 1.3 0.5

2.9 1.0 2.2 0.7

The period of classifying NPAs in case of the NBFC sector is higher at 180/360 days as against 90 days in case of banks. During FY11, gross NPA to credit exposure of NBFC-D declined from 1.3% in FY10 to 0.7%. At the same time, net NPA to credit exposure for the third consecutive year remained negative, with provisions exceeding assets. Further analysis suggests that asset quality of asset finance and loan companies improved significantly with reduction in gross NPA ratio. In case of NBFC NDSIs both gross and net NPA ratio declined to 1.8% and 0.7% as against earlier 2.8% and 1.2% respectively.

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Financial Institutions (FIs)

As of March 2011 four financial institutions (FIs) operate under the directives of the Reserve bank of India (RBI). The table below shows the ownership and shareholding pattern of these institutions as on March 2011.In this section we have examined these FIs on various parameters that include income growth and composition, business growth, profit and operational efficiency, asset quality.
Ownership pattern of FIs (as on March 2011) Ownership EXIM Bank NABARD NHB SIDBI Government of India Government of India Reserve Bank of India Reserve Bank of India Public Sector Banks Insurance Companies Financial Institutions % 100 99 1 100 72.2 21.4 6.4

Financial assistance by FIs declined marginally

Sanction Disbursement

700 600 500

Rs in bn

600 500

400 300 200 100

400
300 200 100

0 All India Term- Specialised lending Financial Institutions Institutions

2010
Source:RBI and D&B Research

Investment Institutions

0
All India Termlending Institutions Specialised Financial Institutions Investment Institutions

2011

2010

2011

Sanction and disbursement made by FIs as at the end of FY11 stands at Rs 1015 bn and Rs 880 bn respectively. The financial assistance sanctioned and disbursed during FY11 declined marginally by 5% and 4% respectively led by more than 20% reduction in sanction and disbursement by Investment institutions consisting of LIC, GIC and erstwhile subsidiaries (NIA, UIIC and OIC).

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Overall Funds raised decline, major part of it utilized for fresh deployment
Sources of funds Deployment of funds

1,800 1,600 1,400 Rs bbn 1,000 800 600 400 200 0 Internal FY10
Source:RBI and D&B Research

RS bn

1,200

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Fresh Repayment of Other Deployment past deployment borrowings

External FY11

Others

FY10

FY11

Total amount raised and utilised decined slightly during FY11. A majour part of the funds were raised through external sources followed by internal and other sources. While funding through internal sources increased , borrowing from external source decreased owing to uncertainity in global markets. A majority of funds raised were utilised for fresh deployment which led to growth of 2%. Other deployment also increased sharply, whereas repayment of past borrowings registered a decrease.A very small proprtion of funds were used for interest payments. SIDBI utilised most of the umbrella limit of raising funds through money market
Funds raised through Money Market Rs In Mn NABARD A)Total Term Deposits Term Money Inter-corporate Deposits Certificate of Deposits Commercial Papers Short term loans from banks B)Umbrella Limit Utilisation of limit
Source:RBI and D&B Research

SIDBI 81,370 21,790 59,580 56,100 145.0

NHB 26,210 2490 0 23,720 32,770 80.0

EXIM 15,380 710 40 14,620 44,080 34.9

Total 193,980 25,480 1100 1410 138,670 27,320 0

71,030 480 1100 1370 64,480 3600 126,750 56.0

FIs are authorised to raise money through money market within the stipulated umbrella limit which is currently at 150% of Net Owned Funds. During FY11 commercial papers proved to be a significant source accounting for 71.48% of total resouces raised through the money market. SIDBI had a highest share in total FIs borrowings standig at Rs 81 bn, however it as within the stipulated limit.

XL

TI and Interest grew by 15%, but rise in operating cost brings down profits
Financial Performance of FIs Particulars Income Interest Income Non Interest Income Expenditure Interest Expenditure Operating Expenses which Wage Bill Provisions for taxation Profit (PBT) Profit (PAT) Financial Ratios * Operating Profit Net Profit Income Spread (NII)
* as % of Total Assets Source:RBI and D&B Research

Rs in MN FY 10 156,240 151,470 4780 104,920 96,110 8800 4680 15,590 43,320 27,730 1.9 1.2 6.7 2.4 FY 11 179,650 174,850 4800 133,370 118,620 14,750 10,950 12,550 38,080 25,540 1.4 0.9 6.7 2.1

% Variation 15.00 15.40 0.50 27.10 23.40 67.60 134.10 -19.50 -12.1 -7.9

Alhough Total Income(TI) of FIs grew 15% , finanacial performance weakened owing to a fall in operating and net profit. This was mainly due to rise in operating expenses by more than 50% contributed by a sharp rise in Wage Bill. However interest Income increased 15.40%. Soundness Indicators
Rs In Mn Standard 2010 EXIM Bank NABARD NHB SIDBI All Fis 389,580 1204870 198,370 378,920 2171730 2011 455,630 1394590 225,820 459,220 2535250 Sub-Standard 2010 620 70 750 1440 2011 1970 1430 3390 Doubtful 2010 3010 440 20 3470 2011 2460 680 1360 4500 2010 500 500 Loss 2011 360 10 370 Net NPA 2010 780 330 690 1800 2011 930 300 1320 2550

Source:RBI and D&B Research

Net non performing assets of FIs during FY11 increased compare with FY10 mainly contributed by increase in NPA of SIDBI. Don the pecking order SIDBIs NPAwas the highest followed by EXIM NABARD and NHB with no NPAs. Sub standard assets of EXIM Bank grew during FY11 but doubtful and loss assets recorded a fall. Although Sub standard assets of NABARD reduced completely, doubtful and loss assets recorded a rise. Both substandard and doubtful assets of SIDBI escalated during FY11.
Capital to Risk (Weighted) Assets Ratio of Select FIs 2010 EXIM Bank NABARD NHB SIDBI
Source:RBI and D&B Research

2011 18.5 24.9 19.6 30.2 17.2 21.8 20.5 31.6

During FY11 Capital adequacy as measered by CRAR in case of all the FIs was above the minimum stipulated. CRAR of NHB and SIDBI increased whereas that of EXIM bank and NABARD declined.
XLI