NBFC Report 2019 PDF

NBFC Report 2019
Table of Contents
Sections
1.0 Microsite - special report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.0 Overall NBFC: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.0 Housing finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.0 Housing finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.0 Housing finance: Borrowing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.0 Housing finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.0 Low cost housing finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.0 Low cost housing finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.0 Low cost housing finance: Borrowing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.0 Low cost housing finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.0 Infrastructure financing: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.0 Infrastructure financing: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
13.0 Infrastructure financing: Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
14.0 Infrastructure financing: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
15.0 Wholesale Finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
16.0 Wholesale Finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
17.0 Wholesale Finance: Lending to Real Estate Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
18.0 Wholesale Finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
19.0 MSME finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
20.0 Loan against property (LAP): LAP: Market size, growth outlook and key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . 69
21.0 Loan against property (LAP): LAP: Competitive scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
22.0 Loan against property (LAP): LAP: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

23.0 Loan against property (LAP): LAP: Micro-LAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
24.0 Loan against property (LAP): LAP: Key industry trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
25.0 Loan against property (LAP): LAP: Business model of market participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
26.0 MSME finance: Non-LAP MSME secured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
27.0 MSME finance: Key trends in MSME secured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
28.0 MSME finance: MSME unsecured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
29.0 Auto Finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
30.0 Auto Finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
31.0 Competitive Dynamics: Captive and Non Captive NBFCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
32.0 Competitive Dynamics: Large, Medium and Small NBFCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
33.0 Used car Finance: Used car finance-Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
34.0 Used car Finance: Used car finance-Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
35.0 Used CV Finance: Used CV finance-Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
36.0 Used CV Finance: Used CV finance-Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
37.0 Tractor Finance: Tractor finance-Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
38.0 Tractor Finance: Tractor finance-Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
39.0 Construction equipment finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
40.0 Construction equipment finance: Industry Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
41.0 Construction equipment finance: Borrowing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
42.0 Construction equipment finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
43.0 Gold Finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
44.0 Gold Finance: Competitive Positioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
45.0 Gold Finance: Region wise industry dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
46.0 Gold Finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
47.0 Consumer durable finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
48.0 Consumer durable finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
49.0 Consumer durable finance: Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
50.0 Consumer durable finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
51.0 Educational loans: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
52.0 Educational loans: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
53.0 Microfinance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
54.0 Microfinance: Changing Industry Landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

55.0 Microfinance: Region-wise Industry Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
56.0 Microfinance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
57.0 Fintech: Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
58.0 Fintech: Fintech adoption in Indias leading market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
59.0 Fintech: Issues related to cyber security and data privacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
60.0 An Overview on NBFCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
61.0 Infrastructure finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
62.0 Housing finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
63.0 Low cost housing finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
64.0 Auto finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
65.0 Wholesale finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
66.0 Microfinance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
67.0 Gold Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
68.0 Construction Equipment Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
69.0 Auto Finance: Arman Financial Services Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
70.0 Auto Finance: Berar Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
71.0 Auto Finance: BMW India Financial Services Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
72.0 Auto Finance: Bussan Auto Finance India Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
73.0 Auto Finance: Ceejay Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
74.0 Auto Finance: Daimler Financial Services India Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290
75.0 Auto Finance: L&T Finance Ltd (Erstwhile Family Credit Ltd) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
76.0 Auto Finance: Manba Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
77.0 Auto Finance: Muthoot Capital Services Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
78.0 Auto Finance: Sundaram Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
79.0 Auto Finance: Kamal AutoFinance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
80.0 Auto Finance: Khushbu Auto Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
81.0 Auto Finance: S M L Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
82.0 Auto Finance: Kogta Financial India Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
83.0 Auto Finance: Mahaveer Finance India Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
84.0 Auto Finance: Deccan Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
85.0 Auto Finance: Rakesh Credits Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
86.0 Diversified: IFMR Capital Finance Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

87.0 Diversified: MAS Financial Services Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325
88.0 Diversified: Electronica Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328
89.0 Diversified: Home Credit India Finance Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
90.0 Diversified: Clix Capital Services Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
91.0 Diversified: Karvy Financial Services Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337
92.0 Diversified: Pudhuaaru Financial Services Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
93.0 Diversified-LAP: HDB Financial Services Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
94.0 Diversified-SME: Capri Global Capital Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345
95.0 Diversified-SME: Paisalo Digital Ltd (Formerly Known As S. E. Investments Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
96.0 Diversified-SME: Shriram City Union Finance Ltd - Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
97.0 Diversified-SME: Vistaar Financial Services Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
98.0 Diversified-SME: Blue Jay Finlease Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358
99.0 Diversified-SME: NeoGrowth Credit Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
100.0 Diversified-SME: Veritas Finance Pvt. Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362
101.0 Diversified-SME: Lendingkart Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
102.0 Gold Loan: Kosamattam Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
103.0 Gold Loan: Manappuram Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
104.0 Gold Loan: Muthoottu Mini Financiers Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
105.0 Housing finance: Bajaj Housing Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376
106.0 Housing finance: Can Fin Homes Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379
107.0 Housing finance: Housing Development Finance Corporation Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382
108.0 Housing finance: Indiabulls Housing Finance Ltd (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
109.0 Housing finance: L&T Housing Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389
110.0 Housing finance: LIC Housing Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392
111.0 Housing finance: Magma Housing Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
112.0 Housing finance: Sundaram BNP Paribas Home Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
113.0 Infrastructure Finance: L&T Infrastructure Finance Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404
114.0 Infrastructure Finance: Power Finance Corporation Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
115.0 Infrastructure Finance: Rural Electrification Corporation Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
116.0 Infrastructure Finance: West Bengal Infrastructure Development Finance Corporation Ltd . . . . . . . . . . . . . . . . . . . . . 414
117.0 Low Cost Housing: Aptus Value Housing Finance India Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
118.0 Low Cost Housing: AAVAS Financiers Ltd (Formerly Au Housing Finance Ltd) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
119.0 Peer comparison: Auto finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424
120.0 Peer comparison: Housing finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428
121.0 Peer comparison: Infrastructure finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
122.0 Peer comparison: Microfinance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
123.0 Peer comparison: Diversified finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435

1.0 Microsite - special report
After witnessing healthy growth over the past few years, non-bank credit growth slowed down in the second half of fiscal 2019
due to the tight liquidity conditions that engulfed the sector. Consequently, Non Bank Financial Companies (NBFCs) which
were gaining market share from banks across major asset classes in the past could not do so in fiscal 2019.
Going forward, NBFCs will need to recalibrate their strategies in order to deal with the changing business dynamics. How
would this impact the credit growth of the sector When is the liquidity situation going to improve Can NBFCs achieve pre-2018
growth in the medium term or will the growth remain anaemic
What are the key factors that will drive their growth Will their earnings growth trajectory be lower What will be the capital that
they will need over the next 1-2 years What will separate the winners from the losers Where are the opportunities for growth
CRISIL Research's NBFC Report, 2019 delves deep into the fast-changing industry landscape to come up with the answers.
The report contains CRISIL Research's perspective on growth prospects, competitive scenario and the attractiveness of the 11
segments in which NBFCs operate and also gives a perspective on the emerging fintech market.
The coverage also includes:
Outlook on growth and delinquencies, credit costs by segment
Segment-wise profitability outlook, considering business growth, resource profile and asset quality
Detailed assessment of competitive scenario with banks and market share of NBFCs in various segments
Perspective on regulatory direction in each segment
Financial and operational benchmarks across various segments
Profiles of over 200+ NBFCs, detailing key operational and financial parameters
Details of fund-raising in various NBFC segments
Level of digital medium usage in origination and appraisal process

2.0 Overall NBFC: Summary
Key messages
NBFCs' credit growth dropped significantly in fiscal 2019; credit growth to further slow down in
fiscal 2020
After the September 2018 crisis, credit growth of non-banks declined ~800 bps to ~13% in fiscal 2019 and is expected to
witness a ~9-11% growth in fiscal 2020.
Liquidity squeeze and slowdown in some segments attributed to slower growth for non-banking finance companies
(NBFCs); second half of fiscal 2020 is expected to witness some improvement.
Banks' credit growth to partially offset slowdown in growth of NBFCs.
Fund raising and managing liquidity remains the biggest concern for NBFCs; divergence across
players' ability to raise funds increased significantly
Higher interest rates in the first half and tight liquidity in the second half increased the cost of borrowing for NBFCs by
25-30 bps in fiscal 2019. Fund raising is expected to remain a challenge in fiscal 2020 as well.
CRISIL Research believes divergence across players' fund-raising ability has risen post-September 2018 and remains
high; fund-raising situation should improve marginally in fiscal 2021.
Banks increased the exposure to NBFCs significantly post-crisis. However, funding to riskier and small players from debt
capital market and banks remain challenging.
Profitability of non-banks' deteriorated sharply in fiscal 2019; lower ROAs likely to be the new
normal
The sector's return on assets (RoA) is expected to narrow 30-40 bps over the next two years.
Non-banks' delinquencies increased in fiscal 2019 across segments;
Tight market liquidity and slower growth will exert pressure on the asset quality in wholesale and LAP segments; asset
quality of the housing segment will continue to witness a slight deterioration
Non-banks' strong growth hits a bump in the second half of fiscal 2019
NBFCs' loan book witnessed a growth of 17% CAGR from fiscal 2014 to fiscal 2019, amounting to Rs. 27.30 trillion. NBFCs
grew at a strong pace in the first half of fiscal 2019, up ~17% on-year. However, the default of IL&FS in mid-September
2018 created a panic, and investor/lender confidence in funding NBFCs declined. Further, with the tight liquidity conditions and
higher risk perception to the sector, raising funds remains challenging. This led to a sharp slowdown in their growth in the
second half of fiscal 2019.
Non-banks' loan book as of March 2019 stood at ~Rs 27 trillion

Source: RBI, NHB, MFin, CRISIL Research
Non-banks have become an important catalyst in the credit market of India increasing its share for the past several years.
However, due to slower growth in fiscal 2019, non-banks just managed to maintain their share of credit against banks. Growth
in fiscal 2019 came majorly in the first half, where non-banks' growth was 7.8%. After the crisis in September 2018 non-banks
registered growth of 4.7% the second half of fiscal 2019. Slower growth in outstanding book was also attributed by portfolio
securitisation by non-banks.
Share of non-banks have increased significantly over the years
Source: RBI, NHB, MFin, CRISIL Res
Market borrowing conditions to remain tight for non-banks

NBFCs enjoyed lower cost of borrowing over several years with ease in access to market borrowings. However, after the crisis
in September 2018 market borrowing rates for commercial paper/non-convertible debentures (CPs/NCDs) jumped sharply,
leading to higher cost of borrowing for players with higher exposure to market borrowings.
Trend in Interest Rates

Source: RBI, SBI, CRISIL Research
With the reversal in the interest rate cycle, benchmark market rates have started falling from the end of fiscal 2019. However,
the market spread remained the highest for mid-sized and small players with high exposure to developer loans and ALM
mismatch. Additionally, mutual funds stayed away from market because of the crisis and tight liquidity conditions after
September 2018, resulting in a sharp fall of commercial paper (CP) issuance by NBFCs.
Commercial paper issuance from NBFCs remains lower after September 2018
Source: F track, CRISIL Research
NCD issuance by NBFCs came down in fiscal 2019
Source: CRISIL Research

Selected players are able to raise funds in the debt capital market
Apart from lower issuance, only selected players had access to the debt capital market. Higher risk perception on mid-sized
and small players and players in riskier segments were not having any takers for their issuances. Selected large players with a
strong parentage, relatively less riskier book in the retail segment and lower ALM mismatch were only able to raise NCD, which
is reflected in the unique player-wise issuance.
Sharp decline in the share of small and mid-sized players in raising NCDs
Note: Players with loan book greater than Rs 300 bn classified as large, loan book between Rs 50 bn - Rs 300 bn classified as medium and players with less than Rs 50
bn as small
Unique player-wise NCD Issuance per quarter
Borrowing cost for small players and riskier segments to remain high; market risk perception
would remain a key monitorable
CRISIL Research believes there is clear divergence among players and the segment for raising funds from the debt capital
market. The divergence of risk perception among players and segments is reflected from the elevated market spreads. The
high risk perception to segments would keep borrowing cost higher in fiscal 2020 as well.
CRISIL Research has identified that the divergence in market perception among players is due to their promoters
and parentage, capital adequacy, exposure to riskier segments, ALM mismatch and perceived corporate governance. The
spread between the three-year gsec and NCD rates of riskier players continued to rise after September 2018. This has
remained higher in fiscal 2020 and is expected to marginally improve in fiscal 2021.
Cumulative spread between three-year gsec rates and three-year NCD rates for different NBFC players
Note: Strong players are defined by their ability to raise funds from debt capital market. Change in players 3yr NCD spread over GSec between September 2018 and July
2019 is considered for the same. Players with change in spread in the range of 0-100 bps are considered strong players. These players account for 61% of overall NBFC
market in fiscal 2019.
Banks are selective in lending to NBFCs
With tight liquidity in debt capital market and lower appetite from mutual funds, bank borrowings is the key fund-raising avenue
for non-banks. Banks credit exposure to the NBFC segment witnessed 29% growth in fiscal 2019, compared with bank credit
growth of 12%. Banks have also played an active role in securitising NBFCs assets, in turn providing liquidity to NBFCs.
Banks credit exposure to the NBFC segment
Source: RBI, CRISIL Research
CRISIL Research believes the banking sector has been flush with liquidity over the past three months. Despite this, both large
PSBs as well as private banks have been selective in lending to the NBFC sector. We expect risk-averse banks to extend
credit to NBFCs on a case-to-case basis.
Monthly average net liquidity in banking system

Note: Monthly average net liquidity in system is measured by liquidity absorbed (-) / injected (+) by RBI under money market operations. Positive value indicates liquidity
deficit (amount infused by RBI) whereas negative value indicates liquidity surplus (amount absorbed by RBI)
Non-banks' borrowing cost to remain high in fiscal 2020
Considering the rising interest rates in first half and liquidity crisis in the second half, the cost of borrowing for non-banks
increased 24 bps in fiscal 2019. With the reversal in interest-rate cycle, benchmark market rates have started falling from the
end of fiscal 2019. However, the market spread remains high for mid-sized and small players with high exposure to developer
loans and with high ALM mismatches.
For fiscal 2020, the fall in interest rates would be offset by higher spreads for NBFCs. The transmission of rate cut from banks
happens with a lag. The cost of borrowing for mid-sized and small players and players with riskier exposure should remain
high. However, select large players may witness a slight moderation in their borrowing cost. CRISIL Research expects the cost
of funds for non-Banks to remain higher for fiscal 2020 and is expected to come down by 25-30 bps in fiscal 2021.
Cost of borrowing for non-banks
Note: Based on sample set of CRISIL rated non-banks accounts for more than 60% of outstanding book of NBFCs as on March 2019; Government backed infrastructure
NBFCs are not considered for calculating numbers for NBFCs.
Source: Company Reports, CRISIL Research
NBFCs to focus more on managing liquidity and matching ALM; market borrowing to decline
Competitive market rates and easy access to market borrowings led to an increase in market borrowings (CPs/NCDs) for non-
banks until fiscal 2018. However, tight market borrowing conditions in the second half of fiscal 2019 led to non-banks hunted
other avenues for raising funds. Non-banks started increased bank borrowings and, consequently, the share of market
borrowing came down by the end of fiscal 2019. CRISIL Research expects share of bank borrowings to increase further in the
resource mix of non-banks considering tight fund-raising conditions. Liquidity challenges for non-banks are expected to soften
gradually over time.
Resource profile of NBFCs
Note: Based on sample set of CRISIL rated non-banks accounts for more than 60% of outstanding book of NBFCs as on March 2019.
Bank credit growth to outpace NBFCs in fiscal 2020

For fiscal 2019, NBFCs loan book grew 13.1% year-on-year registering lowest growth in past five fiscals. CRISIL Research
believes that, due to liquidity squeeze and further slowdown in the economy, credit growth of non-banks will come down to
~9-11% in fiscal 2020. In fiscal 2021, we expect NBFCs to witness a slightly higher growth of ~11-13%, taking the overall
NBFC market size to Rs 33 trillion.
Meanwhile, banks have partly made up for slower growth of NBFCs. Non-banks continue to witness higher growth compared
with banks until fiscal 2018. In fiscal 2019, banks and non-banks posted similar growth. However, CRISIL Research expects
banks to clock higher growth in fiscal 2020, outpacing non-banks growth.
NBFC growth to slow down over FY21
Source: RBI, NHB, MFin, CRISIL Research
Segmental analysis
Wholesale finance growth to take a big hit; retail segments are expected to witness early recovery
Pursuant to fund-access issue started in the second half of fiscal 2019, growth across the segments in fiscal 2019 came down.
Slower growth in the loan book of some of the retail segment is also attributed by increased amount of securitisation in asset-
based retail segments. As fund access remains tight for relatively riskier segments, growth is expected to remain slow in fiscal
2020.
CRISIL Research expects growth in wholesale, MSME and construction equipment to remain impacted over the next two
years. However, retail segments such as housing may witness early recovery, as the fund-access situation may improve
gradually. The key segment of auto loans will depend on economic recovery and revival of fortunes of passenger vehicle
industry.
Segments impacted most due to tight access to funds
Note: CE Construction Equipment Finance
Source: RBI, NHB, MFIN, CRISIL Research
However, some of the segments' growth was not affected meaningfully in fiscal 2019. This was mainly due to the underline
business dynamics of the segment and relatively easy access of funds to major players in the segment. The major players in
these segment are better off in terms of parentage and access to funds.
CRISIL Research expects retail segments such as gold, microfinance and consumer durables will continue to witness strong
growth.
Segments not impacted due to tight access of funds
Note: CD Consumer Durables Finance

Source: RBI, NHB, MFIN, CRISIL Research
Asset quality to remain under pressure for most segments
Pursuant to lower growth and increasing delinquencies, gross non-performing assets (GNPAs) of non-banks deteriorated
across segments except gold and microfinance in fiscal 2019. Slowdown of business in a slower economic growth environment
is expected to increase delinquencies. Some of the segments, where high growth was witnessed earlier, may have seasoning
of portfolio.
CRISIL Research expects asset-quality deterioration to be most under wholesale and LAP segments, due to chunky portfolio
and tight funding conditions. Housing and Auto segments are also expected to witness asset-quality hit on the backdrop of
underline business outlook.
NPAs to remain high amid a challenging economic environment
Profitability of non-banks deteriorated sharply in fiscal 2019; lower ROAs likely to be the new
normal
Most NBFCs, except gold- and auto-loan segments, witnessed a drop of profitability in fiscal 2019. Lower return on assets
(ROAs) was majorly affected by increased cost of borrowings. Limited access to funds kept the cost of funds elevated for non-
banks in fiscal 2019. With the increase in the cost of borrowing and intense competition, most segments witnessed margin
compression in fiscal 2019. The ability to pass on higher cost of borrowing and asset quality would be the deciding factor for
RoAs. CRISIL Research expects the profitability of non-banks to narrow 30-40 bps over next two years.
Non Banks to witnesss lower ROA going ahead

Fintech and digital segments are increasingly playing an important role in
retail lending
Innovation in the fintech has rapidly changed the lending space in the past 2-3 years by leveraging the data available
from credit bureaus, asset-reocnstuction companies, Goods and Services Tax (GST) network, Central Registry of
Securitisation Asset Reconstruction and Security Interest (CERSAI) and Registrar of Companies (ROC). With the advancement
of technology, the gap between fintech companies and financial institutions is slowly disappearing. Alternative lending includes
marketplace platforms, peer-to-peer (P2P) lending and digital-lending platforms targeting specific needs of customers and
MSME businesses that are underserved by financial institutions. Alternative lending also caters to specific market segments
such as e-merchants and internet-enabled businesses. The alternative lending fintech model enables highly efficient customer
onboarding and servicing within lighter regulatory environment. In contrast, most traditional financial institutions operating
model includes branch banking, stringent regulatory environment, collections and recovery of loan book. One of the major
trends in the alternative lending business is API (application programming interface) banking. API banking enables third-party
providers to develop solutions that can be integrated easily with banking platforms. This integration helps in maintaining
confidentiality and data security along with providing complete support to fintech firms in reinventing consumer services.
In the past few years, alternative lending firms have been servicing customers, who are outside the purview of banks risk
appetite. The operating model of fintech firms is yet to be tested, as they are yet to complete their full loan cycle. As the
industry is growing, fintech firms should take necessary steps to maintain the asset quality and keep NPAs low compared with
traditional players. They must prioritise quality over quantity to ensure success of this model.
Impact of fintech on the value chain for retail lending
Overview on securitisation
Securitisation volume more than doubled in fiscal 2019

Securitisation entails bundling up of assets by originating lenders and selling them against future receivables to different
classes of investors (banks, mutual funds, NBFCs, treasuries, foreign portfolio investors and the insurance industry). It
supports credit growth in the economy, as it frees up capital for the originators to lend further.
Securitisation in India has the following characteristic features:
1. The Indian market is dominated by NBFCs as originators and banks as investors

2. Securitisation volume in India is mainly driven by:
a. Demand for priority-sector loan (PSL)-compliant asset-backed securities (ABS), mainly vehicle loans, by banks to comply
with the government's PSL mandate
b. Demand for mortgage-backed securities (MBS) by banks to grow their loan book
In fiscal 2019, non-banks rushed to securitise receivables, as conventional sources of resource mobilisation came under
pressure after September 2018. The relaxation of the minimum holding period (MHP) criteria for longer-tenure loans by the
Reserve Bank of India (RBI) in November 2018 resulted in an increase in the supply of assets eligible for securitisation. The
momentum continued in the fourth quarter of fiscal 2019 resulted in the highest-ever securitisation in the second half of fiscal
2019.
Securitisation volume jumped sharply in fiscal 2019
Source: CRISIL estimates
MBS to remain most-preferred asset class in near-to-medium term
Securitisation of mortgage assets constitutes around half of retail securitisation market in fiscal 2019. High demand for
mortgage from banks to meet their PSL requirements and support credit growth will continue to drive demand for mortgage
assets for securitisation. However, shortage of funds at non-banks is expected to provide significant boost to securitisation
growth.
Share of various assets in retail asset securitisation

Note: Others include education loans, consumer durable loans, gold loans, cash loans, tractor loans and small business loans
Vehicle loan receivables-backed securitisation is dominated by the commercial vehicles (CV) segment. These loans typically
comply with micro, small and medium enterprise (MSME) priority sector criteria, driving their demand by PSL-seeking banks.
Emergence of newer asset classes was witnessed in the securitisation space, particularly after the crisis in September 2018.
PTCs backed by education loan receivables and consumer durables loan receivables were issued. Securitisation in other
segments, such as gold loans, small business loans and personal loans, improved significantly. On conventional (other)
segment securitisation volume increased around 20 times in fiscal 2019. Emergence of new asset classes in the Indian
securitisation market is driven by the widening of the investor base with increasing demand for NPSL securitisation.
Banks continue to prefer PSL asset securitisation
Securitisation under PSL has remained higher for several years against non-PSL. Demand for PSL from public sector banks
and private sector banks is expected to remain high, as several top banks are short on the overall targets. Banks are short on
their PSL targets and foreign banks with less than 20 branches would continue to drive growth for PSL securitisation.
PSL and non-PSL mix of securitisation
PSLCs (Priority sector lending certificates), introduced in early fiscal 2017, were expected to emerge as an attractive
alternative to securitisation for meeting PSL targets. However, PSLC as well as PSL securitisation continue to grow and have
dominance in the market. PSLC-general and PSLC-small and marginal farmers (SFMF) remained the largest-traded segments
within PSLCs in fiscal 2019, with a 41% and 34% share, respectively.
PSLC volume
Note: General include other priority sector lending like education loans, loans to weaker section and small business loans
DAs continue to dominate securitisation transactions
PTC securitisation transactions showed healthy growth in fiscal 2017, after the scrapping of dividend-distribution tax in Union
Budget 2016-17. However, the market moved back in favour of DA (Direct assignments) transactions, as banks looked to grow
their loan book through the DA route and originators preferred the DA route due to the absence of credit enhancement.
The market is expected to continue with its preference towards the DA route because of simpler and quicker execution.
Demand from banks for asset-backed securities largely come under the DA route.
Mix of PTCs and DAs in the retail securitisation market
Limited access of funds to non-banks along with government support to drive securitisation
growth in fiscal 2020
The securitisation market continues to soar, as the limited access to funds for non-banks remain a major issue. Non-banks
being key originators in the securitisation market, with increasing PSL requirement of the banking system, will aid securitisation
growth in fiscal 2020. Securitization volume in the first quarter of fiscal 2020 remains high and witnessed a growth of 167% yoy.
Widening investor and originator base is expected to drive securitisation growth.
Securitisation clocks higher volume

The government has announced one-time partial credit guarantee for purchase of pooled assets of NBFCs up to Rs 1 lakh
crore. The scheme was announced in Budget 2019 to provide the much-needed liquidity to the NBFC sector.
Salient features of Partial Credit Guarantee Scheme
The scheme started on August 10, 2019, for six months, or until such date by which Rupees 1 lakh crore assets get
purchased by banks, whichever is earlier.
Under the scheme, the government offers a one-time partial credit guarantee to public sector banks to purchase pooled
assets of NBFCs/HFCs up to Rs 1 lakh crore.
One-time partial guarantee is for the first loss up to 10%.
One-time guarantee provided by the government on the pooled assets will be valid for 24 months from the date of
purchase and can be invoked on the occurrence of default.
The pool of assets to be purchased by PSBs should have a minimum rating of 'AA' or equivalent at a fair value prior to
the partial credit guarantee by the government.
NBFCs/HFCs can sell up to a maximum of 20% of their standard assets as on March 31, 2019, subject to a cap of Rs.
5,000 crore at fair value.
NBFCs/HFCs have to pay a fee equivalent to 0.25% per annum of the fair value of assets being purchased under this
scheme to the government.
3.0 Housing finance: Outstanding
HFC's book in home loan segment to grow at 10% CAGR over the next two years
Home loans outstanding of housing finance companies (HFCs) grew at over 20% compound annual growth rate (CAGR) during
fiscals 2013 and the first half of fiscal 2019. Demand for individual home loans rose on account of increasing demand from Tier
2 and 3 cities, rising disposable incomes, interest rate subventions, and fiscal incentives on housing loans. However, growth
slowed considerably in the second half of fiscal 2019 owing due to liquidity constraints. players started focusing on managing
asset liability mismatches rather than growing their book. Consequently, overall credit growth in home loans for HFCs stood at
8% on-year in fiscal 2019
CRISIL Research expects the outstanding book of HFCs in the home loans segment to continue growing at a relatively slower
~10% CAGR over the next two years. A tight liquidity situation is expected restrict market borrowings for some of the HFCs
with relatively higher asset liability mismatches, higher proportion of non retail portfolio in overall book, and without strong
parentage.
Growth momentum to slow amid the recent turbulence
Note: above graph represents home loan outstanding of HFCs E: Estimated; P: Projected
Source: Reserve Bank of India (RBI), NHB, Company Reports, CRISIL Research
To strengthen liability management, non-banks are tapping alternate sources of funding such as issuances of retail bonds,
securitisation, and external commercial borrowings (ECBs), apart from increasing borrowing from banks. Securitisation has
emerged as a major source of funding, which is expected to continue this fiscal. Higher level of securitisation will restrict growth
in the outstanding book of HFCs going forward.
CRISIL Research expects the credit growth of the HFCs to slow down owing to the tight liquidity and increased risk perception
over the medium term. While credit supply growth will slow down over the next two years, demand-side fundamentals will likely
to remain robust. Deeper finance penetration, better affordability, latent demand for affordable dwellings, greater government
support, and higher disposable income will continue to drive demand for housing loans.
Measures taken by regulator and government to ease liquidity constraints -

positive
Over the past few months, the government as well as regulators have come out with various measures to improve the liquidity
situation for non-banks. One of the measures announced by the government in the recent budget is a one-time partial
guarantee to banks (for six months) on the purchase of highly rated pools of financially sound non-banking financial
companies.
Credit guarantee by the government to public sector banks (PSBs) on the purchase of assets from NBFCs should narrow the
prevailing trust deficit and boost investor confidence in non-banking finance companies (NBFCs). The assumption here is the
credit guarantee is for the entire tenure of the pooled assets purchased by PSBs over the next six months.
Some of the other measures taken by the regulators to ease the liquidity situation and to structurally strengthen the HFCs are
as follows:
Increasing refinance limit from the National Housing Bank (NHB)
The NHB increased the refinancing limit for HFCs by Rs 60 billion in September 2018, making it Rs 300 billion for the
year against the earlier proposal of Rs 240 billion.
In August 2019, the finance minister revised the NHBs refinance limit to HFCs from the Rs 100 billion proposed in the
budget to Rs 300 billion for the current year.
Easing of norms for bank lending to NBFCs
In October 2018, the exposure limit of banks to non-infrastructure NBFCs has been raised to 15% from the earlier 10%.
In August 2019, the Reserve Bank of India (RBI) again increased a banks exposure limit to a single NBFC from 15% to
20% of its Tier-I capital.
In February 2019, the RBI relaxed norms for a banks assignment of risk weights for exposures to NBFCs depending on
ratings instead of the 100% risk weight earlier. The RBI also harmonised categories of NBFCs to ease the classification.
Relaxation on the minimum holding period for securitisation
In November 2018, the RBI reduced the minimum holding period (MHP) from one year to six months for assets to be
securitised or assigned by NBFCs with original maturity above five years. Relaxation of the MHP enables NBFCs and
HFCs to raise funds by securitising their originations without having to wait for a longer period.
One-time partial credit guarantee scheme
The one-time partial credit guarantee scheme was announced in the budget 2019 and introduced in August 2019.
Government offering guarantee to PSBs on default of purchased pooled asset up to Rs 1 trillion from NBFCs.
The RBI has cut the minimum holding requirement for NBFCs raising funds via securitisation of loans of original maturity
above five years. The NBFCs will now be allowed to securitise loans after showing six months of repayments against the
earlier requirement of 12 months.
Classification of banks lending to an NBFC under PSL for lending to agriculture, micro, small, and medium enterprise
(MSME) and housing sectors
RBI allowed bank lending to registered NBFCs (other than micro-finance institutions - MFIs) for on-lending to agriculture
(investment credit) up to Rs 10.0 lakh; micro and small enterprises up to Rs 20 lakh and housing up to Rs 20.0 lakh per
borrower to be classified as priority sector lending.
On the demand side, THE higher tax exemption announced in the affordable housing segment will keep demand intact. Interest
deduction on loans taken until March 31, 2020 for the purchase of a house valued up to Rs 45 lakh has been enhanced to Rs
3.5 lakh from Rs 2 lakh. The additional interest deduction of Rs 1.5 lakh would reduce the effective home loan interest rate by
40-50 basis points for a typical 15-year loan.
Apart from this, there have been other measures taken by the regulators/government to structurally strengthen HFCs which are
given below -
NHBs revised guidelines announced in June 2019 have made the following key amendments:
The minimum Tier 1 capital adequacy to be maintained by HFCs has been increased from 6% to 10%
The overall capital adequacy ratio requirement has been increased from 12% to 15% in a graded manner
The maximum leverage that HFCs can take up has been reduced to 12 times from 16 times over three years
The ceiling on deposits that HFCs can mobilise has been lowered to three times of net-owned funds from five times
Transferring the regulatory power on HFCs from the NHB to the RBI
Transferring regulatory power will lead to better risk management framework for HFCs and also enable the RBI to have a
prudent risk focussed surveillance over the non-banks.These are structural measures which will help strengthen the sector
over the medium to long term.
Market share of banks likely to increase as HFCs slow down

In the wake of tightened liquidity, HFCs are encountering structural challenges in the form of increased refinancing risk and
asset liability mismatch, which is expected to slow down disbursements over the next two years. On the other hand,, banks
have increased focus on the retail segments in the wake of subdued growth in corporate lending. Consequently, banks which
were losing market share to HFCs from fiscals 2013-18 gained share in fiscal 2019 and are expected to further gain share by
300 (WHAT) over the next two years.
Market share of banks likely to increase over the next two years
Note: market share is based on retail finance- housing outstanding, E: Estimated, P: Projected
Source: Reserve Bank of India (RBI), NHB, CRISIL Research
CRISIL Research expects the home loan growth of banks to outpace that of HFCs for the first time in the past five years. Banks
are expected to gain 200-300 bps market share from HFCs over the medium term. The current liquidity crisis provides banks
with an opportunity to further increase their exposure to home loans as they have more liquidity sources than NBFCs.
Furthermore, banks have intensified their focus on the traditional home loan space due to subdued demand and asset quality
pressures in the corporate sector.
Increased focus of banks is also reflected in portfolio buyouts. Post the IL&FS crisis, lenders have increased their target of
buying standard loans from NBFCs. Constrained by tight liquidity, HFCs collectively sold Rs 1,200-1,300 billion of their book via
securitisation in fiscal 2019.
Liquidity crisis leads to healthy growth prospects for banks due to higher retail focus and ample liquidity
Note: Home loan growth banks and HFCs E: Estimated P: Projected
Home loan outstanding credit growth to slowdown across all player segments
Small and medium-sized HFCs, which witnessed a boom in the past five years, will be the most affected due to the liquidity
crunch facing NBFCs. CRISIL Research believes large players with strong parentage will have greater access to funding
sources vis-a-vis their peers and would be relatively less impacted. Many large and mid-sized HFCs are mobilising resources
by selling their loan portfolio to banks. CRISIL believes securitisation would remain the key avenue to manage liquidity over the
medium term.
Mid-size and small HFCs expected to witness relative slowdown in growth
E: Estimated, P: Projected
Note: Classification is based on outstanding housing loan portfolio; large HFCs: > Rs 300 billion (top five players); mid-size HFCs and small players: outstanding < Rs
300 billion
HFCs likely to slow down non-home loan segment

CRISIL Research estimates HFCs total loan outstanding (housing loans, loan against property, wholesale loans and others)
increased 10-12% on year in fiscal 2019. Loan against property increased fastest among all, whereas the share of wholesale
finance remained stable at ~15% of the overall book due to funding constraints as banks are reluctant to lend for onward
lending in these segments owing to higher delinquency. Therefore, going forward, players will witness slowdown growth in non
retail segments.
Non-retail products in HFCs basket supported higher credit growth in the past
Note: Data representing more than 70% of the industry, past 3 yrs CAGR (2016-2019)
Within HFCs, large players are dominant but smaller players are gaining
market share
The housing finance industry remains concentrated, with top five players accounting for ~80% of outstanding loans as of March
2019. However, the extent of concentration has reduced with mid and small-sized HFCs gaining market share by growing
faster, albeit on a low base. Going forward, growth potential would be determined by fund raising ability of the players.
Share of Small sized players increased by 300 Bps over the past five years
Note: E: Estimated; P: Projected Note: Classification is based on outstanding housing loan portfolio; large HFCs: >300 bn (top 5 players); mid HFCs: 50 - 300 bn (next 10
players); small HFCs: <=50 bn (rest of HFCs)
Share of top five HFCs in retail housing finance is waning
The share of the top five players in the total housing loan outstanding of HFCs is declining continuously owing to a diminishing
proportion of housing loans in their incremental book and rising competition from new HFCs. A strong focus on niche customer
profiles such as self-employed population and increasing geographical presence of other HFCs are contributing to this.
Availability of funding (both equity and debt) and strong origination skills and operating processes have also helped small and
mid-sized HFCs gain market share.
4.0 Housing finance: Key growth drivers
Drivers for growth
Affordability led by disposable income
Indias per capita gross domestic product (GDP) grew at a healthy rate in the three years up to fiscal 2019. It rose to Rs
142,000 in fiscal 2019 (base year 2011-12). Among Indias GDP components, private consumption is the biggest contributor at
~58% in fiscal 2019. Per capita GDP, a proxy to measure private consumption, is estimated to have grown over 8% in fiscal
2018. With GDP accelerating in fiscal 2019, per capita GDP is expected to grow faster.
Buoyant trend in per capita GDP is expected to continue
Note: GDP per capita is in Rs '000
Source: CSO (Central Statistical Organisation), RBI, CRISIL Research
In the short to medium term, disposable income will rise as a result of implementation of the Seventh Pay Commissions
recommendations and sustained low inflation. This will be an enabler for domestic consumption. Increasing disposable income,
typically, has a positive correlation with demand for housing units as it increases affordability.
Low mortgage penetration
India's mortgage-to-GDP ratio was still low at 10-12% in fiscal 2019 compared with other developing countries, but it has
improved from 7.4% in fiscal 2010, given rising incomes, improving affordability, growing urbanisation and nuclearisation of
families, emergence of tier-II and tier-III cities, ease of financing, tax incentives, and widening reach of financiers.
Low mortgage penetration (% of GDP) compared with other developing countries
Note: India data for FY19, Other countries data for CY15
Source: European Mortgage Federation, HOFINET, CRISIL Research
Based on our analysis, mortgage penetration in India is 9-11 years behind other regional emerging markets, such as China and
Thailand. However, due to various structural drivers, such as a young population, smaller family size, urbanisation and rising
income levels, we believe growth rates in the mortgage segment should remain healthy over the long term.
Rise in finance penetration to drive the industry
An increase in finance penetration is also expected to support the industry's growth. Rising demand for housing from tier-II and
tier-III cities and a subsequent surge in construction activity have increased the focus of financiers on these geographies.
Consequently, finance penetration in urban areas is estimated to have increased to ~ 44 in 2019, from an estimated 39% in
2012. Boosted by the affordable housing push and rising competition in higher ticket size loans, we expect finance penetration
to increase to 45% in urban areas in fiscal 2020.
Uptick in finance penetration in urban areas

Source: CRISIL Research, Company Report, NHB
Apart from urban segment, rural areas are also likely to witness considerable improvement in finance penetration, led by the
government's efforts to provide housing for all. However, operational challenges, such as timely collection of payments, lower
ticket sizes and higher delinquencies compared with the urban markets will pose headwinds to rural expansion.
Rapid urbanisation will boost housing demand
Despite a flourishing housing finance industry, India still faces a huge shortage of houses, especially in the urban areas. The
share of urban population rose steadily from 31% in 2011 to an estimated ~34% in 2019. CRISIL Research expects
urbanisation to accelerate, with the urban population growing at a CAGR of 2.0-2.5% between 2018 and 2022, compared with
the overall population growth of 1.2% during the same period. The increasing urbanisation will boost per-capita GDP, as was
evident during the previous five years, and also enhance financial literacy and quality of living.Urbanisation has a twin impact
on housing demand: it results in a rise in the number of nuclear families, leading to the formation of more urban households,
and reduces the area requirement per household.
Trend in urbanization of population
Source: United Nations Department of Economic and Social affairs, IMF
Urbanisation provides an impetus to housing demand in urban areas as migrants from rural areas require dwelling units.
People from rural areas move to cities for better job opportunities, education, avail better lifestyle etc. Nearly 36% of the
countrys population is expected to live in urban locations by 2020, which will drive the demand for housing in these areas.
Rise in nuclear families leads to the formation of new houses
Nuclearisation refers to formation of multiple single families out of one large joint family; each of these families live in separate
houses while the ancestral house may be retained or partitioned to buy new houses. Nuclearisation in urban areas is primarily
driven by changing lifestyle of people, individualism, changing social/cultural attitudes and increased mobility of labour in
search of better employment opportunities. These trends are expected to continue in future.
Traditional tools to promote the housing sector : Tax incentives
The government has traditionally used tax regulations to promote the housing sector. Tax sops for the housing sector have
been instrumental in driving growth in the housing and housing finance sectors
Some of the tax benefits announced in Union Budget 2019-20 are:

Interest deduction on loans taken until March 31, 2020, for the purchase of a house valued up to Rs 45 lakh, has been
enhanced to Rs 3.5 lakh from Rs 2 lakh. The additional interest deduction of Rs 1.5 lakh would reduce the effective home
loan interest rate by 40-50 basis points (bps) for a typical 15-year loan -
Others tax benefits are as follows:
As per Section 24 (B) of the Income Tax Act, 1961, annual interest payments of up to Rs 200,000 (Rs 300,000 for senior
citizens) on housing loans can be claimed as a deduction from taxable income.
As per Section 80 C (read with section 80 CCE) of the Income Tax Act, 1961, principal repayments of up to Rs 150,000
on a home loan are allowed as a deduction from gross total income.
As per Section 80 EE, an additional deduction in respect of interest of Rs. 50,000 p.a has been provided exclusively for
first-time home buyers, given the property value is up to Rs. 5 million, the loan is up to Rs. 3.5 million
Interest subvention scheme will lead to a surge in loan disbursements over the next 3-5 years
The Cabinet Committee on Economic Affairs approved a proposal to increase the interest subsidy to 6.5% for loans of up to
Rs. 0.6 million the for economically weaker section (EWS) and lower income group (LIG) beneficiaries under Affordable
Housing through Credit-Linked Subsidy Scheme (CLSS) component of the Housing for All by 2020 mission.
In February 2017, benefits of the CLSS were extended to include middle-income group households as well. inclusion of middle-
income group (MIG) households, whose incomes range between Rs 6 lakh and Rs 18 lakh per annum under the credit-linked
interest subsidy scheme, will lead to a surge in loan disbursements over next fiscal years, leading to faster outstanding growth.
Higher government support for the affordable-housing segment (in terms of interest rate subsidies) as well as a low interest
rate scenario will boost overall housing loan demand over next two fiscal years.
GST cut a leg-up for realty demand
A drastic 700 bps reduction in the Goods and Services Tax (GST) from 8% to 1% for under-construction affordable housing
projects (effective rate after deducting one-third towards land cost) and from 12% to 5% for other under-construction housing
projects (effective rate after deducting one-third for land cost), is likely to increase end user demand. Also, the GST Council
adopted a new definition of affordable housing, which is now described as a residential house / flat with a carpet area of up to
90 square metres in non-metropolitan cities/towns, and 60 square metres in a metro, and having value up to Rs 45 lakh.
Metros identified are Bengaluru, Chennai, Delhi NCR (limited to New Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon and
Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region). It should be noted that 40-45% of
ongoing supply in these six cities fall below the Rs 45 lakh ticket size, so the effective 1% GST rate should stoke demand.
Over the past two years, preference for completed projects has been clearly visible because of the additional GST burden and
execution risks associated with under-construction properties. With the Real Estate (Regulatory & Development) Act, 2016,
(RERA) framework evolving and GST reduced, end-user confidence towards under-construction properties will improve. This
should also gradually improve volume growth in the housing segment.
Effective implementation of RERA will led greater transperancy and drive growth in the long term
Real Estate (Regulatory & Development) Act, 2016, could have some impact over next 1-2 fiscal years until the industry
adjusts to the new regulations, as RERA has forced developers to focus on completing their existing projects. This, coupled
with sluggish demand, has resulted in fewer new launches of residential properties. However, CRISIL Research expects RERA
will lead to better structure, transparency and discipline in the sector in future.
Copyright 2014 - 2016 CRISIL Research Limited.CMA
5.0 Housing finance: Borrowing mix
Bank borrowings to increase as elevated risk perception restricts market borrowings

During the first half of fiscal 2019, market rates increased sharply as indicated in benchmark commercial papers (CPs) and
non-convertible debentures (NCDs) rates which increased by 140 bps and 120 bps , respectively, during April-Oct 2018. In
addition to this, risk perception has also increased post the Infrastructure Leasing & Financing Services Ltd (IL&FS) default
which further restricted easy access to market borrowings.
Players with high ALM mismatch and higher share of non-retail portfolio are finding it difficult to raise funds from the market.
Also, mid and small-sized players (loan book size less than Rs 300 billion) are facing difficulties in raising money through NCDs
. Whereas players with strong parental support and relatively higher proportion of retail assets have been able to raise funds
from the market.
However, over time, and with measures taken by the regulator, the benchmark CP as well as NCD rates have softened.
Despite reversal in interest rate cycle, risk perception remains elevated in the market for players with high share of non-retail
portfolio and players that are not backed by a strong parent.
Benchmark CP rates cooled off post sharp increase after IL&FS default
Source: Reserve Bank of India, CRISIL Research
Player's dependence on bank borrowing to increase over the next two years
Note: Data represents around 70% of the industry; E: Estimated
Source: NHB, Company Reports, CRISIL Research
Till the first half of fiscal 2019, competitive market rates and easy access to market borrowings led to an increase in the share
of market borrowing, comprising CPs and NCDs. The proportion of market borrowing in the overall borrowing mix of non- banks
increased by 700-800 bps between fiscal 2016 and the first half of fiscal 2019. However, with increased risk perception post
IL&FS default, the proportion of bank borrowings increased from the second half of fiscal 2019. Also, small and mid sized
players are finding it very difficult to raise money from the debt market. CRISIL believes proportion of bank borrowings is
expected to remain high over the medium term.
HFCs access to funds from banks are expected to improve as the government and the Reserve Bank of India have also taken
or announced several measures to ease out liquidity in the market. Small and mid-sized players have higher reliance on banks
borrowings
Note : Large HFCs includes top 4 HFC's HDFC Ltd, Indiabulls Housing Finance Ltd., LIC Housing Finance Ltd., PNB Housing Finance Ltd; Mid Sized HFC's includes next
10 and Small Sized HFCs includes remaining players
Source: CRISIL Reserch
Large HFCs have better access to the debt market, given their size and parentage, making it relatively easier for them to
mobilise resources. On the other hand, mid and small-sized HFCs have greater reliance on bank borrowings and refinancing
from the National Housing Bank. Mid and small-sized HFCs not backed by big institutions would find it difficult to raise funds
from the market. While the former gets funds from the debt market by capitalising on the goodwill of its parent organisation, the
latter is more dependent upon banks' borrowings. However, in the current environment, due to increased risk perception, only a
few large players with strong parentage are able to tap the debt capital market with reasonable interest rate spread.
6.0 Housing finance: Profitability
Profitability to contract for HFCs as cost of borrowing rises
CRISIL Research expects the profitability of housing finance companies (HFCs) to contract by 20-25 bps over the next two
years in fiscals 2020 and 2021, on account of increase in the cost of borrowing as well as slight deterioration in asset quality
leading to higher credit costs. Consequently, during fiscal 2017 and 2018 , profitability contracted by 30 bps in fiscal 2019.
Rising interest rate cycle during the first half of fiscal 2019 and tight liquidity from second half onwards led to increased in
the cost of borrowing by 30-40 basis points (bps) in fiscal 2019, which is expected to rise further by 10 bps in fiscal 2020. On
the other hand, yield on advances is expected to fall by around~20-25 bps as market rates decline, which will be passed on to
home loan borrowers, given the current competitive scenario. In fact, from January 2019 to date, HFCs have already revised
interest rates downwards by 5-10 bps .The compression in profitability, going forward, willalso be because of intensifying
competition from banks.
Companies with negative asset-liability gap will face a higher impact on margins as they will have to refinance borrowings at a
higher cost.
Spreads expected to decline in fiscal 2020 & 21
E: Estimated P: Projected Note: Profitability is only for HFCs
Profitability analysis of housing finance players
E: Estimated, P: Projected Note: Profitability is only for HFCs; NII: Net Interest income/ Average total assets Opex, Credit Cost & RoA as percentage of Average Total
Asset
Large HFCs: Yields to remain under pressure on due to intense competition

from banks
Yield of large HFCs to remain under pressure as they directly compete with banks, who have lower borrowing costs as well as
higher customer information (as they provide savings account facility, whereas HFCs cannot). Going forward, CRISIL Research
expects yield of large HFCs to come down in tandem with yields of banks.
We have also seen that over the last couple of years, these large HFCs are shifting towards LAP and other non-housing loans
to sustain RoAs. However, on account of current liquidity crisis HFCs are expected to reduce their exposure towards non
housing products.
Yield to remain under pressure over the medium term
Notes: (1) Aggregate includes financials of 5 large Housing Finance Players (2) Profitability is only for HFCs
Large HFCs have better access to the debt market, given their size and parentage, making it easier for them to mobilise
resources. But, in view of liquidity issues post September 2018 we expect HFCs dependence on bank funding will increase.
Furthermore, HFCs do not have access to low-cost deposits, such as CASA (current account savings account) deposits of
banks; hence, their cost of funds is always higher than banks. HFCs also do not have the flexibility to completely transfer the
increase in cost of funds to customers due to competition from banks. Therefore, managing their cost of funds is vital for them
to be competitive in this space.
Cost of borrowing to increase over the next two years
Notes: Aggregate 1) Aggregate includes financials of 5 large Housing Finance Players NII: Net Interest income/ Average total assets Opex, Credit Cost , RoA as
percentage of Average total Assets
Higher cost of borrowings along with higher, albeit improving, operating cost
constrain profitability of mid-sized and small HFCs
Mid sized and small sized HFCs earn higher NIMs than large HFCs, as their books are highly concentrated on risky segments
(self-employed and informal sector), where they are able to charge premium on yield. However, their return on assets (RoA) is
lower large HFCs due to higher credit and operating expenses. Also credit cost is also on the rise due to seasoning of books.
Overall cost of fund is higher in small player segment as compared with mid-sized HFCs due to weak credit rating and lack of
access to the bond market. Higher operating cost constrains profitability of mid-sized and small HFCs
E Estimated, P: Projected NII: NII: Net Interest income/ Average total assets Opex, Credit Cost , RoA as percentage of Average total Assets
Asset quality expected to deteriorate further by 20-25 bps during FY19-21
As demand for home loans largely comes from first-time buyers, asset quality in this segment has remained low historically.
However, due to the seasoning of portfolios of rapidly growing HFCs, many of which are focused on self-employed customers,
delinquency in that segment could increase. Asset quality in the non-individual segment will also need to be closely monitored,
given the pressure in wholesale portfolio and LAP segment.
Asset quality expected to remain under pressure
E: Estimated; P: Projected Note: Data represents asset quality for HFCs

7.0 Low cost housing finance: Outstanding
Players focused on low-cost housing finance to witness ~700 bps decline in credit growth over next 2 years
There is enormous unmet demand for low-cost housing finance. Low-cost housing in India refers to housing for economically
weaker sections (EWS) and lower income group (LIG) households. CRISIL Research defines low-cost housing as a
housing market with housing finance-focused players whose average ticket size is of less than Rs 1 million. It is
believed that the root cause of shortage of low cost housing finance is lack of housing finance options for low-income
households. The supply of low-cost housing finance is constrained mainly by the inability of banks to accurately assess credit
risk associated with low-income borrowers, lower profit margins, lack of land titles, and uncertainty of repossession. Lending to
this segment has been restricted chiefly by:
High costs of serving on account of small ticket size and lower volumes
Unknown risks associated with the informal segment, wariness of financiers with regard to the high delinquencies and
uneven payback patterns
While the mortgage-to-GDP ratio in India is already miniscule, mortgage penetration in low-income housing is even smaller.
Due to the burgeoning traditional mortgage finance market, a few commercial banks have entered the low-income housing
market These banks tend to offer long-term mortgage loans, which extend to 20 years and require down-payment between
10% and 30% of the home value, payslips, and legal title to property.
With strong growth in the overall housing finance market and the increasing average ticket size of home loans, the number of
housing finance companies (HFCs) serving the financially excluded, lower-income informal customers has also increased.
Low-cost housing loan outstanding credit growth to slow down significantly

The low-cost housing market grew at a CAGR of over 35% from fiscal 2015 till the first half of fiscal 2019 outpacing the growth
of the overall housing finance market (which grew at ~20%) during the period. This was largely because of the increased focus
of the government and emerging players in low-cost housing. However, growth slowed down considerably in the second half
of fiscal 2019 due to liquidity constraints. Consequently, overall low-cost housing outstanding growth stood at 15% in fiscal
2019. CRISIL believes the outstanding home loan book of low-cost focused housing players will grow at a relatively slow pace
of ~8% CAGR over the next 2 years because of increased refinance risk and asset liability mismatch, which will result in
disbursement slowdown over the medium term. Despite slowdown in the supply side, we believe demand drivers will remain
unchanged. Huge latent demand in the economy for low-cost housing and intense government focus on the same will continue
to drive demand in the low-cost housing segment.
Low-cost housing segment to grow at relatively slow pace

E: Estimated, P: Projected Note: Aggregate includes housing outstanding of HFCs catering to average ticket size less than Rs 1 million in housing loans
Share of low-cost housing loans in overall housing loan outstanding expected to be in the range of 7-8% over next 2 years
E: Estimated; P: Projected Note: The above share of low-cost housing segment is based on our estimates which includes HFCs with ticket size <Rs 1 million. Other HFCs
include small, medium and large HFCs with ticket size >Rs 1 million.
Source: NHB, company reports, CRISIL Research

8.0 Low cost housing finance: Key growth drivers
Despite slowdown in credit supply, demand-side fundamentals are likely to remain intact and will drive growth over the long
term.
Government initiatives like 'Housing for all by 2022' and other regulatory
impetus will provide stimulus to low-cost housing segment
Push by the government to provide 'Housing for all' by 2022 and various steps taken to implement the same, are expected to
boost sales of affordable and low-cost housing units and consequently, financing for the same. Under the 'Housing for All'
mission, the central government has implemented the credit-linked subsidy component as a demand-side intervention, to
expand institutional credit flow, to meet the housing needs of people residing in urban regions.
In Union Budget 2019-20, the government proposed to build 1.95 crore dwelling units under the Pradhan Mantri Awas Yojana
(PMAY) (Gramin). Under the scheme, as many as 1.5 crore houses have been constructed so far.
Under the Pradhan Mantri Awas Yojana (Urban), out of the estimated 1 crore houses to be constructed over 7 years from fiscal
2016 to fiscal 2022, 84 lakh houses have been sanctioned as of July 2019. Of these, while 26 lakh houses have been
constructed, 22 lakh houses are under construction.
Over Rs 4,000 billion opportunity in low-cost housing due to demand-supply

gap
The Ministry of Housing and Urban Poverty Alleviation had estimated at the beginning of the Twelfth Five-Year Plan that urban
housing and rural housing shortage in India was around 18.78 million and 43.67 million, respectively. As per current estimates,
urban housing shortage is around 10 million, i.e., down by 50%.
Low cost-focused housing finance companies (LCHFCs) to cater to 10% of market opportunity over the medium term due to
strong growth of 27-30%
^ Market opportunity estimated, assuming one-fourth demand will be met through housing finance
Source : Ministry of Housing & Urban Affairs, NHB, CRISIL Research
Earlier, there was a shortage of 18.8 million homes across urban centres of India, of which, 95% were needed for the
economically weaker section (EWS) and low-income groups (LIG) in urban areas; in contrast, ~90% of shortage of houses is in
the below-poverty category in rural India.
Indias housing shortage has reduced by 50%, but is still enormous

Source: NHB, Urban Housing Shortage (2012-17) Report of the Ministry of Housing and Urban Poverty Alleviation
Large influx of new players focused on low-cost housing segment in Tier 3

and smaller cities
The past couple of years have seen a huge influx of new players, taking the number of HFCs from 55 in fiscal 2014 to around
100 in fiscal 2019. Further, large number of licences are pending with the National Housing Bank (NHB). Interestingly, many of
these new entrants are focused on the low-cost housing segment in Tier 3 and smaller cities. Many of the new smaller HFCs
are now emerging as important players in niche segments such as low-cost housing.
Saturation in key metro markets and tax incentives will deepen focus of
developers on Tier 2 and smaller cities
Very high cost of homes in Tier I cities has led buyers to explore more cost-effective markets in smaller cities, especially in the
low-cost segment. Also, many new entrants in the housing finance industry are focused on smaller cities and are expanding
their footprint in these regions.
NHBs revision of interest-spread cap for Rural Housing Fund will make
financing attractive for LCHFCs
For fiscal 2018, NHB had allocated Rs 6,000 crore under the Rural Housing Fund (RHF) and Rs 3,000 crore under the Urban
Housing Fund (UHF). Also, NHB revised the interest rate and on-lending cap under RHF in fiscal 2018. CRISIL Research
believes the revised on-lending cap of 3.5% is better as the previous 2% cap made financing unattractive because of higher
operating cost incurred to serve rural areas.
Lower aggression by PSBs in low-cost housing segment to benefit NBFCs in

near term
The asset quality of public sector banks (PSBs) in the lower ticket-size segment is at elevated levels. Banks are reluctant to
lend to rural and semi-urban areas, mainly because of their higher gross non-performing assets (GNPAs). HFCs have
capitalised on this opportunity and grown strong in this segment. It is evident that to be successful in this segment, sound local
knowledge is crucial. Thus, HFCs are employing staff from local geographies who understand the cultural dynamics of these
places.
9.0 Low cost housing finance: Borrowing mix
Dependence on banks to remain high in HFCs' borrowing mix
The share of banks in the overall borrowing mix of housing finance companies (HFCs) has increased to 48% in fiscal 2019
from 43% in fiscal 2017. CRISIL Research expects their dependence on bank borrowings to remain high, given the increasing
pool of smaller and new HFCs with limited access to the capital markets. Further, increasing interest rates will tilt the borrowing
mix towards bank funding for smaller HFCs. In addition to this, medium- and small-sized HFCs, which are not backed by big
institutions, would find it difficult to raise funds from the market due to increased risk perception.
Significant increase in borrowings from banks in FY 2019
Note: Aggregate numbers represent more than 70% of the industry
Source: CRISIL Research; Company reports
Small-sized HFCs traditionally rely on commercial banks and the National Housing Bank (NHB) for their borrowings. Over the
past few years, the government's focus on affordable housing and rural housing has raised the budgetary support for the NHB.
We believe this will continue, given the housing shortage and slow progress in rural housing, thereby boosting the prospects of
HFCs focused on affordable and low-cost housing.
Some HFCs are backed by larger ones or big financial institutions (FIs) and enjoy goodwill of their parent companies, in the
form of cheaper source of funds. Hence, with better parent support, the borrowings of large HFC-backed small companies are
more skewed towards the bond market as they are able to access funds easily and at better rates. Other HFCs with no
advantage of parentage have relatively lesser reliance on the bond market and depend more on banks.
10.0 Low cost housing finance: Profitability
High credit and borrowing costs to cap profitability of the low-cost housing
segment
The low-cost housing segment (<Rs 1 million) earned a lower return on asset (RoA) of around 2.2% in 2019 on account of
high operating costs (processing, verification and servicing costs) and high credit losses owing to low property appreciation in
the rural and urban outskirts, and higher bargaining power of buyers. CRISIL Research expects RoA in the segment to decline
a further 20 bps on account of margin compression and increased credit cost. Due to the recent liquidity crunch, the cost of
borrowing has been increased. CRISIL Research believes players with large and strong parentage will have advantage of
access to funding source over their peers and would be relatively less impacted.
Profitability to decline due to margin compression
E: Estimated P: Projected NII: Net Interest income/ Average total assets, Opex, credit Cost and ROA as a percentage of average total asset Note: Aggregate
includes financials of Avvas Financiers Ltd, Aptus Value Housing Finance India Ltd, Capri Global Housing finance Ltd, Gruh Finance Ltd, Mahindra Rural Housing
Finance Ltd, Mas Rural Housing Finance Ltd, Micro Housing Finance Corporation Ltd, Motilal oswal Home finance ltd., Shri ram housing finance Data represents around
70% of the industry
Cost of borrowing is expected to increase for low-cost-housing-focused HFCs
E: Estimated; P: Projected Note: Aggregate includes financials of Avvas Financiers Ltd, Aptus Value Housing Finance India Ltd, Capri Global Housing finance Ltd, Gruh
Finance Ltd, Mahindra Rural Housing Finance Ltd, Mas Rural Housing Finance Ltd, Micro Housing Finance Corporation Ltd, Motilal oswal Home finance ltd., Shri ram
housing finance
In the <Rs 1 million loan bracket, the overall cost of funds is higher than for large and medium-sized HFCs owing to weak credit
rating and lack of access to the bond market. However, a significant portion of the funding from the NHB refinance, which is
relatively cheaper than other financing avenues, reduces the overall cost of borrowing.
GNPAs to remain high in the low cost housing segment
Owing to concentration of low-ticket focused HFCs in semi-urban and rural areas, where the cash inflow of borrowers is highly
irregular and depends largely on macro factors (such as the monsoon), and their credit history is unavailable, these HFCs are
exposed to higher geographical concentration risk. To mitigate this risk, they charge higher yield and use different/unique
assessment strategies.
For the next two years, CRISIL Research expects overall gross non-performing assets (GNPAs) of these companies to remain
high owing to low seasoning of portfolios of rapidly growing HFCs, many of which are focused on self-employed
customers. Hence, this could increase delinquencies in the segment.
Asset quality to deteriorate further by 50-60 bps over fiscal 2019-2021
E: estimated; P: Projected Note: Data representing around 70% of the industry (HFCs with ticket size less than Rs 1 million)
Source: RBI, Company reports, CRISIL Research

11.0 Infrastructure financing: Outstanding
NBFCs' infrastructure finance book continues to grow at a healthy pace of ~12-13% over the next two years
NBFCs' infrastructure book grew 14% in fiscal 2019. The pace of growth was majorly supported by increased disbursements
by NBFCs towards transmission and distribution in the power segment. In addition to this, the renewable energy segment also
witnessed a significant increase in disbursements. Government-owned enterprises, such as PFC and and REC, witnessed
healthy growth in their loan book, based on increased sanctions and the ability to raise funds from the market.
Loan book to increase, as NBFCs augment their support to infrastructure projects
Source: RBI, company reports, CRISIL Research
The loan outstanding of infra-finance companies is projected to expand at a 12%-13% CAGR from Rs 7.4 trillion in fiscal 2019
to Rs 9.4 trillion in fiscal 2021, driven by strong demand from the transmission and distribution segment and the renewable
energy segment. Also, demand in the roads segment is expected to improve, driven by national highways and state road
planned investments.
Transmission and distribution segments to drive investments over the next five years
CRISIL Research expects investments of ~Rs 9-10 trillion in the power sector over fiscals 2020 to 2024. While generation
investments are expected to decline with the slowdown in capacity additions, investments in the transmission and distribution
(T&D) segment, which have lagged so far, are expected to pick up, led by the government thrust on improving infrastructure
and financial support from Central government schemes.
Segment-wise break-up of total investments in power segment

Note: E: estimates, F: forecast
Roads and Highways (around 4% share of overall infra outstanding of NBFCs) are also expected to report healthy growth over
the medium term, driven by national highways and state roads.
Awarding in national-highway projects is set to pick up in fiscal 2020, after a slump in the previous year, because of a strong
pipeline of projects under Bharatmala. CRISIL Research projects the National Highways Authority of India (NHAI) to award
4,300-4,700 km in fiscal 2020, up from ~2,200 km in fiscal 2019, because of a strong pipeline of projects under Bharatmala.
Furthermore, the development of state roads has progressed well in recent years, and we believe this momentum will continue.
Major states such as Maharashtra and Madhya Pradesh have increased the budgetary allocation for state roads significantly
this fiscal.
Further, the Centre has announced Pradhan Mantri Gram Sadak Yojana (PMGSY-III) in the Union Budget 2019-20 for
construction of 125,000 km of rural roads at a cost of Rs 80,950 crore. This is lower compared with the length of rural roads in
km constructed over the past five years . We expect to see a slight dip in rural-road investments over the next five years.
Overall infrastructure credit grew 17% in fiscal 2019
Infrastructure credit growth slowed down between fiscals 2014 and 2017, due to clearance delays, challenges associated with
the execution of infrastructure projects, conversion of discom loans into Ujwal Discom Assurance Yojna (UDAY) bonds, lower
capital, economic slowdown, along with cautious lending towards the sector, as banks were faced with NPA difficulties and
tried to control their exposure to improve their overall loan-book quality. Ease of access to commercial paper, external
commercial borrowing and other sources of funds were also responsible for growth slowdown during this period. Banks loan-
book growth witnessed a remarkable slowdown, as it grew at a meagre 6% over the four fiscals, while NBFCs performed
relatively well during the period, clocking a growth rate of 11%. It must be noted that while banks loan book towards the
infrastructure sector has witnessed negative growth between fiscals 2016 and 2017, NBFCs have grown at a relatively faster
pace and taken market share from banks. Their share in the overall market pie has seen remarkable increase from 35% in
fiscal 2013 to over 39% in fiscal 2017.
Banks exposure towards the infrastructure sector has further declined 2% in fiscal 2018, as they attempt to clean up their
books. In case of infrastructure loans, the tenure usually remains long, and the interest payments start only after the projects
start generating revenue; however, in case project completion witnesses delays, it could affect the entire cash flow for the
financier. Additionally, in case the project is not able to generate enough revenue, there exist risks with respect to interest
payments, and in certain situations, risks regarding default on the entire loan given out. This is one of the reasons why banks
have now started to reduce their exposure towards the sector; in fact, one of the largest public sector banks in the country has
decided against interest payment financing on these projects. Year-on-year, the overall loan book witnessed a 4%
improvement, driven by NBFCs' continued growth in infrastructure financing; their loan book improved 13% year-on-year
We expect the overall loan book towards the infrastructure sector to improve, driven by the fast-paced growth of NBFCs, as
banks look to improve their infrastructure asset quality.
Outstanding loans to infrastructure projects improved

12.0 Infrastructure financing: Key growth drivers
Govt push, revival in private investments to drive growth over next few years
Key growth drivers for different infrastructure segments:
New funding avenues for infrastructure sector
Infrastructure investment trusts

Infrastructure investment trusts (InvITs) are quasi-debt/quasi-equity instruments designed to pool small sums of money from a
number of investors for an infrastructure project that generates cash flow over a period of time. Part of this cash flow would be
distributed as dividend back to investors. InvITs are set up as a trust and registered with the Securties and Exchange Board of
India (Sebi). InvITs require a minimum investment of Rs 1 million and the funds are locked in for three years. Dividends from
the trust are to be distributed to the investors depending on the net cash flow (90% of the net cash flow is mandated to be
distributed to the investors), and there is no dividend distribution tax on InvIT units.
Infrastructure debt fund
Infrastructure debt funds (IDFs) have been an additional funding source for infra projects. They have been tapping pools of
private capital over the last three years. IDFs essentially act as vehicles for refinancing existing debt of infrastructure
companies, thereby creating headroom for banks to lend to new infrastructure projects. They are investment vehicles, which
can be sponsored by commercial banks and NBFCs in India in which domestic/offshore institutional investors, especially
insurance and pension funds, can invest through units and bonds. IDFs can be set up as either a trust or a company. A trust-
based IDF would normally be a mutual fund regulated by the Sebi and can be sponsored by banks and NBFCs, whereas a
company-based IDF would normally be an NBFC regulated by the RBI. Only banks and infrastructure finance companies can
sponsor IDF-NBFCs. More than Rs 90 billion has been raised through IDF-NBFCs and approximately Rs 20 billion, through
IDF-MFs.
IDF-NBFCs are allowed to invest only in infrastructure projects that have successfully completed one year of commercial
production. Hence there is no risk related to the completion of projects. This is a key advantage of such funds that has helped
draw investors to them.
NBFC-infrastructure finance companies (IFCs) will need to meet the following conditions for sponsoring an IDF-NBFC:
Sponsor IFCs would be allowed to contribute maximum 49% to the equity of the IDF-NBFCs with a minimum equity
holding of 30% of IDF-NBFCs.
Post investment in the IDF-NBFC, the sponsor NBFC-IFC must maintain a minimum capital adequacy ratio (CAR) and
net owned fund prescribed for IFCs.
13.0 Infrastructure financing: Market Share
NBFCs to gain market share; banks to remain cautious towards infrastructure finance
The market share of NBFCs in infrastructure finance grew by 600-700 bps over the last 5 years. However, banks which were
losing market share to HFCs over the last few years gained market share of around 100 pbs in fiscal 2019. In fiscal 2019, the
government had infused over Rs 1 trillion in public sector banks (PSBs), allowing five banks to exit the prompt corrective action
(PCA) framework. Also, in budget 2020, the government had planned to infuse around Rs 70,000 crore for recapitalisation and
providing growth capital to weak PSBs.
Despite PSBs getting recapitalised, CRISIL Research expects them to go slow on lending to power and infrastructure projects,
given the fact that they are already struggling with high amount of bad loans in the sector and much of the new capital would be
required for cleaning up the balance sheet (provisioning for existing bad loans and accounts sent to National company law
tribunal (NCLT)). Private corporate lenders, on the other hand, are focused on strengthening their retail franchise. Therefore,
well-capitalised and governmnet-backed infrastructure-focused NBFCs will gain market share from banks. Also, banks have an
internal ceiling with respect to the sectoral exposure they can have to a particular segment, whereas NBFCs are specialised
institutions lending to infrastructure projects with no such limitations.
Market share of NBFCs likely to increase over the next 2 years
Transmission and distribution segment to gain share in overall disbursement

in power sector
The share of disbursements in the transmission and distribution segment in the overall power sector increased from 45% in
fiscal 2018 to 57% in fiscal 2019 on account of strong support from the government in terms of higher budgetary allocations,
whereas that of the generation segment fell from 49% to 40% due to the poor financial health of private players and dearth of
new projects. With greater emphasis placed by players on the renewable power segments along with transmission and
distribution, their share in overall loan disbursements has increased. Going forward, we expect the transmission and
distribution segment to witness healthy growth on account of planned investment of ~Rs 3.8 trillion in transmission and Rs
3-3.2 trillion in the distribution segment over the next 5 years. Along with this, the share of renewable energy in the mix is
expected to increase, driven by growth in investments in solar power.
Transmission and distribution segment gains share in overall disbursements in power sector
Note: Data for Power Finance Corporation (PFC) and Rural Electrification Corporation (REC)
Financing by NBFCs concentrated on power sector, while banks have a much

diversified profile
A segmental analysis reveals that while banks lent almost 54% of their portfolio to the power segment (generation, distribution
and transmission companies), nearly 93% of NBFCs outstanding loans were extended to the power sector.
We must note that this portfolio is partly skewed due to the presence of government-backed specialised institutions such
as PFC and REC.
Infrastructure finance portfolio
Note: Data of NBFCs is estimated for 2019
PFC and REC together accounted for more than 80% of loan outstanding to the infrastructure sector by NBFCs
While PFC and REC are specialised power players, other NBFCs have a fairly diversified portfolio across power, roads,
telecom and urban infrastructure.
Market share among NBFCs (FY19)

Long-tenure infra loans typically widen the asset-liability mismatch of financiers. Banks, for instance, rely almost exclusively on
retail deposits to fund their advances.
While the average tenure of individual retail deposits does not exceed a year, infrastructure project advances have significantly
longer tenures.
To narrow asset-liability mismatch and incentivise banks to fund infrastructure projects, the RBI released guidelines on infra
bonds and the 5/25 structure.
Bonds continue to remain the major source of funding for NBFCs

NBFCs typically meet their funding requirements through market borrowings, particularly bonds. Bond issuances accounted for
78% of funds raised by NBFCs as of fiscal 2018, and the share of bonds exceeded 85% in total borrowings by PFC and REC.
Excluding PFC and REC, the borrowing mix of other NBFCs is skewed towards banks and financial institutions, and
bonds which now account for ~65% of the overall borrowing mix, with commercial papers and foreign currency
borrowings accounting for almost 35% share.
Market borrowing to remain largest source of funding for NBFCs

Funding mix of NBFCs (FY19) Funding mix of NBFCs (excluding PFC, REC)
Note: Funding mix is for FY19 (estimated)
Source: CRISIL Research, company reports

14.0 Infrastructure financing: Profitability
Higher credit cost and rise in non-performing assets to hurt infra focused
NBFCs profitability
As large non-banking finance companies (NBFCs) raise material share of their requirement in the bond market where coupon
rates are lower than the interest rates charged by banks, their cost of funds has been traditionally low. Bonds issued by Power
Finance Corporation Ltd. (PFC) and Rural Electrification Corporation Ltd. (REC) have a wide market acceptance (highest
credit rating and tax-free feature of bonds), which allows them to keep their borrowing costs at a lower spread over government
securities. Further, these NBFCs can also diversify their borrowings and control cost of raising funds as they can access
external commercial borrowings (subject to cap of 50% of their net worth or $500 million, whichever is lower, under the
automatic route), at a time when global interest rates are lower. Given the credit rating and quantum of net worth of
government entities PFC and REC, they can efficiently raise sufficient resources in the foreign markets. As a result, these
entities enjoy lower cost of funds than their counterparts who borrow at a relatively higher cost.
Overall spread expected to decline by 10 bps in the next two years
Note: Above nos. are aggregate for PFC, REC, L&T Infra and SREI Infra
During fiscal 2019, the cost of borrowing declined by 15-20 basis points (bps) for the industry. However, the aggregate cost of
borrowings looks elevated, excluding PFC and REC. We expect cost of borrowing for infrastructure financing players to decline
by ~10 bps (to 7.5%) over the next two years, as market rates have softened and bank credit turned cheaper over the past
three four months.
Few players witnessed a significant drop in yields in fiscal 2019 owing to loan reset policy and some high-priced loans were
repaid by borrowers during the year. The Reserve Bank of India has lowered the repo rate by 110 bps since January 2019 and
a change in bank lending rates would pull down overall yields for infra financing players as they directly compete with banks.
Further, yields are likely to decline by 10-15 bps in fiscals 2020 and 2021 as the MCLR (marginal cost of funds-based lending
rate) of banks comes down.
Despite the decline in yields, profitability improved in fiscal 2019 as players benefited from provisioning write back owing to a
shift to Ind-AS. Credit costs as a percentage of average assets decreased significantly in fiscal 2019 based on this migration.
Going forward we expect, profitability to reduce to 1.8% in fiscal 2020 and stabilize thereafter. The decline in profitability for
entities other than PFC and REC likely to be on account od decline in asset quality, and, consequently, higher provisioning.
Profitability of infrastructure NBFCs expected to reduce and stabilize thereafter
Note: Above nos. are aggregate for PFC, REC, L&T Infra, and SREI Infra. Net interest income is calculated as (Interest income on advances - Interest paid)/average
assets)
GNPAs to remain high over the medium term
Infrastructure finance companies among NBFCs are facing worsening asset quality. Market leaders in the domain, including
PFC and REC, face major portfolio concentration risk as their loans are primarily based in the power domain. Also, the weak
profile of the borrowers and the inherent risks associated with project financing, such as delayed clearances and cash flows,
made their non-performing asset (NPA) problem more acute in fiscals 2018 and 2019.
Industry gross NPAs (GNPAs) rose to 8.6% of the gross advances from 7.6% in fiscal 2017, driven by poor asset quality of
players such as REC and IIFCL.The GNPAs of NBFCs had been a mere ~2.8% in fiscal 2016. However, it shot up because
NBFCs migrated to new NPA recognition norms whereby a loan is classified as an NPA if the borrower is 90 days past due
(dpd) in payment.
Industry GNPA ratio expected to stabilize with stability in the NPA recognition norms
Note: GNPA nos. are aggregates for PFC, REC, SREI Infra, L&T Infrastructure Finance and PTC India Financial Services;
Infrastructure financing asset quality remains inherently vulnerable to the weak credit risk profile of borrowers. Furthermore, the
players have high sectoral concentration, mainly skewed towards the power segment. Also, more than 80% of industrys
advances is towards government sector power utilities including generation, transmission companies and discoms.
Overall gross non-performing assets of the industry increased by 20-30 bps in fiscal 2019, excluding PFC and REC. GNPAs
deteriorated sharply by over 300-330 bps during the period. Asset quality for few players has improved as under Ind-AS
reporting, as all loans towards state power utilities and public sector undertaking were upgraded to Stage I and Stage II assets
from the NPA category earlier. Other infra players witnessed significant increase in overall GNPA. Going forward, we expect
the overall GNPA of the industry to increase by 200 bps in fiscals 2020 and 2021 on account of asset quality risk of private
sector power player, which have increasingly become more vulnerable because of industrial issues such as lack of fuel
availability, inability to pass on fuel price increase, and absence of long-term power purchase agreements for assured power
off take.
15.0 Wholesale Finance: Outstanding
Wholesale finance
Wholesale finance represents lending services to medium-sized and large corporates, institutional customers and real estate
developers by banks and other financial institutions. It encompasses long- and short-term funding.
Non-banks posted 8% growth in fiscal 2019 as against 26% between fiscals 2013 and 2018
In the past, non-banks witnessed strong growth (five-year CAGR of 26% till fiscal 2018) in their wholesale financing books on
account of easy availability of funds and increased demand since banks curtailed their disbursements in the segment.
However, in fiscal 2019, on account of liquidity crisis, non-banks grew just ~8% to ~Rs 3,300 billion in fiscal 2019.
Non-Banks Wholesale Book Growth
Note: Includes NBFCs and HFCs
Non-banks grew ~11% between April 2019 and September 2019. On account of liquidity squeeze in the second half of fiscal
2019, non-banks de-grew ~3% between October 2018 and March 2019, thereby, growing only ~8% in fiscal 2019.
Non-banks' First and second half growth of the wholesale book in fiscal 2019
Note: Includes NBFCs and HFCs
While players with strong parentage and other players posted robust growth in in the first half of fiscal 2019, in the second half
growth slowed down (players with not so strong parentage witnessed greater impact) leading to overall subdued growth of 8%
in fiscal 2019.
Slowdown in non-banks was partly offset by banks in fiscal 2019
CRISIL Research estimates the market size of wholesale financing (including lending by banks and non-banks) at Rs 30 trillion
as of fiscal 2019. The market grew at a CAGR of 10% between fiscals 2016 and 2019, whereby banks grew at a three-year
CAGR of 8% and non-banks at 21% till fiscal 2019.
Banks subdued growth in the past was due to:
A few public sector banks (PSBs) who had higher exposure to corporate lending were brought under the prompt
corrective action (PCA) framework, thus limiting their ability to lend
Banks turned more cautious towards corporates given the high rate of delinquencies
Though banks witnessed subdued growth in the past, in fiscal 2019, banks' growth picked up and was about 10%. With banks
coming out of the PCA framework and the governments capital infusion in PSBs in fiscal 2020, CRISIL Research expects credit
growth of banks in the corporate sector to remain broadly stable for the next two years as banks are still grappling with high
gross non-performing assets (GNPAs) in the corporate sector.
Banks have a higher market share of 89% in wholesale lending vis--vis non-banks' 11%. Banks extend long and short-term
funding to diverse sectors. On the other hand, non-banks have limited exposure to long-term funding, except for certain public
non-banks that cater to the infrastructure sector.
In our analysis, we have excluded lending to the infrastructure sector and covered only loans offered to large corporates in
non-infrastructure segments. Lending to the infrastructure sector is covered separately under Infrastructure Finance tab of the
report.
Fiscal 2019 growth was driven by banks (grew ~10% on-year) as non-banks slowed in the segment (grew ~8%)
E: Estimated Note: Industry numbers exclude infrastructure and SME finance for banks and non-banking financial companies (NBFCs), and include developer loan as
well as other large corporate loan portfolio for housing finance companies (HFCs).
Source: Reserve Bank of India (RBI), CRISIL Research
Non-banks to witness de-growth over the next two years
Though banks interest rates are lower by 250-350 basis points (bps), non-banks retain their edge over banks by offering more
complex and structured deals. Thus, non-banks witnessed robust five-year CAGR of 26% till fiscal 2018. It logged another ~8%
to reach Rs 3.3 trillion in fiscal 2019.
Despite liquidity coming back into the market in fiscal 2020, banks and mutual funds have turned more cautious towards
lending in the wholesale segment. We expect non-banks to de-grow over the next two years to Rs.3,200-3,300 billion on
account of the following reasons:
Increased risk perception of the wholesale segment

More cautious lending resulting in restricted access to funds for non-banks in the wholesale segment
Elevated levels of costs of funds
Stress in the real estate sector (lending to real estate forms ~60% of non-banks' wholesale lending)
Slowdown in private capex along with weak business sentiments in key sectors
Non-banks' wholesale portfolio to be range bound over the next two years
E: Estimated, P: Projected Note: Non-banks include NBFCs and HFCs

Source: RBI, NHB, company annual reports, CRISIL Research
Diversified players holding significant market share in wholesale lending business
The top NBFCs in wholesale financing are: Piramal Capital Housing Finance Ltd, Aditya Birla Finance Ltd, Tata Capital
Financial Services Ltd, and Edelweiss Financial Services Ltd. Large HFCs in the wholesale segment are HDFC, Indiabulls
Housing Finance, Dewan Housing Finance, and PNB Housing Finance. The top five players in wholesale financing among non-
banks (HFCs and NBFCs) account for more than half of the overall wholesale financing market.
Top five players constitute ~55% of the market among non-banks
Note: Data estimated for FY19, non-banks include NBFCs and HFCs
Source: CRISIL Research, company report
Wholesale finance players concentrated in top 5-6 cities
The penetration of wholesale finance players is primarily in metros and tier 1 cities such as Mumbai, Bengaluru, Delhi NCR,
Pune, Chennai, Hyderabad and Kolkata, as exit options are difficult in smaller cities, especially in the real estate segment
which forms a significant chunk (more than 60%) of the overall non-banks wholesale portfolio. Wholesale financiers in real
estate finance mainly work with top developers in these cities.
16.0 Wholesale Finance: Key growth drivers
Non-banks gained market share through innovative product offerings and strong client relationships
Customised solutions
Non-banks offer customised loan structures with features such as interest moratorium and bullet repayment schedules, which
are not offered by banks. In addition, non-banks often extend credit to developers for land financing and early-stage project
financing.
Lower turnaround time
Customers often require funds in a timely manner for funding business growth and/or managing the liquidity crunch. Non-banks
are able to meet such requirement thanks to faster turnaround time. On average, non-banks disburse a large ticket loan to a
new customer within 45-60 days.
Slower decision-making process in public sector banks
Decision-making cycle in some public sector banks (PSBs) is too long owing to risk aversion and fragile capital position. This
has also contributed to the growth of non-banks.
Strong client relationships
Some non-banks have strong client relationships due to their presence in allied businesses, or because they are supported by
well-established parent companies. This aids them in securing the business and in risk assessment.
17.0 Wholesale Finance: Lending to Real Estate Sector
Non-banks have slowed down towards real estate sector in fiscal 2019
Non-banks have slowed down their lending towards real estate sector on account of:
Asset quality concerns given stalled realty projects and weak demand
Restricted access to funds for non-banks as perceived risk is higher in this segment
Funding challenge in the real estate sector which is impacting the sectors recovery and putting pressure on property
prices
Non-banks slowed down considerably in the real estate segment in fiscal 2019
Note: Outstanding data estimated, Non-Banks includes NBFCs and HFCs
Source: CRISIL Research estimates, Industry
Despite the slowdown, real-estate financing still accounts major portion for
Non-banks wholesale credit (fiscal 2019)
NBFCs' wholesale portfolio HFCs' wholesale portfolio
Note: Breakup is based on top 5-6 players each in NBFCs and HFCs space which combined form 75-80% of the Non-Banks wholesale industry
Source: CRISIL Research estimates, Industry

Post liquidity crisis in fiscal 2019, financiers have now become more cautious towards wholesale non-bank players
Post liquidity squeeze among Non-banks in fiscal 2019, real estate industry witnessed exacerbated funding challenges
since non-banks fund substantial part of real estate sector borrowing
As per industry sources, post October 2018, majority of funding to real estate developers is of already sanctioned loans
thereby pushing developers to focus more on completion rather than on new launches. In few cases, developers are also
asked to get their loans transferred to different financiers. With respect to fresh funding to developers, financiers have
restricted themselves in taking additional fresh exposure; even if they take new exposure, it is majorly towards top
developers.
Consolidation in the real estate sector to see increased momentum; financiers to participate in large transactions by co-
investing
Consolidation has accelerated post demonetization and RERA as smaller players struggle to comply with stringent norms.
Given the ongoing stress in the sector, majority of the small real estate developers will find difficult to survive going forward.
Post liquidity squeeze among non-banks in fiscal 2019, smaller developers are witnessing greater restricted access to funds
(when compared with large developers) thereby increasing the consolidation in the real estate industry.
Large developers on the other hand have different avenues to raise funds through external commercial borrowings, private
investments, assets sale and therefore are lesser impacted by restricted access to fuds .
It is likely that consolidation in real estate industry would intensify. Lenders will then have to inevitably participate in large
transactions through co-investing with other partners.
Players with strong parentage continued to grow their real estate book post the liquidity crisis
The entire segment posted robust growth in first half of fiscal 2019. However, post liquidity crisis in October 2018, players with
not so strong parentage witnessed substantial decline in their books.On the other hand, players with strong parentage
continued to grow their real estate book.
Change in non-banks' real estate book in fiscal 2019
Note: Data estimated, Non-Banks includes NBFCs and HFCs
Source: CRISIL Research estimates
Withdrawal of subvention schemes to impact HFCs growth
HFCs have been directed to cease lending towards subvention schemes,;schemes where loans are serviced by builders
or developers on behalf of borrowers giving developers the access to low-cost funding (at home loan rates - giving a
advantage of yield differential of 400-500 bps to developers). HFCs are likely to witness slowdown in disbursements
given National Housing Bank's (NHB) directive to withdraw subventions schemes.
These schemes were offered by developers to incentivize buyers and accelerate their sales. Withdrawal of such schemes
might bring down the sales or the developers would have to give deep discounts to accelerate sales. This would
adversely impact the developers facing liquidity/funding issues and if developers drop prices sharply to accelerate sales,
it might lead to erosion in asset cover and thereby resulting a sharp rise in the existing LTV on books.
18.0 Wholesale Finance: Profitability
Profitability to deteriorate owing to increased credit costs
The wholesale segment has typically reported higher profitability, given higher yields (on account of structured products) and
lower credit cost. Majority of wholesale finance products command interest rates between 11-19%, with real estate financing
and structured finance being the costliest due to higher risks and complexity of business.
High return on asset (RoA) on account of higher yields (fiscal 2019)
NIM: Net interest margin; Opex: Operating expenditure; RoA: Return on asset
Source: CRISIL Research estimates
The cost of funds for wholesale financiers increased 35-40 bps in fiscal 2019, owing to liquidity squeeze among non-banks
players and increased risk perception of players in the segment. This is expected to continue in fiscal 2020 as the real estate
sector continues to face multiple challenges. Therefore, spreads on long-term Non-convertible debentures (NCDs) issuances
are expected to remain high, which will continue to keep the cost of funds high. However, in fiscal 2021, the cost of funds is
expected to decline as funding availability increases gradually.
Nevertheless, net interest margin will broadly be in range as the increase in cost of funds are typically passed on to the
corporates /developers.
Credit cost is projected to increase up to fiscal 2021 as gross non-performing asset ( GNPA ) is expected to rise from the
current levels of ~2%. The extent of increase in credit costs will vary depending on the chunkiness of exposure of each player.
Consequently, return on assets for wholesale finance players is expected to decline in the next two fiscal years
Concentrated portfolio poses high asset quality risk

GNPA of non-banks vary and are vulnerable because of sizeable single-borrower exposure, especially given the skew towards
real estate. While security cover and structure are usually strong, monetizing pledged assets could prove challenging for non-
banks, as the ticket size is usually very high and the risk is concentrated among a few large borrowers.
Hence, a loan default by a single borrower could result in high GNPA and higher credit cost for the financing company.
Considering the risk because of the concentrated loan portfolio of several players, we expect the GNPA level to be higher than
the current levels
Despite a high collateral cover, liquidating the collateral is challenging in a slowing economy. Additionally:
Collateral cover is reduced when real estate prices fall
Volatile shares prices result in fluctuation in the value of collateral cover
At times, event-based default takes place based on some developments, such as bad publicity
19.0 MSME finance: Outstanding
Overview of MSME finance
Micro, small, and medium enterprises (MSMEs) complement large corporates as suppliers and directly cater to end-users. The
MSME sector contributes to the country's socio-economic development by providing large employment opportunities in rural
and backward areas, reducing regional imbalances, and assuring equitable distribution of national wealth and income. The
segment contributed to 29% of the gross domestic product as of fiscal 2016, thus supporting the countrys economic
development and growth.
The Reserve Bank of India (RBI) has adopted the definition of MSMEs in line with the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006. This definition is based on investments in plant and machinery in manufacturing and
services sectors.
Definition of MSMEs: By size of investment in plant and machinery
Source: RBI
However, the government is now considering an amendment to the MSMED Act, to have a single definition for MSMEs. The
proposed definition of MSMEs for both manufacturing and services is based on turnover.
Proposed definition for MSMEs
Financial institutions also use internal business classifications to define MSMEs, based on the turnover of the enterprise. Most
banks and non-banks follow this practice.
MSME financing structure (fund based)

Note: OD & CC - overdraft facility and cash credit facility, TAT turnaround time
Non-banks' MSME credit growth has slowed down after years of buoyant growth
While growth was robust for non-banks in first half of fiscal 2019, their book was broadly stable between October 2018 and
March 2019.
Portfolio mix of non-banks as on fiscal 2019
Source: Company reports, CRISIL Research

Total non-bank MSME credit to grow at a lower pace of 12-13% CAGR up to fiscal 2021
MSME credit of non-banks: Past and Projected growth
Non-banks' credit to the sector had witnessed robust growth of 24% compounded annual growth rate (CAGR) between fiscals
2015 and 2018. However, on account of the liquidity crisis in fiscal 2019, growth slowed down to ~15% in fiscal 2019. Post
liquidity squeeze, banks, mutual funds, and other financiers have turned more cautious towards lending to certain business
segments such as wholesale finance and loans against property (LAP).
Despite liquidity flowing back into the market in fiscal 2020, access to funds is still difficult in the business segments such as
wholesale finance and LAP. Non-banks in the said segments are witnessing restricted access to funds on account of increased
risk perception, thereby leading to elevated levels of costs of funds, and thus, lower growth in the segments.
Since LAP forms a major portion of non-banks portfolio, a slowdown in the segment is expected to pull down overall non-bank
MSME credit growth in the next two years. LAP, which forms 64-65% of the non-banks' MSME portfolio, is expected to shrink
to 60-61% by fiscal 2021.
Loan against property (LAP): LAP: Market size, growth outlook and
20.0
key growth drivers
LAP market size
Loan against property (LAP)
An LAP is availed of by mortgaging a property (residential or commercial) with the lender. The end-use of the loan amount is
not closely monitored. It could be used for either business or personal purposes. It can be availed of by both salaried and self-
employed individuals. LAP is a secured loan, as it provides collateral to the financier in the form of the property. Its interest rate
is lower compared with personal or business loans. For all these reasons, LAPs have grown popular among borrowers in
recent years.
Evolving landscape of the LAP market
Total outstanding LAP (banks and non-banks) grew at a compound annual growth rate (CAGR) of 25% over the past
five years until fiscal 2018
Earlier, growth was led by an increase in product awareness, coupled with higher financier willingness to lend. Key factors
contributing to high LAP growth in the past were:
1. Quick turnaround time, lower interest rate, lesser documentation: LAP loans get disbursed in about half the time
taken for a secured 'micro, small and medium enterprise' (MSME) loan. It is also offered at a lower interest rate compared
with secured MSME loans, unsecured personal and business loans. LAP requires lesser documentation compared with
other secured SME products, leading to lesser hassles to customers.
2. Greater transparency in the system: Demonetisation, GST, and the governments strong push for digitisation have led
to higher transparency in the system. This will keep pushing up loan-amount eligibility of borrowers. Formalisation will
also help many new borrowers to come under the ambit of formal lending channels.
3. Rising penetration of formal channels: Increase in penetration and availability of formal lending channels in other than
top 10 cities will take away the market share from money lenders.
4. Higher comfort for lenders: Lenders are comfortable disbursing LAP loans, as they offer favourable risk-return
characteristics compared with MSME and unsecured loans. They also offer higher recovery in case of default (supported
by the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002) and better
asset quality is only partly offset by lower yields.
LAP growth slowed down in fiscal 2019 in the wake of liquidity crisis and increasing asset-quality concerns
After witnessing robust growth of 25% (five-year CAGR) until fiscal 2018, total LAP (banks and non-banks) growth slowed
down to ~14% in fiscal 2019, because of liquidity crisis among non-banks and increased asset-quality concerns.
Key reasons for slowdown in LAP growth:
1. Restricted access to funds: Non-banks (NBFCs and HFCs) account for ~51% of the total LAP industry. After
the liquidity squeeze in fiscal 2019, risk perception has increased towards the LAP segment. Therefore, despite liquidity
coming back in to the market, non-banks in the LAP segment are still witnessing restricted access to funds and, thus,
elevated levels of borrowing costs. Because of higher costs and asset-quality deterioration, non-banks have considerably
slowed down to 12% in fiscal 2019, dragging the overall LAP (banks and non-banks) growth to ~14% in fiscal 2019.
2. Balance transfers and top-up loans: High competition in the LAP segment in the past led to aggressive lending by non-
banks and lower yields. Non-banks sourced major proportion of the book through balance transfer, whereby additional
top-up loans were given, leading to higher LTVs. In the current scenario, due to increased asset-quality concerns, loans
sourced through balance transfers have delclined substantially, leading to lower growth.
3. Asset quality concerns: Due to intense competition in the past, players resorted to aggressive lending, thereby diluting
some of the underwriting norms. In the past year, LAP GNPA has increased ~60 bps to 3.3% as of fiscal 2019. Also,
declining property prices have worsened the asset-quality concerns.
4. Reduced disbursements towards high-ticket loans: Lenders are now increasingly becoming risk averse to higher-
ticket loans (risk is concentrated and monetising pledged assets could prove challenging, because of higher ticket size)
and are switching to lower ticket-size segments.
LAP market grew 14% in fiscal 2019 to reach Rs 4.5 trillion
Note: Includes banks and non-banks
LAP market to grow 13-14% CAGR up to fiscal 2021
Note: Includes banks and non-banks
With continued restricted access to funds and asset-quality concerns, CRISIL Research believes the LAP market outstanding
to grow at a modest 12-13% in fiscal 2020 and a pick-up in growth at 14-15% in fiscal 2021, leading to a CAGR of 13-14% until
fiscal 2021.
Though growth will pick up in fiscal 2021, it is unlikely to reach pre-crisis levels, as lenders are likely to be risk-averse in this
segment. We expect the total LAP market (banks and non-banks) to reach ~Rs 5.9 trillion by fiscal 2021.
Non-banks, which grew 19-20% (two-year CAGR) until fiscal 2018, grew just ~12% in fiscal 2019 and are expected to grow at a
subdued rate of 9-10% CAGR between fiscals 2019 and 2021.
21.0 Loan against property (LAP): LAP: Competitive scenario
Non-banks to lose market share by ~300 bps from 51% to 48% by fiscal 2021
In the past few years, non-banking finance companies (NBFCs) have lost their loan against property (LAP) market share owing
to efforts to contain asset quality deterioration and yield pressure. With the liquidity crisis, non-banks (NBFCs and housing
finance companies - HFCs) have grown at a much reduced 12% in fiscal 2019 as against 19-20% compound annual growth
rate (CAGR) in the two fiscals till fiscal 2018.
Private banks registered strong growth in the LAP market. This was on account of their aggressive market strategies, branch
network, lower cost of funds, and the advantage gained by liquidity crisis in the non-banks sector.
After tight liquidity in fiscal 2019, non-banks have started becoming more focussed towards risk and compliance. They are
changing their strategies from growth to going for calibrated growth by taking calculated risks.
CRISIL Research expects NBFCs growth to slow down further from 9-11% (two-year CAGR till fiscal 2019) to 5-7% CAGR
over the next two years. Growth for even HFCs is expected to stutter to 11-13% till fiscal 2021 as against 22-24% till fiscal
2019 (two-year CAGR).
The 19-20% two-year CAGR witnessed by non-banks till fiscal 2018 is expected to halve to 9-10% in the period between
fiscals 2019 and 2021.
Private banks and well-capitalised public sector banks will partly be able to capture market share on account of the slowdown
in non-banks in the near term. However, we expect banks' growth to be range-bound .
Restricted access to funds to slowdown NBFCs and HFCs growth
Source: Company reports, CRISIL Research Estimates
Banks will partly offset the slowdown in Non-banks and thus gain market share
Note: Market share is calculated on the basis of outstanding portfolio

22.0 Loan against property (LAP): LAP: Profitability
Yields to remain stable; profitability to decline over the next two years
In the past, LAP yields were on a declining trend because of higher competition and aggressive lending in the segment (the
major portion of the portfolio was sourced through balance transfer and additional top-up loans were given). Higher competition
led to a sharp decline in net interest margins (NIMs) of the LAP portfolio.
In fiscal 2019, while the borrowing cost increased 30-40 bps, players could pass through a partial 20-25 bps in the form of
increased LAP (loan against property) yields. This led to compression in NIMs by 10-15 bps. LAP yields are expected to remain
at similar levels, due to:
Cautious lending approach by banks and other financiers to the non-bank players in the LAP segment, thus leading to
restricted access to funds
Reduced competition in the segment, as aggressive lending fades away
Increase in delinquencies in the past year
Increase in penetration in smaller cities and higher proportion of micro-loans
NIMs are expected to be at similar levels until fiscal 2021.
Trend in LAP NIMs
Source: CRISIL Research, CRISIL Ratings
Lower dependence on DSA to keep opex stable for non-banks
About 55-60% of the LAP disbursements (by value) given by non-banks are sourced through direct-selling agents (DSA). This,
along with employee cost, accounts for most of the operating expenditure (opex) of lenders. Opex is expected to remain stable,
as the increase in penetration in non-metros and higher focus on micro LAP will be offset by lower dependence on expensive
DSA sourcing.
Asset quality of non-banks to deteriorate, as portfolio seasoning and slower growth effect come
into play
In the past, high competition in the LAP segment led to aggressive lending by non-banks. Non-banks sourced the major
proportion of the book through balance transfer, whereby additional top-up loans were given, leading to higher LTVs and, thus,
higher risks in the LAP book.
Asset quality of LAP deteriorated in fiscal 2019, with gross non-performing assets (GNPA) ratio (90+ dpd) increasing from 2.7%
in fiscal 2018 to 3.3% in fiscal 2019, as many players saw deterioration in their LAP asset quality. For many players, provision-
coverage ratio (PCR) declined as of fiscal 2019, because of increased slippage.
We expect gross non-performing assets to deteriorate from these levels, as portfolio seasoning and slower growth effect
(further impacted due to restricted access to funds) come into play. We expect GNPAs to increase by another 70 bps to 4.0%
in fiscal 2020 and by 30 bps (as most of the slippage would have been accounted in fiscals 2019 and 2020) to 4.3% in fiscal
2021.
After witnessing tight liquidity in fiscal 2019, non-banks have started becoming more focussed towards risk and compliance.
They are changing their strategies and increasing their efforts on collections for a more calibrated growth. Several players have
also initiated efforts like blacklisting certain sectors, which have experienced high delinquencies in the past. Availability of
better borrower data with GST implementation, will help lenders assess borrowers' profiles. However, all these measures will
assist Non-banks to source good quality incremental book and thus will help in controlling NPAs in the long run.
GNPA ratio of non-banks expected to increase in near term
Return on assets (RoA) of LAP products declined in fiscal 2019, mainly due to lower NIMs (increased cost of funds could not
be passed completely to the end-customers), and increased credit costs.
Profitability to be lower compared to prior levels of 1.5-2.0% on account of lower NIMs and elevated levels of credit costs in the
segment.
Estimated profitability of LAP market (includes NBFCs and HFCs) in fiscal 2019

23.0 Loan against property (LAP): LAP: Micro-LAP
Growing interest in micro LAP
CRISIL Research defines micro-LAP (loan against property) as LAP loans of a ticket size of less than Rs 5 million.
The non-banks' share of micro LAP in incremental LAP disbursements has grown at ~20-25% compound annual growth rate
(CAGR) over the past two years.. We expect loans within this ticket size to continue growing faster in the near term since:
These loans generates ~50 basis points higher yield compared with large ticket-size loans
Penetration increases in smaller cities
Becoming increasingly risk-averse to higher ticket loans, lenders are switching to lower ticket size segments
The median incremental ticket size of non-banks declined at 10-15% CAGR over the past three years to Rs 8 million in fiscal
2019, indicating an increasing trend in disbursements of micro LAP.
Share of micro LAP in overall LAP disbursements
Note: MTS: median ticket size
The profitability of micro LAP is slightly higher than big ticket-size LAP loans as they command higher yield on account of their
low ticket size. Micro LAP loans usually have ~50 bps higher interest rates compared with big ticket LAP loans (to the same
customer). The higher yield is partly offset by the greater opex and relatively higher credit cost (due to relatively higher
concentration in smaller cities and low-grade customers).
Estimated profitability of micro LAP product (includes NBFCs and HFCs) in fiscal 2019
Note: All the above items are divided by average assets; RoA: return on assets

24.0 Loan against property (LAP): LAP: Key industry trends
Key trends in LAP market
Outlook on key industry parameters (non-banks)
Higher LTV allures borrowers to go with residential property
While financing can be extended to any type of property, the perceived risk associated with each property is different, based on
the borrower's emotional attachment to the property. Residential property is considered the safest. Hence, the interest rates
charged on them are the lowest and loan-to-value (LTV) provided is higher . Interest rates charged on plots or industrial
properties are higher than the rates charged on residential properties.
Additionally, banks are usually reluctant to lend against plots or industrial properties; even if they do so, LTV will be low,
rendering the role of HFCs and NBFCs pivotal.
Collateral-wise interest rate and LTV for LAP (non-banks)
Surrogate lending to decline
Due to the higher share of the informal self-employed segment (where formal income documents are either unavailable or do
not reflect the true repayment capability of the borrower) in the LAP market, financiers resort to various surrogate methods for
cash-flow appraisal.
A cautionary approach by lenders will lower surrogate assessment in the near term. Increase in availability of data with GST
already in place and increasing formalisation in the system will lead to a further decrease in surrogate assessment in the long
term.
Plain vanilla appraisals account for 50% of total non-banks LAP assessment (fiscal 2019)
Lenders reducing DSA sourcing
Direct Selling Agents (DSAs) play a critical role in the LAP market, as they possess local knowledge and are able to offer a
diverse range of products from various lenders. NBFCs and HFCs derive 55-60% of their business through DSAs and private
banks 40-45%. DSAs remain critical in this segment, especially in the sourcing of new customers. However, the desire to
reduce sourcing costs and balance transfer risks suggests a growing trend among players towards sourcing customers directly
instead of relying on DSAs.
Sourcing mix for banks and non-banks (fiscal 2019)
Self-employed non-professionals account for a large part of LAP borrower base
Self-employed people account for 80-85% of LAP disbursements; of these, 70-75% are self-employed non-professionals
(SENPs) and the remaining 10-15% are self-employed professionals (SEPs). The salaried class accounts for the remaining
~15%, primarily availing of LAPs to meet personal expenses related to marriage, education, healthcare and repayment of
previous loans.
SEPs comprise doctors, chartered accountants and architects, who mainly need funds for expansion of their clinics and offices.
SENPs, on the other hand, comprise small manufacturers and traders, who avail of a LAP as a term loan to meet capacity
expansion, debt repayment, business diversification or working capital needs.
While NBFCs/HFCs target riskier self-employed customers, banks focus more on salaried individuals and self-employed
individuals with good credit profiles. For borrowers, who have taken several personal and business loans earlier at higher
interest rates, LAP offers an attractive option, helping them foreclose old loans and take a single loan (LAP) at comparatively
lower interest rates.
SENPs account for three-fourth of non-bank LAP borrower base

Note: SENP: Self-employed non-professionals, SEP: Self-employed professionals, Non-banks include NBFCs and HFCs
Lower competition and higher opportunity prompt players to eye smaller cities
LAP has been popular in the top-10 metros due to the high concentration of businesses there. However, players have been
expanding to other smaller cities which are relatively under banked and where competition is lower. The trend is expected to
continue.
Growth accelerating in non-top 10 metros for non-banks (Disbursement basis)
Actual tenure of LAP is about half the contractual tenure
Contractual tenure for LAP is typically 10 years, which allows borrowers to spread their payouts over a longer term. However,
the behavioural tenure is 5-6 years, when higher prepayments and frequent balance transfers (which occur when a competing
lender offers a higher LTV or lower interest rate) are taken into account.
Loan against property (LAP): LAP: Business model of market
25.0
participants
Business models of market participants
Note: LTV - Loan to value, PSB - Public sector banks, DSA - Direct selling agents, DST - Direct sales team

26.0 MSME finance: Non-LAP MSME secured loans
Non-LAP secured MSME loans
Non-LAP (loan against property) secured MSME (micro, small and medium enterprises) loans include working capital products
(cash credit, overdraft facility, and bill discounting) and other term loan products, including asset-backed or hypothecated
loans. Hypothecated loans are term loans where the collateral offered is a combination of property, inventory etc.
While banks dominate working capital loans, non-banks have managed to capture a share of asset-backed/hypothecated term
loans over the past few years.
Between fiscals 2019 and 2021, CRISIL Research expects non-banks non-LAP secured MSME books to clock 15-17%
compound annual growth rate (CAGR) to ~Rs 600 billion vis-a-vis 20-21% CAGR between fiscals 2017 and 2019. The reason
for the slower pace is that the share of term loans is decreasing compared with working capital loans on account of lower
capital expenditure, given the lower capacity utilisation levels in the country.
Non-banks' non-LAP secured outstanding
E: Estimated Note: Includes only NBFCs
Yields of non-LAP secured MSME loans are higher than yields of LAP-secured loans, and majorly depend on the type of
collateral offered (in the case of hypothecated loans) or the type of asset against which the loan is financed (in the case of
asset-backed loans).
Several non-banking financial companies (NBFCs) offer big ticket, non-LAP secured loans at very attractive rates to rapidly
grow their books. Many of these loans are also customised loans, given on a case-to-case basis, depending on the collateral
availability and repayment capability of the respective MSME.
27.0 MSME finance: Key trends in MSME secured loans
Secured MSME: Player-wise market share and interest rate
Secured MSME: Sector-wise asset quality and lenders' preference (banks and non-banks)
Most lenders have been avoiding jewellery, mining and metal sectors over the past two years. In fact, many have blacklisted
these sectors due to high delinquencies. Lenders have turned cautious towards the textiles sector over the past few years as
well owing to high delinquencies.
Lenders prefer chemicals, food and leather/rubber industries.
Asset quality versus lenders' preference

Note: Asset quality worsens from bottom to top
MSME secured financing: Industry risk factors

28.0 MSME finance: MSME unsecured loans
MSME: Unsecured loans
Unsecured MSME (micro, small and medium enterprises) loans are given to self-employed borrowers without collateral.It is a
cash flow based lending model rather than collateral based. These loans are underwritten based on financial statements, bank
statements, GST returns, number of loans taken in the past, bureau checks, scorecards etc.
An unsecured small business loan is largely taken to tide over a liquidity crunch or to take advantage of short-term
opportunities, or for a small business expansion - mostly when the cash credit limit of the bank has been exhausted. Many
lenders give these loans on top of other existing secured loans with them.
Total unsecured loan outstanding doubled in 3 years to Rs 1.5 trillion in FY19; non-banks growth to slow down, however still be
healthy till FY21
Unsecured business loan outstanding (banks and non-banks) clocked a strong 26% CAGR over three fiscals until fiscal 2019
to touch Rs 1,500 billion. Over fiscals 2019-2021, non-banks' unsecured business loan portfolio will clock a CAGR of 18-20%,
lower than the 28% figure during the three fiscals until 2019 but still be healthy. The reason for the growth slowdown are
restricted access to funds and increasing asset quality concerns Thus, non-banks are set to lose some of their market share to
banks.
Due to non-availability of collateral, underwriting plays a key role in maintaining asset quality for unsecured business loans.
Underwriting of these loans requires a different expertise and is powered by new financial technology and increasing
availability of data on the credit history of customers.
Competition in the secured loans market (especially retail loans) prompted non-banks and a few private banks to gain expertise
in niche lending and build robust digital platforms to eye fresh opportunities in the unsecured business loans space to maximise
profitability.
CRISIL Research expects unsecured business loans (banks and non-banks) to continue to outpace overall MSME credit
growth over the next two years and reach Rs 2.2 trillion by fiscal 2021. The key growth drivers are:
Lenders earn better risk-adjusted returns than other MSME products (unsecured loans offer more than twice post-tax
RoA compared with other MSME products)
Borrowers can avail this product without any collateral. Further, stagnant property prices limit the ability of SMEs to offer
higher collateral for secured loans which will further help drive the growth of unsecured loans
Lower penetration, low base, increased availability of customer data and faster disbursements driven by technology
supporting strong growth in the near term
Unsecured MSME lending to continue to grow at a healthy pace

Note: E: Estimated; including banks and non-banks
In the past, non-banks focused aggressively on the unsecured segment, growing their book significantly faster than that of
banks. Over three fiscals until 2019, banks' unsecured business credit clocked 22-24% CAGR and non-banks' 27-29%.
Non-banks account for more than half of the overall unsecured book as of fiscal 2019
After the liquidity crisis started in fiscal 2019, non-banks turned more cautious while lending. Additional due diligence is carried
out while underwriting, thereby increasing the time taken to sanction.
A few of them are also moving away from large ticket loans. As per industry sources, non-banks are taking cautious efforts to
make their portfolios more granular (focus on reducing the average ticket size by 5-10% every year) and restrict their exposure
per client in the unsecured business loan segment. We expect the average ticket size (ATS) to be in the range of Rs 1.5-2.0
million.
Unsecured loans offer better post-tax RoA
Net interest income of unsecured SME loans is significantly higher than other SME products and ranges over 10-11% for non-
banks. Conversely, operating cost of these loans is relatively higher since 60% of them are sourced through direct selling
agents (DSAs). DSAs' commission in this segment is the highest among all other retail loan segments, ranging between 1.5%
and 3.0%.
Delinquencies are high in the segment and the credit cost for fiscal 2019 is estimated to be more than 3%. As per industry
sources, delinquencies have risen after October 2018 and GNPA has increased by 40-50 bps. We expect 25-30 bps decline in
post-tax RoA of unsecured loans to 2.75-3.25% in fiscal 2019 on account of increased cost of funds and higher credit costs. It
is relatively easy to pass on the increase in cost of borrowing, given the kind of loan segment and customer profile. However, it
also depends on the competition in the segment amid already high interest rates.
Going forward, CRISIL Research expects RoA to decline on account of increased delinquencies and thus higher credit costs.
Profitability of NBFCs in unsecured loans (fiscal 2019)
Key industry parameters for NBFCs
Large private banks offer loans 200-300 basis points (bps) lower than the rates offered by the NBFCs. Small- and medium-
sized private banks, foreign banks and NBFCs charge more or less the same rate. Very few NBFCs offer loans above Rs 5
million.
Key industry parameters of Unsecured SME lending (fiscal 2019, based on the ticket size)
Unsecured lending dynamics

29.0 Auto Finance: Outstanding
Share of NBFCs in auto financing book to improve in the coming fiscals
While banks have grown faster than non-banking financial companies (NBFCs) in the fiscals post demonetisation, NBFCs have
remained competitive in the auto financing landscape because of:
Specialisation in disbursing this category of loans, based on stronger understanding of customer profiles, and ability to
provide customised product offerings
Greater ability to tap the market (based on improving ratings) in order to raise funds at convenient rates, which has
enabled them to offer competitive interest rates
Increasing market penetration from captive financiers (both Indian and foreign), based on greater ability to tap the
customer at the existing dealership
Share of captive NBFCs in overall auto financing has improved from ~14% in fiscal 2013, to ~17% in fiscal 2019
Greater ability to cater to the riskier customer segments, especially used vehicle financing, based on stronger customer
connect, follow up, account monitoring, and maintenance, along with focus on collections
Doorstep collections offered by the NBFCs have made their product offering much more convenient to the borrower
Option of repayment in cash has aided in improving convenience (however, multiple NBFCs are now increasingly
asking borrowers to make non-cash repayments)
NBFCs offer flexibility in repayment schedule (weekly, monthly etc.) and the amount to be repaid
These initiatives have enabled NBFCs to keep their asset quality range bound and helped to scale up operations
Recruiting local employees also enables NBFCs to gain better understanding of the ground operations, helping
them improve efficiency, and collections
Greater ability of NBFCs to tap financing demand in riskier segments, especially in semi-urban and rural markets, which
have remained underserved by banks, has allowed book growth
NBFCs dominate financing in riskier segments based on stronger valuation expertise, and in smaller ticket
segments such as two- and three-wheelers, based on operational expertise
By using surrogates for credit appraisal, NBFCs have been able to cater to self-employed customers and salaried
customers in informal sectors, which banks find riskier
NBFCs enjoy high flexibility in terms of their operating structure. They have innovative channel strategies such as
opening a mini/rural branch, having tie-ups with unorganised brokers in areas where transporters (commercial
vehicles) are concentrated, etc.
Significant proportion of cash-based disbursements and repayments by NBFCs led to a sharp decline in their overall market
share vis--vis banks. However, many large and mid-sized players have been increasingly moving towards non-cash
mechanisms, which is expected to aid them in gaining share.
In fiscal 2019, NBFCs in auto financing grew at ~14.7% on-year. The pace of market share loss to banks slowed down to ~10
bps that fiscal, from ~30 bps in fiscal 2018. As of fiscal 2019, NBFCs accounted for ~47.0% of the market as against ~47.1% in
fiscal 2018.
Going forward, however, market dynamics are expected to change considerably with new vehicle financing segments facing
sharp slow down amid sharp demand decline in automobile sales, in the back drop of transition to BS-VI norms, rising
ownership costs, new axle norms, proposed scrappage policy, and the price rise post implementation of new safety norms, and
crash test norms for passenger vehicles. As a result of these factors restricting demand, new vehicle sales are expected to
face sharp de-growth to the tune of 14-16% in case of new passenger vehicles, to the tune of 14-16% in case of new
commercial vehicles, 8-10% for two wheelers, 7-9% for three wheelers, while uptick being marginal for tractors.
On the other hand, used passenger and commercial vehicle sales at expected to grow at ~5-7% each in the coming fiscal
based on higher replacement demand for the existing BS-IV vehicle amid sharp price jump for the new BS-VI vehicles. As a
result, new vehicle financing segments are expected to pull overall loan book growth for both banks and non-banks in the
coming fiscal. However, slow down is expected to hit banks more deeply as their loan book remains highly focused towards
new vehicle financing (~92.4% of loan book focused on new vehicle loans). We expect demand slump to pull down
overall banks' loan book growth to ~4-6% in the coming fiscal while non-banks, with relatively lower proportion of new vehicle
loans (~62.6% of loan book focused on new vehicle loans) are expected to drive market growth at ~7-9% loan book growth.
However, in fiscal 2021, demand for new vehicles is expected to recover to ~6-8% in new passenger vehicles, ~7-9% in new
commercial vehicles, ~5-7% in two wheelers, while remaining flattish for both tractors and three wheelers. As a result, loan
book growth for new vehicle financing is expected to pick up pace, however, demand for used vehicles is expected to remain
stronger based on higher affordability associated with the pre-owned BS-IV vehicles. As a result, loan book growth for both
banks and non-banks is expected to inch up, however, the same is expected to remain lower compared to the strong growth
witnessed in fiscals 2016 to 2018.
Share of banks in overall vehicle financing improved marginally post demonetisation but this trend is expected to wear off
Note: E Estimated
Share of NBFCs in new vehicle financing has remained stable post

demonetisation
While NBFCs' share in new vehicles financing segments i.e, new passenger vehicle (PV)/ commercial vehicle (CV) financing,
two- and three-wheeler, and tractor financing, improved in the fiscals leading up to demonetisation, greater reliance on cash for
disbursements led to decline in overall market share for NBFCs in these segments in fiscal 2017. However, in the fiscals post
demonetisation, share of NBFCs in new vehicle financing has remained stable.
In terms of new financing segments, share of NBFCs has remained stable over the 5-year period between fiscals 2014
and 2019 for new CV and tractor financing at 44-45% and 46-47%, respectively. However, NBFCs have gained share in case
of two- and three-wheelers in the same time frame (based on greater rural market penetration, and operational efficiencies)
from 53% to 59% and from 44% to 48%, respectively. In case of new PV financing, however, share of NBFCs declined from
33% to 27% based on lower interest rates offered by banks, as well as greater ability to tap customers at the dealership points.
Going forward, we expect share of non-banks in new vehicle financing to augment marginally by ~50-70 bps as banks are not
expected to venture into riskier customer profiles.
Banks have remained dominant in new vehicle financing based on greater ability to tap customers at dealer points
Note: E Estimated
NBFCs still remain the dominant force in used vehicle financing
In case of pre-owned vehicle financing, NBFCs maintain their dominance in fiscal 2019 based on greater ability to take on
riskier exposures, greater semi-urban and rural market presence, along with superior underwriting and account maintenance
abilities. However, share in the overall pie has been coming down marginally especially in the fiscals post demonetisation, as
cash-based transactions declined. However, with NBFCs moving towards non-cash transactions, share in used vehicle
financing pie is expected to remain stable in the coming fiscals.
In terms of used financing segments, share of NBFCs in used CV financing has remained stable at ~88% between fiscals 2014
and 2019, based on strong presence of larger players, and captives in the financing fold. However, the same for used PV
financing has come down sharply from ~80% in fiscal 2014 to ~71% in fiscal 2019, based on greater non-captive NBFC
preference towards higher yielding used CV segment.
Going forward, we expect non-banks to gain share in the segment based on superior ability to value underlying assets, along
with greater expertise to operate in this vehicle financing segment, as banks remain risk-averse in financing used vehicles.
Banks improved their share in used financing portfolio based on higher disbursements in used PV segment
Note: E Estimated
NBFC growth to slow down by ~500-600 bps over the next two fiscals; market
share to improve by 100-150 bps
Based on the recent demand slump in the automobile industry, and against the backdrop of transition to Bharat Stage (BS)-VI
norms, new vehicle sales are expected to fall steeply to 14-16% in case of new PVs, 18-20% in case of new CVs, 8-10% in
case of two wheelers, 7-9% in case of three wheelers, while see marginal uptick in case of tractors, in fiscal 2020. Fiscal 2021
is expected to witness 7-9% sales growth rejuvenation for new PVs and CVs segments, while two wheelers and tractor sales
are expected to remain positive at 5-7% and 2-4% respectively. Three wheelers are expected to witness sales de-growth in the
range of 0-2%.
On the other hand, sales in case of used car market are expected to increase 5-7%, and by 8-10% in case of used commercial
vehicles in both fiscals 2020 and 2021, supported by greater demand for the existing cheaper BS-IV vehicles. As a result, auto
finance market growth is expected to be dragged down by new vehicle financing segments.
Banks operate majorly in new vehicle financing segment with a meagre ~7.6% portfolio earmarked for the used vehicle
financing segment. NBFCs on the other hand, have a relatively higher presence in used vehicle financing segment (~36.4% of
the loan book) based on greater risk taking ability. As a result, share of NBFCs is expected to increase for the first time in three
fiscals post demonetisation, based on their superior expertise in this segment.
As a result of these developments, NBFCs' book growth is expected to decline by 300-350 bps over the next two fiscals.
NBFCs expected to consolidate share in the next two fiscals
Note: E: estimated, P: Projected
Used vehicle financing to drive disbursement growth in the next two fiscals
Slow down in new vehicle sales growth in the initial months of fiscal 2020 based on muted consumer sentiment, central
government elections, price hikes post safety norms, increasing insurance costs, along with elevated interest rates is expected
to drive down financing disbursement growth to flattish levels in fiscal 2020 before improving to ~12-14% in fiscal 2021 (with
share of new vehicles in overall financing mix coming down sharply), as against ~16-18% disbursement growth
experienced between fiscals 2017 and 2019.
Concurrently, share of new vehicle financing in disbursements is expected to decline from ~59% in fiscal 2019 to ~55% in
fiscal 2021
Share of smaller segments such as two- and three-wheelers is expected to remain stable as financiers are expected to
move into semi-urban and rural markets, to channel loan book growth amid sectoral slow down
New vehicle financing disbursements are expected to slow down to 0-2% CAGR in the next two fiscals, dragging down
overall disbursement growth
However, used vehicle financing disbursements are expected to grow at 9-11% CAGR over the next two fiscals from
marginally lower than ~13% between fiscals 2017 and 2019, based on stable demand for cheaper BS-IV vehicles, which
would come up in used vehicle financing market in the backdrop of transition to the BS-VI vehicles post fiscal 2020.
Share of various auto financing segments in overall disbursements

Note: P - Projected
Auto financing growth over the past fiscals was largely driven by:
Muted interest rates

Yield of auto financing NBFCs reduced 60-70 bps on account of interest rate cut by financiers
Growth in new vehicle financing, whereas used segment share in overall disbursement fell ~4-5%
Increased focus of banks in retail segment
Banks started waiving processing fees and prepayment charges to attract customers, a marketing practice hitherto
used in housing finance
Factors driving portfolio growth over the past two fiscals

Factors expected to support financing over the next two fiscals:

Significant new regulatory developments and changes and their impact on auto segments
A comparison between banks and non-banks in different auto finance segments

High-yielding used financing mix is expected to improve for larger players
NBFCs continue to focus on growing their high yielding products such as used CVs and LCVs even though these products
have higher inherent risks. Risk adjusted returns for these products are higher compared to other lower risks products.
In used vehicle finance more than two-third share is of used CV financing

Large players have diversified into most of the auto finance segments
Large financiers with their experience and reach are better placed to run riskier products profitably
Mid and small players operate in 12 product segments
Captive financiers are the main providers of dealer financing
Large captive financiers like Mahindra & Mahindra Financial Services (MMFSL) and Tata Motors Finance (TMF) finance
vehicles of all original equipment manufacturers, whereas small captive financiers finance purchase of their own make
vehicles
Primary focus remains auto financing, but many large players have diversified into other asset classes
Note: 1) Data as of FY19 2) Others include dealer financing, mortgage finance, SME, CE finance and other businesses 3) Portfolio mix is based on financials of Shriram
Transport Finance Corporation, Mahindra & Mahindra Financial Services, Magma Fincorp, Kotak Mahindra Prime, Sundaram Finance, Cholamandalam Finance, Tata
Motors Finance, Toyota Financial, TVS Credit
Share of banks in resource profile to improve; that of short-term borrowings to reduce
Auto finance NBFCs mainly depend on bonds and non-convertible debentures (NCD), which constituted ~33% of their total
borrowings in fiscal 2019.
All major NBFCs enjoy good credit ratings, so their debt instruments are well accepted across various investor classes
such as banks, companies, insurance companies and mutual funds
Moreover, because of strong credit ratings, their spreads over government securities are lower, keeping their cost of
borrowings low. Therefore, auto finance NBFCs have been able to lower their cost of borrowings by increasing their share
of market borrowings though commercial papers and NCDs
Post Infrastructure Leasing & Financial Services (IL&FS) default, auto financing NBFCs shifted towards alternative sources of
funding including external commercial borrowings, subordinate liabilities, and securitisation to finance their growth needs. Other
sources of funding saw sharp increase from ~14% in fiscal 2015 to ~33% in fiscal 2019. On the contrary, share of market
borrowings (NCDs and CPs) declined from ~47% in fiscal 2015 to ~43% in fiscal 2019. Increasing ability to borrow from the
capital markets saw share of bank borrowings come down gradually from ~32% in fiscal 2015 to ~21% in fiscal 2019.
However, in the backdrop of elevated spreads in the bond market for multiple large players, reliance on market borrowings is
set to come down further as mid and smaller NBFCs revert to bank borrowings to channel incremental loan growth. Larger
NBFCs are expected to explore alternative funding avenues including securitisation, retail bonds, and sub debt, to channel loan
book growth.
High reliance on capital market for funds to come down post IL&FS default
Note: Others include securitization, ECBs, sub debt, and loans from related parties
NBFCs strengthening their grassroots presence with focus on improving operational efficiency
Strong grassroots presence enable NBFCs to have better understanding of their customer segments and geographies, this
helps them in developing products better suited to their customers, sourcing of business and collection.
For growth, NBFCs are:
1. Focusing on strengthening their presence and expanding their reach further by
Increasing penetration into rural and urban centres

Building partnerships with private financiers (private financiers take the credit risks whereas the NBFCs provide the loans)
in the unorganised market to leverage their local knowhow to enhance the market share
2. Diversifying into non-auto segments
To bring down the opex-to-assets under management (AUM) ratio by supporting AUM growth
To reduce concentration risk of their earning profile
Diversification of products also help financiers to increase cross sell opportunities to captive customer base
Expansion of NBFCs branches network
Note: based on numbers for Shriram Transport Finance Corporation, Mahindra & Mahindra Financial Services, Magma Fincorp, Sundaram Finance, Cholamandalam
Finance, Arman Financial, Berar Finance, Ess Kay Fincorp, Muthoot Capital, SML Finance, Sakthi Finance and Tata Motors Finance
Operational efficiency saw marginal uptick in the segment

Note: Figures include data for STFC, Sundaram Finance, Cholamandalam, Magma Fincorp, Mahindra Finance, and Muthoot Capital
Source: Company report, CRISIL Research

30.0 Auto Finance: Profitability
Profitability of Auto Financing NBFCs to somewhat contract over the coming two fiscals, courtesy credit cost
In fiscal 2019, spreads made by auto financing NBFCs (on average assets) improved marginally by ~5-10 bps as the players
passed over the additional costs of funding directly to the end-user amid greater ability to charge higher interest rates in riskier
segments such as used PV and used CV financing. Operating expenses remained stable as players continued to expand their
branch network to channel loan book growth. Credit costs as a percentage of average assets on the other hand, remained
stable (under Ind-AS accounting). However, overall provisioning created on the loan book came down, as they switched over to
ECL-based provisioning from the existing standard provisioning norms.
Over the next two fiscals, we expect the profitability for auto financing NBFCs to moderate by ~5-10 bps on account of:
Borrowing costs for the financiers are expected to remain elevated, especially for players with greater exposure in riskier
segments including used CV, and used PV financing. We expect costs to further increase by ~5-10 bps in the coming
fiscal, before improving by ~15-20 bps in fiscal 2021.
As NBFCs try to compete with banks for market share in new vehicle financing segments, while trying to consolidate
market share in used vehicle financing segments, spreads are likely to be hit marginally, by ~5-10 bps, in fiscal 2020, and
remain stable in fiscal 2021, as players pass on the benefit of reduced borrowing costs to the end users
Operating expenses are expected to remain stable as benefits of scale would be taken away by cost of expansion further
into semi-urban and rural markets to channel growth amid growth slowdown
Efficiencies are expected to come into play in fiscal 2021 through increasing non-cash disbursements and
digitization initiatives undertaken by the financiers
Credit costs are expected to go up as financiers are expected to increase provisioning cover as financiers take on
additional portfolio risks to sustain loan book growth
As a result, overall return based by financiers on average assets is expected to come down by ~5-10 bps over the next
two fiscals
Spreads expected to contract in the coming two fiscals for auto financing NBFCs
Note: 1. Aggregate includes values for Shriram Transport Finance, Sundaram Finance, Cholamandalam Investment and Finance Company, Magma Fincorp, Mahindra
Finance, Kotak Prime, and Muthoot Capital which account for ~65% of auto financing AUM as of fiscal 2019
While profitability improved post transition to Ind-AS for the players, the same is expected to normalize in the coming fiscals
Note: 1. Aggregates includes values for Shriram Transport Finance, Sundaram Finance, Cholamandalam Investment and Finance Company, Magma Fincorp, Mahindra
Finance, Kotak Prime, and Muthoot Capital which account for ~65% of auto financing AUM as of fiscal 2019 2. Calculations based on average total assets
A comparison of profitability of NBFCs in different product segments of auto financing
Non-performing assets set to increase over next two fiscals after improving in
fiscal 2019
Asset quality in case of segments such as Commercial Vehicles, Tractors and Three Wheelers, remains linked with the pace of
economic activity, rural income, monsoon expectations, along with farm income, and transport operators profitability. Since
NBFCs cater to riskier customer profiles, and in turn, charge higher spreads, they carry higher risks of default, and in turn,
losses on their lending.
Transition to Ind-AS accounting saw GNPA levels worsen marginally in fiscal 2018 to 6.6% (similar number in case of IGAAP
was 6.0% in fiscal 2018), however, with transition to 90 DPD well in place, increased collection efforts put up by financiers such
as Shriram Transport Finance, Mahindra Finance, Cholamandalam, and Magma Fincorp led to improvement in asset quality in
fiscal 2019. Increased recovery initiatives, improving rural cash flows for borrowers, improving infrastructural projects and
improving farm income assisted in initiating NPA reversal during the fiscal.
Going forward, CRISIL Research expects asset quality for auto financing NBFCs to worsen marginally by ~15-20 bps over the
next two fiscals, as sales de-growth pushes multiple large and mid-sized financiers towards incrementally risky financing in
order to sustain loan book growth in the coming fiscals.
Trend in auto financing NBFCs GNPA
Note: 1) P Projected 2) Numbers prior to FY18 are based on 120 DPD recognition norms, while post are based on 90 DPD recognition 3) Numbers post FY18 (included)
are based on Ind-AS provisioning norms 4) Aggregates include Shriram Transport Finance, Sundaram Finance, Cholamandalam Investment and Finance Company,
Magma Fincorp, Kotak Prime, Mahindra Finance, and Muthoot Capital, which account for 65% of overall auto financing AUM 5) FY18 GNPA under IGAAP was 6.0%

31.0 Competitive Dynamics: Captive and Non Captive NBFCs
Share of non-captive NBFCs in the market pie to increase in the coming fiscal
The steady growth of captive financiers of leading Indian original equipment manufacturers (OEMs) and the entry of foreign
captive financiers with their OEMs have resulted in captive financiers increasing their market share during fiscals 2013 and
2019 from ~13.8% to ~17.1%.
In fiscal 2019, their market share in overall auto finance book grew by 65-70 bps to ~17.1% of the market, taking further share
from non-captive NBFCs.
Captive NBFCs have been gaining market share steadily, on account of:
Their large dealership networks, where a significant proportion of auto loans originate
Higher degree of convenience they offer to customers
Provide of alternative financing products like leasing, step-up or step-down, bullet or balloon payments, besides plain
financial products
Bundling of insurance, maintenance contracts and other after-sales services in their loan products
Support to respective OEMs in their growth and profitability
Provide of offering financial products to channel partners (working capital for dealers)
Schemes like interest-free periods and subventions to support dealer profitability
Based on greater ability of captive financiers to tap the customers at dealerships, their market share has seen improvement
since fiscal 2014. However, their portfolio remains highly concentrated towards new-vehicle financing loans (89-91%), with the
remaining being used-vehicle financing. On the other hand, non-captive NBFCs have a much more diversified business mix
with 46-48% portfolio comprising new-vehicle financing.
With new vehicles facing sharp sales slump across segments, NBFCs with greater presence in new-vehicle financing
segments are expected to see higher growth slow down. Within NBFCs, non-captives are expected to gain further share:
While captive NBFCs are expected to improve their presence in used-vehicle financing loans to support loan growth, they
are not expected to take share from non-captives, based on superior market understanding, and underwriting abilities of
non-captive NBFCs
Non-captive NBFCs are expected to, on the other hand, gain market share to the tune of 65-70 bps over fiscal 2020 as
they shift focus towards used-vehicle financing market to channel loan book growth
Portfolio concentration towards new-vehicle financing to impact share gain plans for captives
Note: Auto book of Small Finance Banks is excluded
Share of capital market borrowings for both captive and non-captives declined
significantly over FY19
Captive financiers enjoy strong support, in terms of equity and management support, from parent OEMs owing to:
Their strategic importance in pushing the sales of their respective OEMs. Therefore, their debt instruments enjoy strong
ratings, resulting in easy access to capital markets
Increasing the scale of their businesses has also helped captive financiers reduce the share of banks in their funding mix
with greater ability to raise funds from the market
In the non-captive financiers segment, debt instruments of three to four large financiers enjoy healthy ratings, owing to their
years of experience in the business with large/established market shares. Their scale and experience ensure stability in their
earning profiles.
These financiers are expected to continue to have easy access to the capital market
However, smaller non-captive financiers who have neither the scale nor strong parent backing are expected to continue
to have low access to the capital market
However, capital market lending in overall borrowing mix for both auto financing NBFC categories dried up in the fiscal 2019,
as financiers have shifted away from short-term instruments such as commercial papers, towards longer tenured loans, along
with bank borrowing and alternate funding avenues.
While market borrowings (CP and bond issuances) accounted for majority of the borrowing mix for both captive and non-
captive NBFCs (~56% and ~58% respectively) in fiscal 2017, their share in overall borrowing mix post IL&FS crisis has come
down significantly with market borrowings accounting for ~46% and ~42% share, respectively, as of fiscal 2019.
The same has been compensated by increased reliance towards funding from banks and other financial institutions, along with
alternate avenues of funding such as securitisation, retail bonds, etc. For instance, share of bank funding, post crisis, has gone
up to ~39% and ~31%, respectively, in fiscal 2019 for captives and non-captives, from ~30% and ~24% in the previous fiscal.
Share of banks in overall auto financing NBFC resource mix expected to remain elevated over the coming fiscals
Note: Others include subordinated debt, loans from related parties, and securitisation

Profitability for both captives and non-captives set to worsen in FY20
While cost of borrowing for both captive and non-captive financiers remains similar, the yields charged by non-captive
financiers remain much higher on riskier customer financing based on higher operations in used-vehicle financing. Cost of
borrowing remains similar on account of the presence of large NBFC players in both player groups. Captive NBFCs include the
likes of Mahindra Finance, Hinduja Leyland Finance, Hero FinCorp among others, while non-captive NBFCs include the likes of
Shriram Transport Finance, Sundaram Finance, Cholamandalam, Kotak Prime, etc.
Profitability for captive financiers improved marginally on account of rise in spreads made on average assets, while credit costs
increased marginally by 5-10 bps over the fiscal. On the other hand, profitability for non-captive financiers remained stable as
gain in spreads and other income was countered by rising provisioning by financiers.
Over the next fiscal, spreads made by both captive and non-captive financiers are expected to worsen by 5-10 bps as
financiers try to compete for market share by offering lower interest rates, amidst sales de-growth. Credit costs are expected to
rise for both player groups based on incremental risky financing as players compete for loan book growth. As a result, returns
generated by both captive and non-captive financiers are expected to come down by 10-12 bps over the next fiscal.
Spread to contract for both captives and non-captives in FY19
Trend in profitability for captive and non-captive NBFCs

32.0 Competitive Dynamics: Large, Medium and Small NBFCs
Share of large NBFCs to remain elevated over the coming fiscal
Limited ability to raise funds through the capital market, along with limited niche product offerings is expected to hurt smaller
and mid-sized NBFCs pursuit of gaining market share in the coming two fiscals.
Smaller and mid-size NBFCs are mostly captive NBFCs with specific product offerings and mainly operate in new vehicle
financing segments
With banks slowing down disbursements in the coming two fiscals, large NBFCs with expertise in riskier used financing
segments are expected to gain further market share as banks are likely to stay put in these segments based on lack of
underwriting expertise and lower risk appetite
Smaller NBFCs and their lack of ability to raise funds at competitive rates and to diversify into other segments hold them
from gaining market share in the coming two fiscals
Share of large NBFCs expected to augment
Note: NBFCs have been classified as small NBFCs if AUM is less than Rs. 25 billion as of FY19; as mid-size NBFCs if AUM is between Rs. 25 and Rs. 100 billion; and
Large NBFCs if AUM is above Rs. 100 billion as of FY19
Reliance on banking funding and longer tenure loans to increase for NBFCs
With improvement in ratings, and increase in scale of operations, smaller NBFCs have been shifting towards longer-tenured
bonds, securitization and debentures, diversifying away from excessive reliance on bank funding. However, with the recent
liquidity squeeze, smaller NBFCs are expected to shift their focus back to banking funding as capital market lending restricts to
financiers with better loan book quality, healthy ratings, and larger scale of operations. Mid-size NBFCs majorly comprise of
captive financiers such as Hero Fincorp, Toyota Financial Services, TVS Credit etc. with strong parent support enabling greater
ability to raise funds through the capital market. Going forward, with the tightening of liquidity, such mid-size players are
expected to shift over to bank funding for financing growth needs.
Larger NBFCs have reduced their dependence on short term borrowings such as commercial papers in the recent fiscal, and
are further expected to shift over to bank funding along with alternative sources such as External Commercial Borrowing, amid
greater ability to receive funding from such sources. Along with this, larger NBFCs are expected to move towards other
alternate sources of funding such as securitization, and retail bonds to finance their incremental funding needs over the coming
fiscals.
Share of short tenured borrowings in overall mix expected to come down significantly in the coming fiscals
Note: 1) NBFCs have been classified as small NBFCs if AUM is less than Rs. 10 billion as of FY19; as mid-size NBFCs if AUM is between Rs. 10 and Rs. 100 billion; and
Large NBFCs if AUM is above Rs. 100 billion as of FY19 2) Others include subordinated debt, loans from related parties, and securitization
RoA contraction to be much worse for smaller NBFC players in fiscal 2020
Stronger ratings and larger scale of operations grant larger and few mid-size NBFCs ability to raise funds from the market at
much cheaper rates. Through this ability to raise funds at cheaper rates, larger and mid-size NBFCs are able to compete in a
competitive scenario for market share with banks.
In fiscal 2019, NBFCs directly passed on the incremental costs of borrowing to the end-user, as a result of which, overall
spreads made by these players remained stable vis--vis the previous fiscal. The case was similar across all three NBFC sizes,
ie large, mid-size, and small.
With other factors remaining range bound, return generated by NBFCs remained stable with mid-size NBFCs witnessing
marginal uptick in overall profitability. However, profitability improvement for smaller NBFCs remain restricted on account of
lower ability to pass on incremental rates, and rising provisioning costs.
Going forward, we expect RoA to contract across all three NBFCs classes, with smaller NBFCs witnessing the highest impact,
based on lower inability to compete in the market scenario.
Spread is expected to contract across NBFC classes in fiscal 2020
Note: All numbers are as percentage of average assets

Trend in profitability for large, mid-size and smaller NBFCs
Note: All numbers are as percentage of average assets

33.0 Used car Finance: Used car finance-Disbursement
Used car financing market growth to be supported by rising demand in the backdrop of BS-VI transition
In fiscal 2019, used car financing market grew at ~12.4% to Rs. 619 billion from Rs. 551 billion in fiscal 2018 driven by rising
replacement demand (pushing individuals towards selling used vehicles), rising per capita income, and addressable
households, and volume of cars in the replacement market. Over the course of the past six fiscals, new model launches,
attractive exchange offers, and flexible financing options have brought down the average retention period of passenger
vehicles to 4 years in fiscal 2019, from 5 years in fiscal 2013.
Used car market size growth in fiscal 2019 was driven by ~11% YoY increase expected in case of the addressable vehicle
supply, as average prices are expected to have remained stable. Financing penetration over the past fiscal, is expected to
have remained stable at ~71-73% while LTVs remained unchanged at ~74-76%.
Growth in used car financing market
Note: Figures represents potential overall used car financing market
CRISIL Research expects the market growth to slow down marginally in fiscal 2020, before recovering in fiscal 2021, growing
at a CAGR of ~9% over the two fiscals driven by:
Addressable used car sales are expected to increase by ~5-7% in fiscal 2020, before increasing further by ~6-8% in fiscal
2021
Average prices are expected to remain stable with a marginal increase of ~1-3% expected over the two fiscals
Increase in share of organized dealers in overall financing
Increasing focus of NBFCs in case of used car financing as growth in case of new car financing takes a hit based on
transition from BS-IV based models to BS-VI models
Strong growth expected in addressable households over the fiscals to the tune of 8-10%
Highly un-organised nature of the used-car and used-car finance markets provides significant scope for growth for the
organised financiers, including banks and non-banking finance companies (NBFCs):
Used car sales through organized dealers account for ~20% of the overall market with True Value leading the pie
Source: Industry, CRISIL Research
Within the overall market, unorganized financiers are expected to account for ~48-52% of the market, while cash transactions
are expected to account for ~28-32%; organized financiers are estimated to comprise of ~18-22% of the overall market, and
within organized financiers, banks are expected to account for ~28-29% of the market, while captive NBFCs are estimated to
account for ~13-14% of the market with non-captives accounting for the rest.
Banks and Captive NBFCs had been increasingly taking share from non-captives
Shriram Transport dominates the lending landscape in case of used passenger vehicles (FY19)
Note: Figures as of FY19
Used cars sold through the un-organised dealers carry the following risks:
They may be selling cars with inferior quality spare parts that were robbed or involved in illegal activities. It is difficult to
catch hold of the un-organised dealers in case something goes wrong.
In other words, legal protection for the buyer is nil or insufficient.
The acquisition cost for the customer is also higher compared with the organised dealers.
Additionally, when the purchase is from the unorganised dealers, the customer is required to avail services from a range
of service providers, i.e., insurance provider, financiers, servicing, and accessories seller.
This can be cumbersome.
The organised dealers offer a range of benefits which is supporting them to capture market share:
Organised dealers offer competitive pricing, certified vehicle and make finance accessible to
customers
The valuation of used cars depends on various factors such as brand, the year of purchase, condition of the vehicle, mileage,
region, use of vehicle (personal/taxi), etc.
The organised dealers have trained and expert staff who follow set processes and criteria based on which they value the
car.
These include evaluation of the physical condition of the car and checking maintenance history
They offer certified vehicles with warranty. Established brands, those backed by original equipment manufacturers
(OEMs) and independent ones, have robust certification processes involving 120-200-point inspection checklists. The
certification helps enhance a products credibility, particularly for the price-sensitive target market
They have tie-ups with multiple financiers to help customers get loan easily
Low PV penetration in the economy vis--vis other developing economies
India as a passenger vehicle market remains largely under-penetrated with only 21 passenger vehicles per 1,000 in the
population, as compared to other developing economies such as China, Thailand, Mexico, Brazil, and South Korea among
others. The number is significantly lower than developed economies, which indicates scope for future growth.
Still a long way to go in terms of PV penetration vis--vis other major economies
Note: Figures for India are as of FY18; Values for others are as of CY15
Source: Wards Auto, OICA, CRISIL Research
Used-car Sales Characteristics:
Source: Industry sources, CRISIL Research
More than 70% of used cars sold are small cars
Affordability of small cars makes them a preferred choice for low- and mid-income customers. The average price of a car in this
category is Rs 3-4 lakh.
Used-car Sales: Customer Profiles
Source: Industry sources, CRISIL Research
Sourcing of business mainly through organised dealerships
The organised financiers source business mostly by entering into strategic tie-ups with organised dealers. Over 40% of loans
for organised financiers originate from the organised channel. Repeat customers and customer references are the other major
contributors to the business for the organised financiers. The growth of the organised dealers (single brand as well as multi-
brand) augur well for the used-car finance business as their presence assures quality of the underlying asset and absence of
any malpractice for the organised financiers.
LTV offered by NBFCs steadily increasing
With the organised dealers conducting detailed evaluation of the cars coming to the market, the NBFCs have confidence in the
pricing. This is enabling them to offer higher LTVs. However, the LTVs differ based on the usage of the vehicle. Those intended
for personal use are offered higher LTVs at 70-80%), while those meant for commercial use get lower LTVs at 60 to 70%). The
LTVs also vary based on the repayment capability of the customers.
Loan to value comparison between banks and NBFCs
Inherent risks in used-car financing
Difficulty in arriving at a fair value of the used vehicle: There are different methods to evaluate an asset. However,
arriving at an appropriate valuation of a used car remains a challenge. Overpricing of a used car is an issue that
financiers have to deal with. Fierce competition forcing them to offer higher LTVs increases the risk.
Sudden drop in vehicle price due to discontinuation of a particular model: Discontinuation of a model results in
reduction of its price in the secondary/tertiary markets. This renders loan recovery laborious as disposal of a repossessed
model that is being phased out is difficult.
Dependency of income on monsoon in rural areas: The NBFCs' customers in the rural used-car market are mainly
self-employed / informal salaried people. Their income is dependent on the monsoon. Any short fall in rain reduces their
capacity to service their loans, resulting in asset quality deterioration.
Unauthentic source of vehicle: The financiers, especially the smaller ones, fail to verify source of the vehicle coming to
the market due to the fierce competition. This risk is expected to come down with the organised dealers widening their
market.
Lower attachment towards vehicle: A customers attachment towards a used car is lower compared with that towards a
new car. And so, in case of non-serviceability of loans, the threat of possession issued by a financier is not taken
seriously.
Practices adopted by financiers to control delinquencies and manage profitability
Although greater risk of default is associated with this loan category, most lenders in the organised sector have actually
reported low non-performing assets (NPAs) because of certain good practices they follow. Here are some of the steps they
take:
Stringent credit appraisal norms: All organised lenders have a set of criteria to assess the credit profiles of the
borrowers, including credit bureau scores, minimum annual income, age of the borrowers, their cash-flow situation,
reference checks and thorough field investigation.
Adequate valuations: Financiers consider multiple factors while valuing a used car such as vintage, number of
ownerships, mileage and how the car is maintained. They usually consider the minimum of the following: (i) insurance-
declared value, (ii) valuation done by an independent valuer, and (iii) pricing based on an in-house matrix. Some
financiers also train staff internally to conduct valuation. Online classified advertisement portals are also useful valuation
references.
Risk-based pricing: Pricing of used-car loans (on average, 300-400 bps higher than the price of new-car loans) is based
on the valuation of each vehicle, its vintage, how the model is selling in the market and its condition. The pricing of the
loan also takes into account risks associated with the borrower.
Criteria for tie-ups with dealers: Most organised lenders have their own criteria for choosing the basis on which dealer
tie-ups can be established. The brand equity of a dealer, minimum monthly volume of used-car sales and the number of
years the dealer has been in business are some the typical criteria. The practice of filtering dealers significantly reduces
the risk of defaults for lenders.
Model and segment targeting: Some financiers limit their business to just one segment, for example medium segment
vehicles. Some exclusively focus on certain segments of customers such as tour operators and taxi drivers. For some
brands, such as Maruti and Hyundai or petrol cars, finance is available for up to eight-year-old vehicles. For some other
brands, such as Tata, Ford and Chevrolet or diesel cars, the facility is restricted to vehicles that are up to five years of
age.
34.0 Used car Finance: Used car finance-Profitability
Used car financing remains relatively more lucrative than new car financing based on higher returns generated
While the costs of funding for used car financiers increased by ~15-20 basis points (bps) over the fiscal, the players maintained
their overall spreads in the segment by passing on the incremental costs over to the customers. This was possible based on
the greater ability of financiers to charge incremental spreads based on the riskier nature of customers, coupled with issues in
valuing the underlying asset correctly.
However, rapid penetration by credit bureaus is expected to bring more clarity in credit quality for end users. In turn, this would
enable interest rates charged in the segment to reduce.
Over fiscal 2019, average net interest income made by the players remained stable at ~7.3-7.5%. Operating expenses incurred
by financiers in the segment remained elevated at ~3.1-3.3%, while credit costs remained much higher at ~1.2-1.4% when
compared with new car financing (~0.7-0.9%). The overall return made by financiers in the segment remained stable over the
fiscal, further increasing the gap vis--vis the return made by players financing new vehicles.
A comparison of the profitability of used car and new car financing
Asset quality weaker than that in new car financing

Asset quality in case of used car financing is expected to remain much weaker than that of new car financing based on the
relatively weaker credit quality of borrowers, difficulties in appraising the correct value of the underlying assets, and issues
inherent with underwriting loans for self-employed individuals, where income documentation becomes a concern.
In spite of these difficulties, financiers have been able to maintain their overall asset quality. We expect gross non-performing
asset levels in case of used car financing remained unchanged at ~6-7% as of fiscal 2019.
35.0 Used CV Finance: Used CV finance-Disbursement
MHCV segment to drive disbursement growth in used CV market
After witnessing healthy growth in fiscals 2012 and 2015, used commercial vehicle (CV) disbursement growth slowed down in
following two years. Poor fleet demand from customers owing to slowdown in economic growth resulted in low capacity
utilisation of existing fleet of transport operators. Transport operators' operational costs also increased somewhat. However,
low capacity utilisation of their fleet made it hard for operators to pass on the increase in operating costs to customers, leading
to a rise in delinquencies and, consequently, higher credit costs for non-banking financial companies (NBFCs).
Replacement cycle of large-fleet operators (LFO) stretched to almost five years in fiscal 2017, from an average of four
years in past, because of lack of visibility in contracts and existing unutilised capacities.
Resale interest from these LFOs also dwindled, as used CVs attracted lower prices. Financiers also remained cautious
while lending to LCV (light commercial vehicles) customers, who are mostly SFOs (small fleet operators) and FTBs (first-
time buyers) with weaker credit profiles.
In fiscal 2018, Loan disbursements for purchase of used commercial vehicles grew ~17% to reach Rs 1089 billion, with used-
LCV disbursements growing ~6% supported by availability of market load, and redistributed freight in consumption-driven
sectors and used-MHCV (medium and heavy commercial vehicle) disbursements posting ~20% growth driven by increasing
demand from road and mining sectors along with stricter implementation of overloading ban.
In fiscal 2019, used CV financing market grew at the rate of ~10% as financing growth for used LCVs reduced to low single
digits ie ~4% while bigger ticket used MHCV financing market clocked in higher ~11% growth over the fiscal as lower
replacement demand kept market growth low.
Growth trend in used CV disbursement market
Note: 1) Figures represents potential used car financing market 2) Growth represents overall market growth
CRISIL Research expects growth rate to remain stable over the next two fiscals (2020, and 2021), as proportion of vehicles
coming into the financing market remains low, based on relatively lower sales during fiscals 2015 and 2017. In terms of
segmental growth, Used LCV financing is expected to grow at a CAGR of ~7% over the coming two fiscals, much lower than
~12% CAGR growth between fiscal 2014, and 2019, based on sales decline (~2% decline in LCV sales between the fiscals)
witnessed in fiscals 2015, and 2017, which is expected to bring down vehicles entering the used financing market.
On the other hand, MHCV segment is expected to push up used CV financing growth with ~10-12% CAGR growth in financing
disbursements over the coming two fiscals, relatively higher than ~8% growth in financing disbursements posted between
fiscals 2014, and 2019. Sharp growth in MHCV sales between fiscals 2015, and 2017, at ~17% CAGR is expected to bring
greater volumes of MHCVs into the used financing segment, especially in the backdrop of BS-VI transition. Financing is
expected to remain strong especially in case of MHCVs based on sharp jump in prices of the new BS-VI vehicles (~10-15%),
which is expected to turn transport operators towards the cheaper, and economical BS-IV vehicles. Financing growth is
expected to be further assisted by offloading of BS-IV vehicles by larger operators, as they shift onto the newer BS-VI vehicles.
Regulatory norms and changes to impact used CV sales
Factors driving MHCV growth over the long-term
Healthy industrial growth to aid revival
The Indian industry's gross value added (GVA) had been growing tepidly, averaging ~6% between fiscals 2014 and 2019. But
we expect growth to pick up gradually over the next couple of years. given the government's stated objective to take Indian
economy to USD 5 trillion by fiscal 2024. . Moreover, improvement in infrastructure and higher expected corporate expenditure
is likely to revitalize the capex cycle going forward.
Focus on infrastructure and higher mining production to bolster tipper demand
Recognizing the impetus needed by the economy, the government continued its push on infrastructure. The investment of Rs.
100 lakh crore for infrastructure over the next five years was announced in the budget 2019 speech implying Rs. 20 lakh core
of spending per year.
Execution by the National Highways Authority of India (NHAI) will reach up to 15.75 km/day in fiscal 2023, as against 8.4
km/day in fiscal 2018, aided by the Bharatmala project. Projects such as Sagarmala and investments in various irrigation
projects will further drive MHCV demand.
We expect coal production to expand at ~6% CAGR between fiscals 2019 and 2024, while iron ore mining will also likely grow
at a healthy pace during this period, aiding tipper demand.
Low LCV-MHCV population ratio and improvement in freight demand to support LCV sales
Despite improving penetration, India's LCV-MHCV population ratio (1.4 times, expected to rise to 1.5 by fiscal 2022) still
lags China (1.8).
Improved finance availability and better replacement demand for SCVs is expected to support growth. Improved
consumption and rising replacement demand will drive long term LCV demand.
NBFCs understand the market, customer profiles, and products and have
developed expertise in valuation and credit appraisal
Banks have stayed away from the segment due to the complexities involved including high cost of delivery, understanding of
local geography and riskier customer profiles.
A large part of the banks used CV portfolio is refinancing. Banks also occasionally extend financing to a buyer purchasing a CV
that is sold after repossession by the bank
Auto-finance NBFCs that operate in this segment have developed a deep understanding of the market, customer profile,
product and developed expertise in valuation, credit appraisal and efficient management of operations and have, thus, been
able to maintain the asset quality
In the used-vehicles segment, financiers have their in-house valuation grid for valuation of vehicles of different models,
make, vintage and area in which the vehicle is operated
They have greater penetration in semi urban and rural areas, which contribute majority of used-CV sales
Major NBFCs in the space also have branches close to the transport hubs
NBFCs also accept payments in cash, given that a large part of their customer segment earns in cash
Continuous monitoring of the disbursed loans by field officers, who had originated the loans through frequent visits to the
borrower, helps keep delinquencies under control
NBFCs dominate the used-CV disbursement market with ~85-90% market share. Two to three large NBFCs account for a
significant portion of the business, keeping the competition low. Top players in captive NBFCs include the likes of Mahindra
Finance, and Hinduja Leyland Finance while that for non-captive NBFCs includes the likes of Shriram Transport Finance
(~55-60% market share in organized financiers), Cholamandalam Finance (~6% share), HDB Financial (~5% share),
Sundaram Finance (~5% share) among others.
Non-captive NBFCs dominate the lending landscape in case of the organized financiers

NBFCs strengthening their presence and diversifying their portfolio
NBFCs are focusing on strengthening their presence and expanding their reach further by:
Increasing penetration into rural and urban centres

Build partnerships with private financiers (private financiers take the credit risks whereas the NBFCs provide the loans) in
the un-organised market to leverage their local knowhow to enhance the market share.
NBFCs have been introducing top-up products such as finance for tyres, working capital and engine replacement
Diversifying into non-auto segments to bring down the opex-to-AUM ratio by supporting AUM growth
Reducing concentration risk of their earning profile
Diversification of products also help financiers to increase cross sell opportunities to captive customer base
NBFCs cater to riskier customer segments; banks focus mainly on large fleet operators
In this highly un-organised borrower industry, sales and client servicing, if entrusted to a single product manager, brings in
efficiency
In some of the NBFCs, all customer origination and evaluation, loan disbursement, loan administration and monitoring, as
well as loan recovery is carried out by the same person
Financiers prefer to employ local people, who are comfortable dealing with transport operators, and understand the local
community dynamics
Stringent appraisal norms required to ensure proper recovery
In addition to their knowledge about asset class, financiers also need to acquire appropriate information on their potential
customers. The borrowers generally comprise SFOs and FTUs, which neither have collateral nor required documents, such as
income-tax returns, to prove their creditworthiness.
Therefore, players insist on a guarantor, who, most of the time, is also a truck operator and plies the same route as the
borrower. It is preferred if the guarantor is an existing customer.
Movable and immovable properties of the customer as well as the guarantor is checked, and both are required to extend
personal guarantee for repayment of loan. Peer pressure also works, if both are from the same community
Repayment record, income sources, and length of stay at the current residence is also checked, with information
collected from trade references
Players further undertake inspection of regional transport office (RTO) records of the vehicle to check for nonpayment of
road tax or pending court cases or any other issue, before the loan is sanctioned.
Before extending a loan, financiers make sure the customer is clear about the deployment of the vehicle and knows the
earning potential from the deployment. Knowledge of the borrower about the business is checked as well before the loan
is sanctioned.
Lenders also generally insist on a power of attorney from customers to repossess the vehicles in case of default.
Table below summarises the key success factors

36.0 Used CV Finance: Used CV finance-Profitability
Higher spreads charged by financiers in the segment compensate for the higher provisioning costs
In fiscal 2019, costs of borrowings for NBFCs operating in used CV financing segment inched up by ~15-20 bps, however, this
incremental cost was directly passed over to the end consumers based on which overall spreads made by the financiers in
used CV financing remained stable.
Operating expenses and credit costs remained stable despite increasing use of non-cash mode of loan disbursals. As a result,
return made by the financiers in the segment remained stable over the fiscal. This resonates with the scenario in new CV
financing, where spreads declined by ~15-20 bps however, benefits from scale, helped maintain stable returns.
A comparison of the profitability of used CV and new CV financing
Margins are attractive in Used-CV finance segment
Used CV financing is an attractive option for financiers, as profitability in that segment is high and the market is still growing.
On an aggregate basis, typically higher gross spreads in used-CV finance more than compensate for increase in operating
expenditure and cash losses. This translates into a better net profit margin for the financier in used-CV finance compared with
new-CV finance.
The fragmented nature of the market and the underserved customer class allow financiers to charge higher yields
The gross spread of NBFCs is in a broad range of 7-9% for used CVs, compared with about 5-7% for new CVs. Net
margins of players depend on cash losses and operating expenditures incurred by the financiers.
The interest rate charged to customers depends on the vehicle segment and the customer profile
There is a difference of 200-350 bps in the interest rate, depending on the customer profile (namely LFOs, SFOs and FTUs).
Interest rates are higher in the case of FTUs and SFOs, as they have weaker credit profile and lower bargaining power.
This is a result of the lower scale of business and non-availability of fixed contracts, leading to irregularity of income.
LFOs have a better credit profile and higher bargaining power because of income consistency, due to a large number of fixed
contracts. Interest rates also differ based on the age of the vehicles.
Interest rates are higher by 200-350 bps on older vehicles compared with newer vehicles
Interest rates on used LCVs range in 15-25%, while those on MHCVs range 14-25%, depending on the customer profile and
the asset class. According to sources, there is a gap of 100-250 bps between the interest rates charged on used LCVs and
used MHCVs financing to similar customers. Used LCV finance is offered at an average 19-21% interest rate, while that for
used MHCV finance is 18-20%.
Profitability based on age of vehicle, and segment
Asset quality in case of used CV financing improved as focus shifted to

improving collection efficiency
Asset quality in case of this segment is linked with the level of economic activity, along with movement in transporters
profitability, and improvements in infrastructural availability, which ensures greater efficiency from the vehicles. Whilst operating
in a highly risky segment, NBFCs have been able to put controls on asset quality based on expertise developed in relation
management with operators, along with expertise developed in valuing the underlying asset.
As financiers, and customers have fully adjusted to the new 90 DPD regime, asset quality in case of used CV financing is
expected to have improved as can be seen from the NPA figures from top three largest players in the segment ie Shriram
Transport Finance, Sundaram Finance, and Cholamandalam Finance (CV financing forms majority of the portfolio for these
players).
GNPAs of top NBFCs operating in the segment (GNPAs are for the entire portfolio)
Note: 1) FY18 and FY19 numbers are based on Ind-AS 2) Numbers post FY18 are based on 90 DPD regime

37.0 Tractor Finance: Tractor finance-Disbursement
Third consecutive normal monsoon keeps tractor finance disbursements healthy in fiscal 2019
In fiscal 2019, tractor finance disbursements grew at ~11.2% on-year, driven by ~10.4% increase in domestic sales, while
average realisation grew marginally by ~1.0% on-year. Sales growth over the fiscal was driven by the third consecutive normal
monsoon, which ensured higher crop production, direct farm income transfer support schemes announced in multiple states,
along with government funding schemes towards rural development activities such as road construction, and rural housing.
Over the next two fiscals, disbursement is expected to grow at a relatively slower pace of ~6% CAGR based on 3-5% growth in
domestic sales. However, retail sales are expected to be higher to the tune of 4-6%, as average realisations remain stable.
Based on interactions, inventory build-up as high as 55-60 days as against normal levels of 30-35 days, is expected to keep
retail sales higher. On the financing penetration front, marginal inroads into rural markets are expected over the next two
fiscals, as penetration levels reach 77-78%. Loan-to-value offered by financiers is expected to remain unchanged at 75-76%
over the coming two fiscals. Tractor sales remain restricted from further growth due to low reservoir levels in majority of the
states, decision of manufacturers to not participate in subsidy schemes in southern states (which account for ~10% of overall
sales) along with government curbs on illegal mining, which accounts for significant demand for non-farm tractor activity.
Tractor financing market to touch Rs 262 billion over next two fiscals
The tractors industry is expected to clock a CAGR of 3% over the next two fiscals to reach Rs 445 billion by fiscal 2021 with a
sales volume of 827,172 units.
Growth in tractor sales market

Growth drivers: Tractor sales
Existing tractor population inadequate for tilling India's entire arable area: Tractor penetration is estimated to have
been ~1.3 hp/ha (horsepower per hectare) as of fiscal 2012 In developed countries, tractor penetration is estimated to be
in the range of 3-4 hp/ha. This reflects significant scope for sales growth
Cross-country comparison of hp/ha (horsepower per hectare) penetration
Rise in farm incomes to drive tractor sales Minimum support prices (MSPs) for crops and crop output are expected to
continue to improve, which will boost farm income. This bodes well for tractor sales
Improvement in irrigation intensity - With higher investment in irrigation, irrigation intensity is expected to continue to
improve. This, in turn, will lead to higher, more stable farm incomes over the period, thus supporting tractor sales
Non-farm usage of tractors on the rise - Non-farm usage accounts for ~30% of demand for tractors, which are also
used for mining, construction and haulage. With the government's increased focus on improving rural infrastructure,
tractors are being used to carry construction material such as bricks, cement and pipes, finding increasing usage in non-
farm activities. They are also being looked at as a better alternative to commercial vehicles as they are more economical,
can carry heavy weight and manoeuvre easily on rough, rural roads
Regional growth outlook
Although farm mechanisation has been increasing in India, its progress across states varies widely. The northern states of
Punjab, Haryana and Uttar Pradesh have already achieved high levels of mechanisation. With an increase in the area under
irrigation and growing awareness among farmers, mechanisation has also increased in western states such as Gujarat,
Maharashtra, Rajasthan and certain areas of Tamil Nadu, and Andhra Pradesh. The pace of mechanisation is slower in the
eastern and northeastern states.
Tractor sales: Region-wise share in market size
Source: TMF, CRISIL Research
Demand remains concentrated on higher horsepower segment
The 41-50 hp segment has been maintaining its dominant share due to its multiple applications in agriculture and haulage. We
expect upgradation from 31-40 hp tractors to 41-50 hp tractors to continue over the next 5 years.
HP-wise tractor sales mix
Finance penetration to improve marginally in the medium term
Penetration declined slightly in fiscals 2013 and 2014 owing to increasing frequency of purchases with cash as high MSPs and
good crop output increased farmer incomes. Purchases were also made using kisan credit cards (KCCs). Finance penetration
has not changed much in the last 4-5 years.
Going forward, CRISIL Research expects finance penetration to be steady at 77-78% over the near-to-medium term.
Increasing focus of NBFCs and private players on the sector is also expected to sustain finance availability.
Trend in finance penetration

LTV levels to remain stable in medium term
Public sector banks (PSBs) offer LTV of 90-95% of the dealer price for tractors. On the other hand, non-banking financial
companies (NBFCs) and private banks offer lower LTVs, financing 70-75% of the landed cost of tractors. Although private
players have been increasing their LTV under pressure from competition, we believe overall LTV will remain at 75-77% over
the next two fiscals. The falling share of PSBs in tractor loan disbursements will also help LTV remain at current levels as
NBFCs entice customers by offering LTVs.. Banks will find it difficult to increase their share, despite their growing focus on
retail loans as the tractors segment is considered to be risky.
Trend in LTV offered
Note: P - Projected
Tractor financing market served almost entirely by formal financier
The domestic tractor financing industry is dominated by formal financiers who account for 90% of the total disbursements. The
informal lenders are mainly small money lenders who charge usurious rates on loans. Borrowers typically prefer availing loans
from banks and NBFCs (the formal sector) as they offer lower interest rates and also employ less aggressive collection
mechanisms.
Share of formal financiers vis--vis informal financiers

In case of organised lenders, captive NBFCs, including the likes of Mahindra Finance, TVS Credit, and Hinduja Leyland
Finance, have been increasingly gaining market share with greater ability to tap customers, translating to strong loan book
growth over the past five fiscals. NBFCs have strategically targeted high-growth areas and developed the necessary expertise
to run the niche product segment profitably. NBFCs and private banks have capitalised on growing demand for tractors,
offering loans with lesser documentation, faster turnaround times and more personalised collection systems, helping them
capture market share from PSBs.
NBFCs account for over half of disbursements in tractor financing market
Extensive reach, quicker disbursements, adequate LTV levels, lower collateral requirements, and low processing time
give NBFCs a competitive edge
While NBFCs require less collateral and set less stringent appraisal criteria for disbursements, they also keep the risk of under-
recovery in check by offering loans with low LTVs. NBFCs typically offer LTVs of 70-75%. Among banks, while private players
match the LTV levels and collateral requirements of NBFCs, PSBs offer higher LTVs of 90-95% and require borrowers to also
mortgage a portion of their land in addition to the tractor. NBFCs are also more flexible than banks, allowing borrowers to
customise their repayment timelines, based on crop patterns. Also, the average turnaround time for NBFCs is lower, at 5-7
days compared with 1-2 weeks for private banks and 3-4 weeks for PSBs.
NBFCs have better collection mechanisms in place as well, with collection agents who visit the borrowers residence to make
collections. Additionally, NBFCs have a less stringent appraisal criteria on land holdings compared with PSBs and private
banks. However, stringent recovery procedures and a large sales/ collection force ensures timely repayments and cuts down
credit losses.
Although NBFCs have a competitive edge over banks, thereby covering a major portion of the total tractor loans disbursed,
some PSBs are still striving to gain market share. They have entered into partnerships with tractor manufacturers to finance
farmers and purchase tractors. As a result, a large number of small and marginal farmers have benefitted and have access to
the necessary finance to purchase heavy-duty tractors.
NBFCs acquire customers through existing customers' references or with the help of their database. A strong dealership
network also helps to increase business.
NBFCs' competitive advantage
Prudent lending practices - Lower LTV offered by NBFCs compared with PSBs
Non-mortgage schemes - While NBFCs insist only on hypothecation of tractors, private banks keep hypothecation
mandatory for tractors
Quick disbursal of loans
Easy documentation and better collection mechanisms
Wider branch network
Dealer influence: NBFCs build tie-ups with dealers aggressively, who influence both the choice of product (tractor) and
the choice of financier at a single point
Comparison between features of tractor loans offered by banks and NBFCs
Loan appraisal process at NBFCs for tractor financing

38.0 Tractor Finance: Tractor finance-Profitability
Profitability of tractor financing NBFCs remained stable in fiscal 2019
Non-banking financial companies (NBFCs) charge higher interest rates for tractor financing, with yields ranging between
16-23%, based on customer profile, asset class, and financiers. Yields are such that they cover the higher costs associated
with riskier borrowers, and operating expenses associated with setting up infrastructure (personnel and branches) in semi-
urban and rural markets.
As per industry sources, the rate of interest charged too, varies region-wise. For instance, interest rates are lower in Andhra
Pradesh, Gujarat, Maharashtra and Tamil Nadu, compared with Bihar and Uttar Pradesh.
NBFCs offer better services via lower documentation requirements, faster turnaround time, and borrower-friendly collection
mechanisms. While monsoon failures can result in substantial borrower delinquency, NBFCs reduce this risk by extending
loans to borrowers who are able to use their tractors for commercial purposes during a lean season.
Gross non-performing assets (GNPAs) for tractor financing improved to ~6-7% in fiscal 2019 as against ~7-8% for the industry
in fiscal 2018, owing to rising farm income resulting from third consecutive good monsoon.
While NBFCs offer better services vis--vis banks, banks offer tractor loans through priority sector lending targets, amid greater
market reach and lower interest rates. This keeps competitive intensity in the segment higher, putting pressure on the overall
return made by the players.
Profitability from tractor financing remained stable in fiscal 2019
Inherent risks in tractor financing

39.0 Construction equipment finance: Outstanding
Construction equipment financing hinges on economic growth
Demand for construction equipment financing (CEF) is linked to performance and growth prospects of the construction
industry, which is largely driven by investments in end-use sectors, such as mining, urban infrastructure, roads, ports, irrigation,
power, real estate, steel, cement, and automobiles.
How does real GDP growth drive demand for CEF
Anticipating growth, companies across various industries make incremental investments or expand capacities.
They either purchase new or used equipment, or opt for equipment on lease. Rise in demand for equipment pushes up the
need for CEF.
NBFC disbursement growth to witness slowdown over fiscal 2021
Non-banking finance company (NBFC) disbursement towards construction equipment rose to ~Rs. 206 billion in fiscal 2013
from ~Rs. 132 billion in fiscal 2011 based on:
Improvement in the power sector demand for material handling equipment (MHE) from Rs 120 billion to near Rs 189
billion
Infrastructure and real estate development and NBFCs supporting smaller construction equipment manufacturers
However, post fiscal 2013, NBFC disbursements saw a substantial decline of ~13% CAGR from Rs. 206 billion to Rs 158 billion
in fiscal 2015 due to:
Ban on mining in some states

Limited access to long-term finance and high interest rates, which impacted investments in large infrastructure sectors
Fall in capacity utilisation
Policy paralysis
Delayed clearances
Poor financial health of infrastructure companies
Growth returned post fiscal 2015 as disbursements grew by ~23% CAGR between fiscals 2015-2018 to reach ~Rs 308 billion
in fiscal 2018. Growth drivers for the same included:
Recovery in the demand for earth moving equipment (EME), especially from the roads and mining sectors
For instance, investments in the roads sector increased to Rs 1,554 billion in fiscal 2018 from Rs 926 billion in fiscal
2015
Also, coal and iron ore mining increased from 742 tonnes in fiscal 2015 to nearly 1,000 tonnes in fiscal 2018
Additionally, the incumbent government focussed on improving the pace of infrastructure projects, clearing policy logjams
and improving financial health of infrastructure companies
Significant policy changes made to improve the infrastructure sector included:
Allowance of 100% Foreign Direct Investments in railway infrastructure sector
Easing of exit clauses in case of national highway projects so as to facilitate private sector investment.
Amendment of the Mines and Minerals (Development and Regulation) Act, 1957, through the MMDR
Amendment Act, 2015, in the coal mining sector, which mandates that resource disbursement in the sector
would take place through competitive auctions rather than through the first come, first serve basis.
In fiscal 2019, the pace of disbursements for construction equipment financing declined significantly to ~11% YoY to Rs. 342
billion in the back drop of the upcoming central government elections, which led to delayed payments.
Nevertheless, the demand was supported by :
Continued growth in the market for Earth Moving Equipments (EME) for the fourth consecutive fiscal year
For instance, market size for Backhoe loaders, and Excavators is expected to have grown by ~22% and ~20%
respectively over the fiscal 2019.
Execution of road projects by National Highway Authority of India (NHAI) totaling to ~3400 kms over the fiscal aided
to the same.
On the other hand, robust demand for Material Handling Equipment (MHE) over the fiscals aided to the strong growth in
the financing disbursement
For instance, MHE demand for Automobile sector rose by ~12% YoY in fiscal 2019, while that for Oil & Gas sector
rose by ~6% YoY
Demand rose in fiscal 2019 due to increase in capital expenditure led by high capacity utilisations
However, disbursement growth over the coming two fiscals is expected to slow down to ~5-6% CAGR based on:
Volume decline expected in case of EME sales, in the backdrop of central government elections in the initial part of fiscal
2020.
This coupled with delayed payments for the ongoing government projects is expected to bring down sales to ~79000 units
over the calendar year, vis--vis ~85,000 in the previous fiscal
On the other hand, MHE demand is expected to remain flat over fiscal 2020, as investment growth in sectors such as
Cement, Mining, and Oil & Gas is expected to be nullified by de-growth in sectors such as Automobiles, Power, and
Steel.
Disbursements to slow down with slow down expected in end-user industries

Source: Company Reports, Industry, CRISIL Research
AUM growth to remain pegged down with poor demand in end-user industries
Asset under management (AUM) for construction equipment financing NBFCs remained flat at ~Rs 324 billion in fiscal 2015
from ~Rs 313 billion in fiscal 2013 due to significant investment slowdown in end-user industries and execution challenges.
Demand recovery between fiscals 2015 and 2018 saw AUM grow by ~14.9% CAGR from ~Rs. 324 billion in fiscal 2015 to ~Rs.
491 billion in fiscal 2018.
Strong MHE demand from end-user segments particularly automobiles (~12 YoY growth), and Oil & Gas (~6% YoY growth)
sectors along with strong market growth for EMEs (~21% YoY growth in fiscal 2019) kept AUM growth strong at ~16% YoY in
fiscal 2019.
With slowdown expected across in case of both EME and MHE segments, AUM growth is slated to come down to ~7% CAGR
over the next two fiscals, after registering strong growth of ~25% CAGR between fiscals 2017-19.
AUM growth to come down after three strong years of growth

Construction equipment sales likely to slowdown in the coming two fiscals
EME sales plummeted between fiscals 2013 and 2015 on account of reduction in demand from roads and mining sectors due
to economic downturn, policy logjam, project delays, and high interest rates.
Sales growth, however, revived at the end of fiscal 2015 as demand in these sectors recovered
For instance, investment in the roads sector increased from Rs 926 billion in fiscal 2015 to over Rs 1,554 billion in
2018
Meanwhile, the MHE industry, which grew at a robust pace from fiscals 2011 to 2014, has been plagued by weak demand from
end-user industries and execution challenges since fiscal 2014.
The MHE industry has been unable to contain the fallout of subdued investments in end-user sectors such as power,
cement, ports (bulk cargo) and steel, which account for over 85% of the MHE demand
Lack of fresh power purchase agreements, stretched financials of developers, and delays in environmental clearances in
the power sector are other reasons for low investments in the sector
The industrys market size increased by 9% in fiscal 2017, 16% in 2018 based on these developments.
In fiscal 2019, consolidated market size increased at a strong pace of ~14% driven by:
~21% YoY growth in overall Earth Moving Equipment market size based on sharp growth in market for Backhoe Loaders
(~22% YoY) and Excavators (~20% YoY)
~8% YoY increase in overall Material Handling Equipment (MHE) demand across sectors, with automobiles (~12% YoY),
and Oil & Gas driving the growth (~6% YoY)
Going forward, CRISIL Research expects market size growth to slow down to CAGR of ~1-3% to Rs. 650 billion in fiscal 2021
as investments in end-user industries are likely to stagnate.
EME market is expected to grow at a CAGR of ~3-5% over the two fiscals pegged down by payment delays post the
central government elections, along with slowdown in growth for Backhoe Loaders market (~0% growth over two fiscals),
and Excavators (~3% over the two fiscals)
MHE demand is expected to grow at a much slower pace of ~1% CAGR over the coming two fiscals as against ~8% in
the previous two fiscals (2018, and 2019) dragged down by investment de-growth expected in auto, power and steel
sectors.
Construction equipment sales over the fiscals

40.0 Construction equipment finance: Industry Dynamics
Financing penetration remains high in CE financing
Finance penetration in the construction equipment (CE) industry is 85-90% as of fiscal 2019, with institutional sales or cash
purchases accounting for the rest.
Institutional sales include purchases by government institutions/corporations such as Coal India Ltd, Indian Army, Bharat
Heavy Electricals Ltd and GAIL (India) Ltd that procure equipment via tenders
There have been a few instances of equipment being bought with cash
In the case of imported machinery, the finance penetration is higher at ~90%.
Construction equipment finance penetration (FY19)
Share of used equipment likely to continue increasing in future

Between fiscal 2012 to 2014, low earnings and a dwindling number of new projects prompted a shift in customer preference
towards used equipment
In a bid to improve margins, financiers also stepped up funding for used equipment in that time period
There was a push from the market as well as manufacturers to boost sales of used equipment, benefiting clients,
manufacturers and financiers.
As a result, the share of used equipment financing in the overall pie improved to 30% from ~20% levels in the past five
fiscals.
Clients purchased equipment at affordable prices, and manufacturers can move idle inventory to focus on improving
technology and providing better quality equipment
The secondary market for used equipment, though, is still underdeveloped. End-users, who earlier purchased new
construction equipment, are focusing on buying used equipment, owing to lower price.
Thus, the share of used equipment is likely to continue increasing in future.
New and used equipment financing break-up (FY19)

Retail segment dominates customer mix

In terms of customer mix, banks mainly focus on large customers (contractors) as retail clients (hirers) are generally small and
either have limited documentation or take too much time meeting the stringent criteria of banks.
While non-banking financial companies (NBFCs) focus mainly on retail customers, including first-time buyers (FTBs), they also
cater to large customers:
At the industry level, FTBs and retail customers dominate the industry with 55-60% share
FTBs and retail customers generate higher margins for financiers as they are charged a higher rate of interest vis--vis
other customers, due to their lower credit profile vis-a-vis large customers and lower bargaining power
In contrast, contractors purchase specialised equipment (higher unit price) and prefer to lease standard equipment (backhoe
loaders, excavators, etc). Hence, financiers will continue to scale up in the retail small and medium enterprise (SME) business
space.
Retail segment dominates the CE finance industry (FY19)
Indian customers are price sensitive

However, with experience, they tend to become value-focused and demand quality and after-sales services
Players on the spectrum from price-focussed purchases to value-focussed purchases

SREI equipment finance remains the market leader in CE financing (as of FY19)
Note: Market share is calculated based on estimates for outstanding loan portfolio in fiscal 2019.
CE industry: Key challenges

Clearance and land acquisition- Delays related to forest and environment clearance, and land acquisition escalate
project costs, discourage lenders, and send negative signals to investors
Loan recovery- This is a challenge for NBFCs. This is because the secondary market for used construction equipment is
underdeveloped in India, and thus, the re-sale of used equipment is a growing challenge for CE sellers
Low penetration of rented equipment- In India, the penetration of rented equipment is low. Therefore, leasing/renting
construction equipment, though fragmented, is expected to clock a healthy 25% CAGR over the next five years
Unavailability of skilled manpower- Operators mostly get on-the-job training as skill training institutes run by OEMs
tend to be expensive for low-income groups
Lack of consistency in demand- This has made capacity planning challenging for equipment suppliers
Hence, renting equipment is a suitable option for a large number of businesses to save on the high cost of buying equipment.
However, renting options are limited in terms of getting the right equipment in good condition at the right time and place.
41.0 Construction equipment finance: Borrowing mix
Share of banks in resource mix came down in fiscal 2019; to improve going forward
Share of banks in overall borrowing mix for construction equipment NBFCs, though reduced from 59%, remained high at ~45%
in fiscal 2019 as , players resorted to alternate funding avenues to fuel growth.
Banks typically extend term loans, and also offer working capital facilities
While their share in the overall borrowing mix has decreased considerably over years, they still remain the major source
of financing for CE financing NBFCs
Post-August 2012, with the change in the Reserve Bank of Indias (RBI) securitisation guidelines, the share of securitisation in
overall borrowings of NBFCs declined from ~31% in fiscal 2012 to ~14% in fiscal 2015.
The RBI guidelines stipulated a minimum holding period and minimum retention requirement for originating NBFCs to
securitise loans.
However, since fiscal 2015, this share has seen a steady increase, currently accounting for 21% of the overall borrowing
mix
Debentures and other components, namely loans from ECB and commercial papers, make up the remaining portion in the
overall mix, whose share has increased significantly over fiscal 2019.
The major reason for issuance of commercial papers is the lower costs of borrowings associated with the instrument;
however, post IL&FS crisis, fund raising through CPs reduced significantly in case of CE financing, in line with other
segments
The share of commercial papers in the overall mix saw a sharp decline in fiscal 2019, currently accounting for a mere
~1% of the total as players resorted to longer tenured loans to finance growth
Going forward, we expect the exposure from banks to increase as spreads charged by the banks to CE financing
NBFCs improve over the coming two fiscals, and reliance on alternative funds of sourcing such as rupee-dominated bonds
come down to ~15-20% with improved funding availability from banks as credit flow towards NBFCs improves with banks
offering relatively lower interest rates. Share of banking funding is expected to improve to above ~50% levels in the coming two
fiscals.
Banks' share in overall borrowing mix expected to reduce further
Note: Based on the borrowing profile of SREI Equipment Finance; Others include ECB and commercial papers.

Organised lending share remained stable at ~95% of overall disbursements
The disbursements of the organised sector in the overall CE financing segment had seen a decline after peaking in fiscal 2013,
due to significant investment decline in end-user segments. Disbursements, the lows recorded in fiscal 2015, have seen a
steady increase, primarily based on the recovery in the roads and mining segments.
The share of organised lenders in the overall market pie is expected to remain high going forward, supported by:
Specialised support provided by the players to clients across the asset lifecycle, ie. procurement, deployment,
maintenance, and disposal
The wide range of services offered with respect to new and used equipment loans, leasing solutions, equipment rentals,
and disposal assistance
Given the high equipment prices, asset valuation expertise and dependence on customer relationships, the industry is
expected to remain largely organised, with the share of organized players expected to increase.
Major players include SREI Equipment Finance, Hinduja Leyland Finance, Sundaram Finance, Shriram Transport
Finance, Tata Capital Financial Services, Magma Fincorp, HDFC Bank, Kotak Mahindra Bank, and IndusInd Bank among
others.
Organised lending share in the overall pie to remain range bound
Note: Figures as of FY19
Significant increase in market share of NBFCs in organised sector lending
NBFCs continue to account for the lion's share in financing for construction equipment with respect to the organised sector.
The share of NBFCs in this regard grew substantially from 48% in fiscal 2014 to 64% in fiscal 2018
Banks normally extend project finance (including disbursements for procuring equipment) and have lower exposure to
direct Construction Equipment Finance
Given the larger share of construction equipment loans, NBFCs have better processes that focus on target customers and a
wider reach aided by direct selling agents and a faster documentation process as compared that followed by banks
NBFCs have better recovery systems, Including warehouses at strategic locations to house the repossessed equipment,
in the case of defaults
Conversely, banks incur huge expenses towards warehouse rentals and transportation of equipment
NBFCs also have a better understanding of its customers businesses, associated risks and cash flows
They recommend equipment selection and suggest prudent asset redeployment if any project becomes stressed or an
asset becomes idle
Both NBFCs and Banks are expected to slow down in their disbursements as demand for construction equipment declines as
both player groups cater to different customer segments, their share in overall financing is not expected to change significantly
in the coming fiscals
NBFCs share in the overall pie to remain range bound over fiscal 2021
Source: CRISIL Research, Company Reports

42.0 Construction equipment finance: Profitability
Profitability to see downward bias in the coming two fiscals
Yield on advances declined till fiscal 2017 on account of a slowdown in investments in end-user industries, which led to players
reducing the interest rates charged from the clients.
However, as economy improved and interest rates witnessed down cycle in fiscal 2018, players marginally passed on the
benefits of lower costs of borrowing directly to the borrowers as overall spreads made improved sharply by ~60-70 bps
In fiscal 2019, however, with the liquidity crunch faced by the NBFC sector, borrowing costs for CE financing NBFCs also went
up by ~75-80 bps over the fiscal, which the players directly passed onto the end users
As a result, the overall spreads remained stable over the fiscal

However, with end-user industries expected to witness sharp slow down in the coming two fiscals, spreads are expected
to contract as financiers absorb impact of rising borrowing costs to channel loan growth
Spreads expected to decline for CE financing NBFCs
Note: Financials based on SREI Equipment Finance
Players were able to maintain the gross spread over time, due to reduction in market rates and issuance of low-cost
alternatives in commercial papers. Operating expenses have seen a significant increase over the past five fiscals on account of
increasing employee compensation expenses and depreciation in the values of the underlying assets
From fiscals 2015 to 2019, operating expenses increased at a steadye rate from 3.7% to 5.9% of average total assets
Credit costs shot up to 2.5% during fiscal 2016 as players increased provisions due to a decline in demand for construction
equipment economic slowdown along with poor health of infrastructural companies.
However, with revival in economic growth and demand, credit costs have come down, and are expected to remain stable
going forward
Return on assets reduced to 0.9% in fiscal 2015 as growth in demand for Earth Moving Equipment and
Material Handling Equipment slowed.
However, growth recovered due to increasing demand for earth moving equipment on the back of recovery in the roads
and mining sectors and initiatives undertaken by the government to improve infrastructural conditions in the country
As a result of these developments and declining provisioning, profitability improved to 1.4% in fiscal 2018
In fiscal 2019, spreads improved as incremental borrowing costs were directly passed onto the borrowers. While costs
increased by ~60-70 bps, interest rates rose by ~110-120 bps during the fiscal.
Operating expenses came down by ~40-50 bps over the fiscal, while credit costs shot up based on rising non-performing
assets in the backdrop of central government elections
As a result of these development, profitability improved marginally by 10 bps to 1.5% in fiscal 2019
Going forward, costs are expected to increase further by ~8-10 bps, which players are expected to absorb in the backdrop of
economic slowdown in end-user industries
Operating expenses are expected to reduce by ~20 bps, while credit costs are to remain elevated over the coming fiscals
Based on these developments, profitability is expected to see a downward bias in the range of 5-10 bps over the coming
two fiscals
Return on assets for CE financing NBFCs to contract
Note: 1) Profitability based on total assets, and data based on figures for SREI Equipment Finance 2) Data includes depreciation and amortisation expenses in operating
expenses
Gross non-performing assets on a decline with improvement in CE demand

The equipment finance industry is inherently cyclical. Challenging macroeconomic environment and delays in execution of
infrastructure projects adversely affect cash flows of borrowers.
Risks relating to asset quality are partially offset as NBFCs primarily lend to sub-contractors and hirers. Further, while the
average life of major construction equipment is 6-7 years, the loan tenure is typically only 3-4 years.
Thus, the residual value of the equipment incentivizes borrowers to repay

Moreover, as the equipment forms the collateral, lenders are comfortable about loan recovery in case of defaults
The owners can move assets across projects, and are not dependent on specific projects to generate cash flow
Good rentals and buoyant demand help owners of construction equipment recover cost faster, thus improving their
repayment capacity
GNPAs rose sharply to 5.0% in fiscal 2015 as infrastructural demand and the macroeconomic environment faced slowdown
and the market for EME faced a 10% decline.
As the demand for these equipment started to improve towards the end of fiscal 2015, GNPAs started on a downward
trend, reaching 1.5% in fiscal 2018.
However, general elections, coupled with payment delays on government projects affected asset quality significantly in fiscal
2019, as GNPAs shot up to ~4.7%.
GNPAs are expected to increase, albeit marginally, going forward based on slow-down expected in multiple end-user
industries, which is expected to impact the repayment capabilities of the borrowers. We expect ~15-20 bps uptick in overall
GNPAs over the coming two fiscal period, with an equal ~5-10 bps uptick in each of the fiscals.
GNPAs to remain elevated with slow-down expected in multiple end-user industries
Note:1) Includes figures for SREI Equipment Finance 2) Figures for FY20, and FY21 are projected

43.0 Gold Finance: Outstanding
Gold outshines other NBFCs: Higher gold prices support growth

The industry's assets under management (AUM) grew at a compounded annual growth rate (CAGR) of 8% between fiscals
2015 and 2019 to reach Rs 2,875 billion. Industry registered higher growth (15%) in fiscal 2019 owing to:
Rise in gold prices by ~6% in fiscal 2019

Banks higher growth in gold financing in contra to unsecured agri loans in times of distress due to poor monsoon
Specialised NBFCs' focus on improving the business per branch as they diversified their regional concentration,
undertook aggressive marketing, and witnessed strong growth from non-southern regions
Non-specialised NBFCs increased their pie of gold loans, specially post crises, because gold financing is considered to
be less riskier and shorter duration of loans have no ALM mismatch
Going forward, we expect the industry AUM to reach above Rs 3,100 billion by fiscal 2020, driven by high gold prices, higher
geographical penetration, and flexibility offered by players in terms of interest rates and loan tenure.
Gold loans witnessed higher growth in FY19
Note: Includes agriculture lending by banks with gold as collateral
NBFC' AUM to cross Rs 900 billion by FY21
NBFCs have witnessed slower growth between fiscals 2014 and 2018, as industry stabilised post regulatory changes and
relatively stable gold prices. However, lately, NBFCs have found gold as an attractive segment to be in, due to increasing gold
prices and relatively secure segment in times of crisis. Owning to higher growth witnessed, NBFC AUM rose to Rs 719 billion in
fiscal 2019.
NBFC AUM to grow faster over next 2 fiscals

Currently, southern India accounts for more than 50% of the regional demand.
As these markets saturate, diversification into regional geographies and untapped markets would be key to AUM growth
Players marketing initiatives to raise awareness against very high interest rates charged by unorganised players (25-50%
in some cases), especially in rural parts, will further aid growth
At the same time, players ability to leverage technology and improve their online gold disbursements could turn out to be
a game changer
Along with these drivers, funding needs of small businesses, higher gold prices will improve demand for gold loans
Based on these growth drivers, we expect gold loan NBFCs' AUM to clock 12% CAGR from fiscals 2019 to 2021 to reach Rs
904 billion.
Higher gold prices and increasing gold jewellry stock with NBFCs will drive AUM growth
Source: Company reports, CRISIL Research, World Gold Council, World Bank data
In fiscal 2019, banks marginally improved their market share, but structurally, NBFCs will continue to increase market share.
Share of banks & non-banks in gold financing

Note: 1) Includes agriculture lending by banks with gold as collateral

44.0 Gold Finance: Competitive Positioning
Major players in the industry include Muthoot Finance, Manappuram Finance, Muthoot Fincorp, Shriram City Union Finance,
India Infoline, Muthoottu Mini Financiers and Kosamattam Finance .
The top three players in the NBFC space account for around 80% of the overall market pie
Muthoot Finance remains the market leader based on its strong network presence
Specialised gold loan NBFCs have been able to drive AUM growth based on their focused approach along with the new
technological initiatives undertaken by them, allowing customers to transact online with ease
Market share among gold financing NBFCs
Role of technology in growth of gold loan market
Online gold loan facility provides finance to borrower at convenience of anytime and anywhere. Borrower once pledge the gold
with nearest branch in beginning and afterwords can take and repay loans online as and when required. This hassle-free,
paper-less transaction enables NBFCs to scale the business and improve efficiency.
Technology has led to faster decision making and reduced turnaround time for disbursal. It has reduced human
intervention significantly, thereby making the approval, disbursal and repayment processes much faster, simpler and
more robust
Better compliance to lending regulations such as KYC, efficient tracking of customer accounts, and lowering of
operational costs are some of the major benefits realised through the use of technology
Because of these features, the online gold loan book of NBFCs has seen extraordinary growth over the last three
fiscals.
Online gold loan AUM growing rapidly

Market borrowings remain unaffected for gold loan NBFCs
Banks continue to remain the major source of funds for gold loan NBFCs with over 50% of funding coming from banks. , But,
unlike for other NBFCs, the share of capital market borrowings increased during fiscal 2019. Last year, when other NBFCs
were struggling to raise funds from the market, gold loan NBFCs continued to raise funds through commercial papers and
NCDs, though at a slightly higher cost.. This is because there is no liquidity concerns with gold loan NBFCs as there is no
negative ALM mismatches given the short tenure of loans (average tenure of 4 - 5 months) compared with other NBFCs, which
were borrowing short term and deploying into long-term loans
Borrowing mix of gold loan NBFCs
Note: Based on the borrowing mix for Muthoot Finance and Manappuram Finance
Specialised gold loan NBFCs have carved a niche for themselves
Specialised gold loan NBFCs have witnessed decent growth amongst organised players, driven by the aggressive expansion
of branches, heavy spending on marketing and rapid acquisition of customers.
NBFCs and banks approach the gold loan market differently, which is reflected in their interest rates, ticket sizes and loan
tenures. NBFCs focus more on the gold loans business and have accordingly built their service offerings by investing
significantly in manpower, systems, processes and branch expansion. This has helped them attract and serve more customers.
Some of their advantages are:
Less documentation, enabling faster turnaround

Adequate systems to ensure quick disbursal. For example, NBFCs have dedicated personnel to value gold jewels at the
branches
Flexible repayment options, wherein the borrower can pay both the interest and principal at loan closure
Greater accessibility due to better penetration, ability to serve non-bankable customers
Single product focus on gold loans, enabling them to develop strong appraisal and valuation expertise, resulting in faster
and better customer service
Banks, on the other hand, have a more vigilant approach.
They view gold loans as a safer means to meet their priority sector lending targets, especially agricultural loans
Even in the case of non-agricultural gold loans, they mostly target the organised segment or their existing customers as
they are unable to offer flexible and rapid disbursal
Only a few south-based banks - Indian Overseas Bank, Indian Bank and South Indian Bank - have a higher share in non-
agricultural gold loan disbursements, given the regions proclivity for gold loans
The gold loan market will continue to be attractive because of
1. Strong collateral, higher interest rate, lower cost, better return on investment
2. Product diversification that compensates for lower off-take of auto, home loans
3. Scope for cross-selling opportunities in future, including other gold-based products
4. Opportunity to capture under-penetrated, untapped markets
For the above-mentioned reasons, even small finance banks have entered the gold loan market and are expected to increase
competition in the coming years.
Moreover under-penetration provides substantial potential for growth
Organised gold loan penetration remains significantly low, which provides ample opportunity for organised financiers loan book
growth.
Overall gold loan stock with the organised sector forms a miniscule part of the overall gold stock in the economy.
However, this has been increasing at a steady overall pace
Focused approach driving the business received per branch
As NBFCs push for higher operating efficiency, they are concentrating more on improving business per branch. Focused
marketing efforts by branch personnel has led to a gradual but continuous increase in the average gold loans given out per
branch. For the top two players in the industry, the per branch gold loan outstanding has witnessed a moderate CAGR of over
8% over the past five fiscals. This limits the fixed costs incurred, thus improving operating leverage and increasing operating
profits.
Average gold loans outstanding per branch expected to continue increasing based on increasing penetration

45.0 Gold Finance: Region wise industry dynamics
South India accounts for major share of NBFCs assets under management
(AUM)
Even going forward, south India will continue to dominate overall gold loan demand. However, non south regions are likely to
emerge as growth centres, driven by changing consumer perceptions about gold loans on account of increasing awareness as
well as rising funding requirements.
Region-wise AUM split for gold loan NBFCs
Notes: 1. Aggregate includes region-wise AUM split of Muthoot Finance, and Manappuram Finance 2. Shares are based on AUMs as of FY19
Regional gold loan demand
Gold holders in the south are more open to pledging gold to raise funds than those in other Indian regions. Tamil Nadu, Kerala,
Andhra Pradesh, Telengana, Karnataka, and Puducherry together accounted for ~ 60% of AUMs of the top-four gold loan
NBFCs, as on March 31, 2019. Although attempts by NBFCs to expand into certain pockets of northern and western India have
lowered the share of southern markets, the south still remains a stronghold for NBFC gold loans.
Specialised gold NBFCs are gradually expanding their presence beyond south India. However, they still have to contend with
public sentiment against pledging gold. In addition, for the south based NBFCs, earning the trust of borrowers in other
geographies is a long and time consuming process.
South-based NBFCs command major market share
Indias top-three gold loan NBFCs are based in the south and controlled ~80% of the market (in terms of AUMs), as on March
31, 2019.
They have managed to retain their market share through the years due to their continuous customer focus and
penetration into newer territories
This is an obvious consequence of a more evolved gold loan market in the south india
Demand for gold is skewed towards the southern states, where households account for the largest share of accumulated gold
stock in the form of ornaments, coins, bars, etc.
Major players increasing presence beyond south India
Indias top-three gold loan NBFCs are based in the south and controlled ~80% of the market (in terms of AUMs), as on March
31, 2019. In terms of branches, the south accounts for the major share of gold loan NBFC branches. NBFCs are opening more
branches in under-penetrated north and east India in order to improve business and reduce their dependence on the south
which is reaching saturation point.
Efforts to diversify the loan portfolio by model changes to de-risk offerings has helped players enormously as demonstrated by
their continuously increasing gold loans per branch. Overall, year-on-year, there has been a marginal 0.74% increase in the
overall number of branches as players seek to de-risk their overall loan portfolios.
There has been an ~5% increase in the number of branches in the eastern regions by major players, which signifies their
intent to diversify from the saturated southern market
Major players still have more than 60% of their overall branches in south India
However, share of branches as well as business in south Indian market is expected to fall further in coming fiscals
Region-wise share of branches
Note: Aggregate includes Muthoot Finance and Manappuram Finance

46.0 Gold Finance: Profitability
Higher borrowing cost to impact profitability in fiscals 2020 and 2021

There has been significant bounceback in the profitability of gold finance non-banking financial companies (NBFCs), after a
tighter regulatory phase till fiscal 2016. In 2019, after NBFC funding crisis, cost of borrowing for gold financiers increased.
However, higher gold prices, cost control and lower credit cost helped them to maintain higher return on assets (RoAs)
Going forward in fiscal 2020 and fiscal 2021, in the lower interest rate scenario, NBFCs are expected to witness slight pressure
on yields. However, as NBFCs are still finding it difficult to raise funds, the cost of funds (CoF) is expected to remain higher in
fiscal 2020. Consequently, net interest margins may compress. Therefore, RoA is expected to decline to 5.2% in fiscals 2020
and 5.00% in 2021.
RoAs to soften in coming fiscals
Note: Aggregates includes Muthoot Finance and Manappuram Finance
Between fiscals 2016 and 2018, there has been a significant decline in the cost of borrowing, as players shifted to alternative
sources of funding, such as commercial paper, which allowed them to raise funds at cheaper rates compared with that offered
by banks.
Profitability of gold loan NBFCs to reduce in FY20 and FY21
Note: Aggregates includes Muthoot Finance and Manappuram Finance, Figures are taken as a percentage of average assets
Asset quality to remain stable with waning impact of classification norms

Gold prices posted a healthy recovery in fiscal 2019 with a 5% rise on-year. A rise in gold prices has historically lowered under-
recoveries and improved asset quality. Gross NPAs spiked in fiscal 2018, as the Reserve Bank of India (RBI) changed the NPA
recognition norms for NBFCs to 90 days. Credit costs increased due to higher one time provisions. With higher gold prices and
stabilisation of regulatory framework, NPA levels normalised in fiscal 2019. Asset quality is expected to remain stable in the
near term, based on higher prices and lower delinquencies in the segment. Asset quality has not been a major cause
for concern for gold loan companies, since post default the company could auction the gold jewellry underlying to recover the
dues.
Asset quality to remain stable going ahead
Note: Aggregate includes Muthoot Finance, Manappuram Finance.

47.0 Consumer durable finance: Outstanding
Consumer durables financing from NBFCs tripled in past 5 years

Consumer durables purchased against loans from financial institutions (banks and non-banking financial companies) come
under consumer durable (CD) finance. This is essentially dealer-point finance, i.e., these loans are normally processed at the
retail outlets or at the showroom.
Often, the dealers ability to convince the customer at the point of decision-making is instrumental in making them opt for
consumer durable loans
This is unlike the trend in other retail loan products where the services of direct sales agents (DSAs) are utilised with the
objective of generating inquiries and concluding a transaction
CD financing essentially enables a customer to convert hidden future income streams into current consumption and remove
whatever constraints the lack of liquidity might have.
During fiscals 2015 to 2019, loan disbursements from NBFCs for purchase of consumer durables grew at a CAGR of 30% to
Rs 418 billion from Rs 147 billion, driven by increasing point-of-sales (POS) set-ups, expanding distribution network, and
locations.
CD financing from NBFCs witnessed sharp growth
Source: RBI, CRISIL Research, industry
Other factors enabling CD financing are:
Reduction in the replacement cycle of consumer products from 9-10 years to 4-5 years
Increase in the product portfolio offered by players for financing
Better availability of credit information with customers
Improving ability of customers to buy higher-value products through financing schemes
The industrys growth picked up in the past five years due to strong demand and thrust from almost all manufacturers of
consumer durables.
CD financing market size to cross Rs 1,100 billion by fiscal 2021
The CD finance market witnessed 21% CAGR during fiscals 2015 to 2019, from to Rs. 397 billion to Rs 726 billion , driven by
rapid expansion of NBFCs, increasing use of credit cards and online financing models. CRISIL Research expects CD finance
disbursements to log ~23% CAGR during fiscals 2019 to 2021.
Some of the driving factors for higher growth in CD finance are:
Rising penetration as players enter newer territories and expand their geographical presence beyond Tier 1 and Tier 2
markets
Players ability to offer greater number of products under the financing umbrella
Faster growth in sales of high-value products like smartphones
Easy availability of finance through credit card
Reduction in cash payments based on the push towards digitisation
CD financing market witnessed rapid expansion over last 5 fiscals; aggressive expansion by players increasing finance
penetration
Note: Finance penetration = (Total products financed during the year/Total products eligible for such financing)
Source: RBI, CRISIL Research, Industry
Overall demand for CD finance is expected to grow as more consumers migrate towards superior quality and higher capacity
products. Over the next 2 years, finance penetration will increase across product categories. Hence, we expect finance
penetration for overall consumer durables to go up from 28% as of fiscal 2019 to 34% by fiscal 2021.
However, growth in CD loans depends on the manufacturers of these products, as this is a supply-push market where
financing is facilitated by the manufacturer
If manufacturers reduce or stop subvention to financiers to protect their margins, it would impact growth in disbursements
negatively.
Easy availability of credit and rising disposable incomes driving consumer durable sales
Demand for consumer durables has witnessed a steady increase due to rising penetration and disposable incomes, along with
increasing affordability, and shorter replacement cycles.
Besides the above factors, easy availability of finance for purchases of consumer durables also aided sales growth.
For instance, 0% interest and flexible duration schemes launched by many manufacturers have made high-quality
household appliances affordable for many low and middle-income families
Major demand for these products came from the urban areas
Domestic sales of consumer durables increased at 13% CAGR from Rs 1,573 billion in fiscal 2015 to Rs 2,565 billion in fiscal
2019.
Consumer durables market expected to grow at a steady pace, driven by better affordability
Source: CRISIL Research, industry
Smartphone sales accounted for 66% of the total consumer durables sales in fiscal 2019
Source: CRISIL Research, industry

48.0 Consumer durable finance: Key growth drivers
Increasing regional penetration and ability to improve product financing

portfolio to drive growth
With greater regional penetration and availability of finance for consumer durables, owning high-end consumer durables has
become more affordable.
Many low- and middle-income families who earlier could not high end or afford superior quality products are now finding it
easier to satisfy their aspirations owing to the availability of financing for consumer durables.
New ways of selling consumer durable products have also supported the growth of the consumer durable finance industry:
Equated monthly installment schemes have helped prop up dealer sales by 2-4 percentage points
Zero down-payment schemes, which are the most popular among manufactures
Higher subventions offered by manufacturers even for products with small ticket size during festive seasons to boost
sales
Key drivers for the consumer durables finance industry
Urbanisation will have positive impact on financing consumer durables over long term
Note: E: Estimated
Source: National Housing Bank, Reserve Bank of India, CRISIL Research

Schemes with 0% interest are key enablers of growth
Financing schemes enable customers, especially those with low income, to use future income streams to buy consumer
products and pay in installments over a period.
Consumer durable financing schemes are generally available at the dealers location (point of sale) or showrooms.
Apart from customers, such schemes also benefit lenders, manufacturers and retailers.
For manufacturers, the schemes boost sales and help increase customer preference for high-margin products
For retailers, financing schemes increase footfalls
For lenders, they increase the customer base and help cross-sell loan products (personal loans, insurance, etc.) to
customers availing of the loans for consumer durables
The most common consumer durable scheme is the 12/4 zero interest scheme, which accounts for ~75% of total financing.
The scheme allows:
A customer buying an appliance costing Rs 20,000 to make a down payment of Rs 6,667 (four months down payment)
The balance amount, as a loan, is to be directly paid to the dealer by the non-banking financing company (NBFC)
The borrower then repays this amount to the NBFC through monthly installments over eight months
The customer does not have to pay an interest on the loan amount
Structure of consumer durable financing schemes

Note: Dotted line indicates particular charge dependent on certain conditions. For e.g., dealer discount is given by NBFCs if the dealer closes a certain number of loan
applications. In new products, dealer buy-downs are sometimes absent as manufacturers provide the entire subvention to NBFCs. The processing charge is sometimes
waived off.
Once the lender disburses the loan, it also informs the manufacturer.
The manufacturer then pays the subvention and the processing charges to the lender, which is 4.5-5.5% of the invoice
value (Rs 20,000)
In effect, it is the manufacturer paying the interest to the financier, rather than the customer
However, in some cases where the dealer wants to clear old stock, part of the subvention is paid by the dealer
Also, in some cases, processing charges are taken from the customer rather than from the manufacturer
Apart from NBFCs, other channels include credit cards or personal loans taken from banks to buy durables:
In the case of credit cards, no down payment is made by the customer; other things remain more or less the same
Unorganised financing (dealer financing) is also prevalent in India:
However, lending patterns differ from one dealer to another

For our analysis though, we have considered consumer durable purchases against loans borrowed from NBFCs or banks
(via credit cards)
49.0 Consumer durable finance: Market Share
NBFCs to continue dominating consumer durable finance space

Non-banking finance companies (NBFCs) have been dominating consumer durable disbursements as this largely involves
point-of-sale financing; i.e., the loans are normally processed at the retail outlet or the showroom. A customer would prefer to
avail of EMI (equated monthly installment) schemes while purchasing an appliance rather than going to a bank for a loan.
The largest player in the consumer durable finance space has witnessed over 30% growth rates over the past three fiscals
based on these effective zero-cost EMI schemes.
NBFCs dominate the market pie for consumer durable finance
NBFC presence at location of sale makes it easier for CD financing and has been the driver of growth. For instance, the largest
player in the consumer durable financing domain expanded aggressively from over 11,000 points of sales in fiscal 2015 to
57,400 in fiscal 2019 and from 161 unique locations to over 927 locations. This has led to significant market share gain for the
largest player in the industry.
Dealer point of sale (POS) and location presence increasing at a rapid pace for the largest player
Note: Data includes distribution network and location presence for the largest player in the consumer durables finance space
As a result, the share of banks in consumer durables financing is reducing and constitute ~12% share in pie. The share of
financing through credit cards, however, is expected to increase gradually, as more EMI schemes are offered via credit cards .
However, NBFCs still lead the market with largest share.
Credit card disbursement showing steady growth
NBFCs have an upper hand when it comes to consumer durable financing
NBFCs have an advantage over other players owing to:
Their close proximity to the consumer, better understanding of consumer psyche, and a robust network that provides
volumes to manufacturers of consumer durables
Providing better value proposition to manufacturers since they already have the existing infrastructure and attain higher
volumes with the backing of manufacturer buydowns or subvention
Therefore, CRISIL Research believes NBFCs will continue to dominate disbursements as banks are also not aggressively
pursuing the consumer durables finance market. This is due to the shorter tenure of loans (8-10 months) and smaller ticket
size. Moreover, banks prefer lending for two-wheeler purchases with comparable ticket size owing to a longer average tenure
of 24 months.
50.0 Consumer durable finance: Profitability
Profitability in Consumer durable financing is 2.5-3.5%; asset quality varies

The revenue of a non-banking finance company (NBFC) that offers loans for consumer durables purchase includes processing
fees and subventions given by the manufacturer. A financier typically generates annualised returns of 23-25% in the segment.
While their cost of funds is 8-9%, operating expenses (employee costs, point of presence for loan origination, in-house
processing or outsourcing business process costs) are higher at 6-7% owing to the small ticket sizes of consumer durable
loans.
Typically, the net profit margin of consumer durable financiers is 2.5-3.5%. Their asset quality varies with the product, area of
operations and customer profile. Asset quality is relatively worse in the case of mobile phones and laptop financing as
customers are mostly youth with unstable incomes lacking awareness about implications of loan default.
The variation in asset quality across is due to changes in the customer mix. CRISIL Research believes the asset quality may
deteriorate in coming fiscals as NBFCs penetrate deeper into the hinterland and get more new-to-credit customers. As of fiscal
2019, the overall gross non-performing asset (NPA) level in of this category is 1.0 - 2.0% for NBFCs.
Economics of NBFCs' consumer durable financing in the 12/4 financing scheme
Source: CRISIL Research, Industry
Move into unconventional markets, customer-centric product offerings key to NBFCs' growth
NBFCs enjoy greater access to large format retailers with strong presence in tier-I cities. Their association goes back over a
decade.
However, NBFCs do not have much presence in the smaller cities and towns and consequently have little access to customers
of single shops that have higher presence in these areas. Another segment where they have low access is the customers of e-
commerce platforms, who mostly use credit cards for purchases. The advantage of credit cards is that they have pre-set limits
while NBFCs need to assess a customers profile before approving financing.
Channel wise consumer durable finance mix & distribution wise finance penetration
Strategy followed by NBFCs with respect to multiple parameters
NBFCs offer finance for multiple products

Clubbing of various consumer durables under a loan product is a key strategy of NBFCs. Because of this, even products that
would not otherwise be eligible for financing get loan. For instance, mixers are not usually eligible for financing, but they are
clubbed with TVs to avail the same EMI scheme.
12/4 scheme most popular, half of durable loans under it
Manufacturers prefer lower, if not nil, initial down payment schemes as it helps spur impulse purchases. However, NBFCs do
not prefer this as such schemes are relatively more at risk of defaults.
Most of the schemes (except 10/0) require the customer to make a minimum down payment. Currently, the most popular
scheme for financing is the 12/4 scheme. Almost half of the consumer durable loans are disbursed under this scheme.
NBFCs offered ~20 different EMI schemes on appliances in FY19

Tenure
Under the 12/4 scheme, the customer has to pay four installments of the loan amount as down payment and give post-dated
checks for the balance eight installments. Hence, the effective tenure of the loan is only eight months. The tenure of a
consumer durable loan has remained about the same over the last four years.
Loan to value
Four installments down payment effectively means ~33% of the product price is paid upfront by the customer. Hence, the
balance ~67% is the loan-to-value (LTV) or proportion of the asset value financed by the financier.
Ticket size
The minimum ticket size of consumer durable loan by an NBFC varies from Rs 7,000 to Rs 10,000. Since the yield of a
financier is subject to the ticket size, lenders prefer to finance higher ticket size loans.
NBFCs: Key parameters of consumer durable financing schemes:
Interest earned on loan
A majority of the NBFC loan schemes for consumer durables is 0% interest. Hence, financiers nil. As a result, they are
dependent on processing fees, manufacturer buy-downs or subventions, dealer buy-downs and volume discounts offered to
the dealers for income from such schemes.
Processing fees
Processing fee or administration fee increases the yield of financiers. While processing fees vary, in most cases it is ~1% of the
total value of the product.
Manufacturer buy-downs or subventions
Manufacturer buy-downs or subventions are incentives offered by manufacturers to financiers. In the case of consumer
durables, manufacturer buy-downs are usually in the range of 3.5-5.5% of the invoice value. Subventions help financiers
maintain their yields on portfolios. Over the last few years, subventions have become a key strategy toacquire customers as
they lower the cost to consumers.
The quantum of subventions financiers earn depends on their scale which, in turn, is dependent on their business with the
manufacturers, tie-ups with manufacturers for preferred financier status, brand image of the financiers, and their marketing and
distribution strength.
Dealer buy-downs
Dealer buy-downs refer to the discount forfeited by the customer while opting for a scheme. This is financiers' earning. Dealer
buy-downs are usually 1-3% of the invoice value.
Dealer discounts / incentives
Financiers also offer volume discounts of 2-3% to dealers. Volume discounts refer to incentives offered to the dealers
depending on the number financing deals the dealers generate over a specified period (for instance 15 cases per week at a
showroom).
Credit loss
Credit assessment assumes importance in ensuring profitable operations. The credit loss ratio in consumer durables financing
is in the range of 1.5-3.0%. Credit loss ratio is relatively higher due to customer profiling. However, write off is usually high in
the segment resulting into lower NPA numbers.
Cost of funds
The cost of funds is the most crucial element in determining financiers' net margin. It also determines their ability to offer
competitive rates in key markets that are interest rate-sensitive. As of fiscal 2019, the cost of funds in consumer durable
financing stood at 9-10%.
Operating expenses
Operating expenses are a function of distribution and scale. In consumer durable finance, operating expenses for a financier
would depend on:
Branches and points of presence for loan origination
Employee size
In-house processing or outsourcing of business processes
They are also a function of scale, as a larger portfolio would lower operating costs as a percentage of the asset portfolio. In
consumer durable financing, they are usually 6-7% due to the smaller ticket sizes of loans.
51.0 Educational loans: Outstanding
Soaring cost of education and increasing number of enrollments drive growth of education loans
India has a huge population that is eligible for higher education. However, enrollments at the higher education level are much
lower than those at the overall school level. One reason for this stark difference is the high cost of quality education. The
soaring cost of education and increasing enrollments to specialised courses across various fields have contributed to the trend
of borrowing for education. Education loans help ease the financial burden by financing the cost of education for students, who
can repay the loan after the course is completed and a job is secured.
Indicative fee structure in higher education: Fiscal 2019
Note: Indicative fees are calculated by taking an average of fees charged by top 25 colleges in India in 2018
Growth in domestic enrollments for management, engineering and medical colleges (numbers are in '000)
E: Estimated; P: Projected
Source: AISHE, CRISIL Research
Education loan growth to improve marginally over the next two years
In recent years, the number of students joining professional courses has been rising. The cost of pursuing these courses has
also gone up in tandem. Education loans given out by organised financial institutions, both banks and non-banks, helps in
payment of fees, which might not have been possible otherwise for some students. The education loan market clocked 4-5%
CAGR between fiscals 2014 and 2018. Growth has slowed down since fiscal 2017 on account of uncertainty in the overseas
market. Over the next two years growth is expected to improve marginally.
Trend in growth of education loans
Growth is fueled by an ever-increasing number of higher education institutions in India and the number of students joining
them. Some other reasons for this growth are detailed below.
Increasing role of the private sector
The number of private educational institutions has been on the rise in the country. These institutions attract a large number of
students as they provide better facilities. However, they also charge a higher fee for these privileges.
Growing young and aspiring population in India
India, at present, is very well placed with a large share of young population in its demographic profile. These people are
seeking opportunities to grow their income and are acquiring higher education to obtain the necessary skills.
Higher returns generated by higher education
India has seen a rise in the income of professionally qualified people in various sectors, both within and outside the country. As
the returns keep increasing, the number of people taking up these courses also goes up.
Willingness to pay for higher education
While it is true that the cost of higher education is on the rise, the willingness to pay for these courses has been growing. This
is the main reason for higher returns generated by these courses. Access to education loan makes higher education affordable
to these people.
Due to these factors, the education loan industry in India is on a growth trajectory and this growth is expected to continue in the
future.
There is still a huge untapped market that holds significant potential for growth. At last count, there were nearly 700 universities
in India with 35,000 colleges and about 25 million students. Yet, the education loan market in India is just Rs 762 billion.
Compare that with a market of $1 trillion in the US (a hundred times larger) for a population that is a fourth of Indias and the
market opportunity is plainly visible.
Education loans mostly given for post graduation studies
At present, the education loan market caters to financing higher education. About 85% of the education loans given out by
banks are for post graduation studies in India and abroad. The number of students enrolling for higher education in India is less
than 50% of those enrolling in primary school compared with ~85% in the US. This shows a huge chunk of the population is still
outside the reach of higher education mainly in the rural areas where there are no proper credit facilities available for those
who aspire to take up higher education.
Seeing this potential, many new players have either already entered this arena or are trying to do so. Almost all big banks do
give education loans. Non-banking financial companies (NBFCs) have also carved out their own niche in this market.
NBFCs' share in education loans industry growing steadily

Public sector banks (PSBs) dominate the education loan market with an outstanding amount of over Rs 560 billion. Private
banks have an outstanding amount of over Rs 48 billion. NBFCs have been gaining foothold gradually over the years, their
exposure is over Rs ~65 billion due to the big ticket size of their loan accounts.
Education loan is kept as a part of priority sector lending in banks. This is because if it is left to the market forces, then there
would be discrimination in the loan provided as the affluent class will benefit from this facility, while the poor, who really need it,
would be left out. Since education is a core sector, government intervention is necessary. With the rise in demand for education
loan in recent years, especially higher-value loans for foreign education, the private sector (mostly NBFCs specialising in
education loans) has stepped forth to meet this need.
Share of NBFCs increasing over the years

NBFCs offer superior services than banks
NBFCs and banks have minor differences across most of the parameters in the educational loans offered. However, they differ
from each other largely in terms of the interest rates offered. NBFCs' interest rates are 200-400 bps higher than that of the
PSBs. NBFCs offer a larger ticket size, which allows them a larger presence in the foreign loans segment. NBFCs also offer
flexibility in terms of EMIs, zero margin money and longer tenure that safeguard borrowers liquidity.
A comparison between NBFCs and banks
Note: Government provides 100% subsidy on interest for moratorium period to eligible students for education loans taken from banks.
NBFCs increasingly giving loans to unconventional courses

Another important differentiating factor for NBFCs and a potential for growth is that they give loans to different unconventional
courses such as BSc Music, Sports Events Management, Associate of Art (Music), MA (Sports Business), MSC (Advanced
cardio-respiratory physiotherapy), and MS (Advanced Sports Therapy and Rehabilitation Science) that some banks refuse to
give loans for.
There is a huge market potential here given that there is a growing interest among students for such courses
However, the risk is comparatively higher for these courses as it is sometimes difficult to get good jobs in these domains
Banks offer small ticket size education loans (up to Rs 5 lakh)

Since education loans up to a limit of Rs 10 lakh fall under the category of priority lending for the banks, they have higher share
of small ticket size loans in their portfolio. Moreover, there is no need for security or guarantee for such loans, making these
loans riskier for the banks. This has resulted in high gross non-performing assets (GNPAs) in the education loans portfolio of
banks - 7-8%.
NBFCs, on the other hand, focus more on higher-end of the spectrum and prefer giving loans above Rs 10 lakh duly secured
by collaterals. Their average ticket size is Rs 17-18 lakh.
NBFCs gaining share steadily in overseas education loans

Banks enjoy majority share of ~90% due to their vast presence across India, which makes them more accessible to students.
NBFCs are gaining market share on account of value-added services they provide to the students in the form of pre-admission
sanction of loans or counselling for visa or disbursement of a higher quantum of loan to cover additional expenses such as
accommodation.
Source: Company reports
Within NBFCs, top two continue to dominate

NBFCs education loan market is dominated by two major players - HDFC-backed Credila Financial Services Pvt Ltd and
Avanse Financial Services. HDFC Credila is the largest player with an outstanding loan portfolio of Rs 53 billion as of March
2019.
Market share within NBFCs
Source: Company reports
Some other small players in the market who provide education loans are InCred Finance, Knowledge and Skill Financing
(KSFi) and Mudra Finance.
NBFCs' loan book in education finance expected to grow at ~31% CAGR over
next 2 years
In recent years, NBFCs have witnessed a tremendous growth in terms of loan disbursement. The loan portfolio of NBFCs
which was around Rs 30 billion in 2016 has reached Rs 80 billion as of March 2019, showing a staggering CAGR of
~40% (data based on Avanse and Credila). This pace of growth is expected to slowdown in the coming years considering the
liquidity constraints. Also, number of students going to US declined over the past two years because of stringent visa and
immigration policy changes. Despite, slowdown in US market , growth in domestic market expected to continue in the coming
years considering the huge market potential that is available in domestic education market.
Outstanding loans of NBFCs to grow rapidly
The main reason for this growth is better services provided by these NBFCs to their clients:
NBFCs approach the education loan market differently compared to banks. They focus only on the education loans
business and have built better systems and processes to facilitate their clients.
They provide various value-added services like visa approvals, counselling, pre-sanction loan for students wanting to
study abroad, financing the cost of living and other costs like books and laptops.
Moreover, facilities like no margin requirement and flexibility in repayment make the deal sweeter for the clients.
Hence, nowadays students prefer NBFCs over banks when it comes to education loans, especially for foreign loans.
NBFCs continue to focus on foreign education

Foreign education loan accounts form 40-50% of the total accounts of NBFCs. But, in terms of value, the share is ~70-75%.
The share of foreign education loans is higher as:
the ticket size for these loans are bigger. The average ticket size for domestic loans is ~Rs12 lakh, whereas it is ~Rs 25
lakh for international loans.
NBFCs do not impose restrictions on the maximum amount that can be borrowed for foreign loans.
they cover not only the tuition fees for the course being pursued but finance other personal expenses of the students like
expenses on travel, accommodation, books, laptops etc.
International education forms major chunk of the portfolio mix of NBFCs
Note: Estimated Portfolio mix based as on March 2019
Source: CRISIL research
Bank borrowing to increase as elevated risk perception on NBFCs would

restrict market borrowing by NBFCs
Till the first half of fiscal 2019, competitive market rates and easy access to market borrowings led to an increase in the share
of market borrowing, comprising CPs and NCDs. The proportion of market borrowing in the overall borrowing mix of education
finance players increased from 21% in FY 2015 to 44% in FY19. Till the first half of fiscal 2019, competitive market rates and
easy access to market borrowings led to an increase in the share of market borrowing, comprising CPs and NCDs. However,
with increased risk perception post IL&FS default, the proportion of bank borrowings have increased from H2 FY19.
Dependence on bank loans to increase over the next two years
E: Estimated; P: Projected
52.0 Educational loans: Profitability
Profitability of NBFCs in the education loan space to remain stable over the next two yeras
The profit margin of non-banking financial companies (NBFCs) has been improving over the years, but is still much lower than
the banks. The higher cost of finance is one of the key reasons for this disparity. As NBFCs are not allowed to accept deposits
from the public, they have to rely heavily on bank loans, which makes them incur higher costs.
The average cost of finance incurred by NBFCs is 9.2%, which is significantly higher than banks, which source their fund at a
much lower rate of ~6%. As a result, NBFCs have to charge higher interest rates on the loan they disburse in order to maintain
a healthy margin.
Trend in yield and cost of borrowings for NBFCs
Trend in profitability of NBFCs
E: Estimated, P: Projected; NII: Net interest income/ average total assets Note: All ratios are based on average total assets.
In fiscal 2020, the cost of borrowing for NBFCs is set to increase. However, with streamlining of operations, NBFCs' operating
expenses are expected to decline, thereby offsetting the increase in cost to some extent.
Processing cost is lower for NBFCs

Compared with banks, the processing cost for NBFCs is generally lower, as they specialise only in one kind of loan - education
loans. They have developed set procedures, unlike banks who treat every loan individually. Moreover, NBFCs provide online
platforms, which further reduces their cost as most of the formalities can be done online.
Asset quality to remain healthy for NBFCs

The story on bad loans differs drastically for NBFCs. About 43-45% of the loans given by NBFCs are unsecured, i.e., not
backed by collateral. These are generally small-ticket loans and pose a higher risk.
However, asset quality in the education loan segment for NBFCs is strong and gross non-performing asset (GNPA) numbers
range between 0.05-0.15%, on account of:
Niche focus on the segment helps NBFCs develop a better understanding of their customers
They assess worth of the borrower and his family carefully, and estimate the return that can be expected after doing a
course
NBFCs maintain a repository that helps them track educational loans at the college as well as at the course level, a
practice that helps them mitigate risk. The repository helps them to gauge the ability of the student to find a suitable job
and, hence, his/her ability to repay the loan
Moreover, unlike banks, where repayment starts only after the moratorium period, NBFCs make parents of the student
co-borrowers, and the interest payment start immediately after the loan is disbursed
GNPAs remain low for leading NBFCs

53.0 Microfinance: Outstanding
Microfinance industry unfazed by the liquidity crunch for the NBFC sector post
IL&FS crisis
Gross loan portfolio (GLP) of NBFC-MFIs and small finance banks (SFBs) grew at a robust pace of ~37.4% YoY in fiscal 2019,
faster than ~25.6% YoY growth witnessed in the previous fiscal (2018). Growth was mainly driven by NBFC-MFIs at ~55.8%
YoY in fiscal 2019, through their rapid pace rural penetration, taking share from the unorganized sector (which charges
unscrupulous rates) amidst strong domestic loan demand from small borrowers. Small finance banks, on the other hand, have
steadily transitioned to other loan product offerings such as auto loans, home loans (including affordable housing loans),
MSME loans across other offerings. As a result of this shift away from the traditional microfinance loan segment, SFBs grew at
a mere ~15.5% YoY in fiscal 2019, however, growth remained higher than fiscal 2018 (~3.4% YoY), as many players settled
into the SFB model, and their loan book growth strengthened.
Growth pace remains strong despite headwinds faced by the sector
Note: GLP includes NBFC-MFIs and all 8 MFI turned SFBs; Bharat Financial Inclusion Ltd, which has merged with IndusInd Bank, is excluded from the analysis; Data
excludes values for NBFCs such as L&T Finance and Fullerton
Source: MFIN, CRISIL Research
While SFBs are expected to trim the proportion of microfinance loans in their overall portfolio over the coming fiscals, the
transition is expected to be gradual. As a result, their GLP in microfinance is expected to grow at a stable compounded annual
growth rate (CAGR) of 14-15% over the next two fiscals.
Overall GLP growth is expected to be driven by NBFC-MFIs, which are expected to maintain their strong growth trajectory amid
flush funding availability from the banking sector and through securitisation. Growth for these players is expected to be
supported by strong incremental lending to those customers turned away by SFBs, which are busy strategically aligning their
lending portfolios to a multiple loan segment mix.
The growth forecast is calculated excluding the impact of any external factors that may hinder the growth of microfinance
NBFCs. The future GLP growth of microfinance NBFCs is also contingent on the availability of adequate capital.
Factors that will define success in the future are:

Ability to attract funds and maintain healthy capital position
Strong promoters, who have witnessed various business cycles and successfully tackled events
Loan recovery and control aging of non-performing assets
Geographic diversification
Adoption of technology to improve efficiency and lower costs
Ability to manage local stakeholders
Historical growth and development of the Indian microfinance industry
The industrys growth has been notwithstanding the fact that it was caught in a storm of developments in the past decade
national farm loan waivers (2008), the Andhra Pradesh crisis (2010), Andhra Pradesh farm loan waiver (2014), SFB licences
issued to eight MFIs (in-principle approval in 2015), demonetisation (2016), and farm loan waiver across some more states
(2017). Of these events, the Andhra Pradesh crisis of 2010 had a lasting impact on the industry. Some players had to
undertake corporate debt restructuring and found it difficult to sustain their businesses. Since then, however, no other event
has affected a complete state to such a degree. While demonetisation of Rs 500 and Rs 1,000 denomination banknotes in
November 2016 hurt the industry, the impact was nowhere as serious as the Andhra Pradesh crisis and limited to certain
districts. Portfolio at risk (PAR) data as of the fourth quarter of fiscal 2018 indicates that the industry is recovering from the
aftermath of demonetisation. The collections experience of loan disbursements since January 2017 has been healthy.
Microfinance industry has shown resilience to major shocks over the past decade
Note: Data includes values for NBFCs, NBFC-MFIs, non-profit MFIs, SFBs, and Bharat Financial Inclusion
Source: CRISIL Research, MFIN
Banks retain highest share through SHG and JLG disbursements, but other
players catching up
Banks operate through both joint lending group (JLG) and self-help group (SHG) models, which provide them the operational
edge over other players that operate only through the JLG model. Banks also give microfinance loans directly or through
business correspondents to meet their priority-sector lending targets. While share of banks in the overall pie (including both
models) was strong at ~65.4% in fiscal 2017, robust growth from NBFC-MFIs, and NBFCs have eaten into their share over the
past two fiscals. As of fiscal 2019, they accounted for ~59.8% of the overall market.
Banks to continue holding pole position in microfinance over the next two fiscals
Note: Bharat Financial Inclusion is included in 'banks' as it has merged with IndusInd Bank
Source: NABARD report on Microfinance FY18, MFIN (March, 2018), CRISIL Research estimates
NBFCs without MFI licence steadily making inroads in microfinance segment
NBFC-MFIs and non-profit MFIs are the only two player groups with loan portfolios exclusively focused on microcredit. In fiscal
2018, SFBs with MFI lending businesses started looking at other asset classes such as affordable housing, SME, and vehicle
finance, after receiving the SFB licence.
NBFC-MFIs, NBFCs, and non-profit MFIs have witnessed strong double-digit growth, while SFBs have introduced new product
offerings. GLP growth has especially remained strong at ~85% CAGR between fiscals 2017 and 2019 for NBFCs operating in
multiple asset classes (such as L&T Finance and Fullerton) based on higher yields generated in the segment, along with lower
ticket size (keeping concentration risk low).
NBFCs and NBFC-MFIs clocked the fastest growth over the past two fiscals
Note: Data includes Bharat Financial Inclusion in banks
NBFC-MFIs to ride on greater market opportunity; SFBs to maintain slower

trajectory
GLP growth remained strong between fiscals 2014 and 2017 for both NBFC-MFIs and SFBs, owing to greater market
opportunities, as they expanded their presence in semi-urban and rural markets. However, as of fiscal 2017, eight erstwhile
NBFC-MFIs transitioned into full-fledged SFBs, with a more holistic approach towards lending, rather than a specialised focus.
As a result, their GLP growth slowed down sharply to ~9.3% CAGR between fiscals 2017 and 2019, from ~62.4% CAGR in the
previous three fiscals.
Such a sharp slowdown opened up market opportunity for NBFC-MFIs (among other player groups), who cashed in on it.
Coupled with strong banking funding avenues, and ease in portfolio securitisation, GLP growth of this category jumped from
~34.3% CAGR (fiscals 2014 to 2017) to ~54.6% CAGR (fiscals 2017 to 2019).
This trend is expected to continue going forward, as SFBs maintain a modest growth trajectory over the coming two fiscals and
continue bringing a greater proportion of population under the financing umbrella, offering a variety of loan products. We expect
SFBs to grow marginally higher at 14.2% CAGR between fiscals 2019 and 2021. On the other hand, NBFC-MFIs are expected
to grow at a robust 35.8% CAGR, driven by regular funding availability from banking and other financial instititutions.
NBFC-MFIs to eat into SFBs' share increasingly
Note: Projected portfolio for SFBs is only for their microfinance business; Bharat FInancial Inclusion is excluded in NBFC-MFIs; E: Estimated; P: Projected

54.0 Microfinance: Changing Industry Landscape
Transition to Small Finance Banks for eight erstwhile players leaves market opportunity for MFIs
As of September 16, 2015, RBI had awarded small finance banks (SFB) licenses to 10 applicants out of which 8 operated as
NBFC-MFIs. These eight players included Janalakshmi Financial Services, Ujjivan, Equitas, RGVN Microfinance, Disha
Microfinance, Utkarsh Microfinance, Suryoday Microfinance, ESAF Microfinance, and Fincare Microfinance. Collectively, these
players accounted for ~18% of the overall Joint Lending Group industry (as of fiscal 2019). However, with transition the new
business model, and ability to offer other loan products including MSME loans, affordable housing finance, gold loans, CV/non-
CV loans and two-wheeler loans, among others, their share in overall microfinance industry is expected to come down further
going forward.
Share of SFBs in the JLG pie has reduced to ~18% in FY19 from ~44% in FY16
Details of players with SFB approvals
Note: RoA numbers are as of FY18 for Jana SFB, and North East SFB
While both players had been offering higher ticket disbursements over the past fiscals, the same for players with SFB license
came down, as collective proportion of microfinance loans in overall portfolio for these players came down from ~22% in fiscal
2016, to ~12% in fiscal 2019, and they shifted towards smaller ticket loans in the recent fiscal.
Microfinance ticket size for MFIs increased steadily in the recent fiscal, while SFBs took to smaller ticket loans
With ease in funding access through relatively lower cost deposits for small finance banks, these players are expected to
increasingly cater to larger segments of population by offering complementary products, while complying with tougher
regulations.
However, competition from banks in raising low-cost deposits would push SFBs towards offering higher rates in order to
attract newer customers, which is expected to keep overall funding costs elevated, albeit much lower than that of NBFC-
MFIs
With SFBs moving towards complementary products, remaining NBFC-MFIs have significant opportunity at capturing
market share
Having said that, microfinance industry remains sensitive to political interventions, including farm loan waivers, along with
policy changes, based on how they cater to masses
MFIs to continue to gain share in the overall microfinance pie vis--vis the banking sector
While NBFCs and NBFC-MFIs have exhibited strong growth over the past fiscals, banks still hold the lions share in overall
lending based on their operations through both Self-Help Group (SHG) and Joint Lending Group (JLG) models. Non-banks
focus more on JLG model as it is easier to form such groups, and track their performance.
Key metrics with respect to MFI players

Note: E - Estimated
Source: Bharat Microfinance Report, MFIN, CRISIL Research
Share of MFIs (NBFC-MFI, NBFCs and non-profit MFIs) has continuously increased in the overall microfinance industry pie
(including Bank-SHG numbers), despite large players shifting to newer models, and inherent sensitive nature of the business.
With specialized focus in microfinance operations, and greater regulatory clarity in operations, their share in overall pie is set to
account for ~34% of the pie, as SFBs shift over to other loan products.
Share of MFIs in the overall book expected to improve further in next two fiscals
Note: Banks includes loans given out under both SHG and JLG models; Bharat Finance is included in Banks; MFIs comprise of NBFC-MFIs, NBFCs, and non-profit MFIs
P: Projected
Source: Sadhan Microfinance Report, MFIN, CRISIL Research
Comparison of different business models

Strong loan book growth, business model, customer reach and resilience despite continuous challenges faced over the past
fiscals, have led to private equity becoming increasingly attracted towards these players. They have tapped the existing
opportunity either through acquisitions or stake purchases. Similarly, for private banks, the primary attraction is the huge
number of clients that these MFIs have access to, which can be used to cross-sell various products.
Some deals in the MFI space

Note: This is not an exhaustive list; NA: not available
The future prospects of mergers and acquisitions in the microfinance industry are bright, as investors are keen to fund micro
lenders with both business interest as well as with a charitable outlook.
That reinforces the importance as well as the attractiveness of the model.

Since there is still a huge gap in the microfinance space, banks are developing their own ecosystem to reach out directly
to the poor for higher returns.
In this regard, NBFC-MFIs can help banks in a great way to achieve their desired targets in the microfinance space.
55.0 Microfinance: Region-wise Industry Dynamics
Growth pace for NBFC-MFIs remained strong over fiscal 2019
NBFC-MFIs continued to grow at a strong pace in terms of their penetration into the Indian unorganized market in fiscal 2019
as witnessed by a ~29% growth in the number of branches (higher than ~23% increase as seen in fiscal 2018). We expect this
growth trajectory to remain strong over the coming fiscals, as NBFC-MFIs delve into newer geographies across states to
channel overall loan book growth.
Assam saw highest percentage growth in terms of branches over the two fiscals, followed by Rajasthan and Orissa
Note: The data for each state includes the data for NBFC MFIs; SFBs are excluded from the graphs
Source: MFIN, CRISIL Research estimates
North-east India remained a bustling destination for NBFC-MFIs with Assam and Meghalaya witnessing ~78% and ~67%
growth in the number of NBFC-MFIs operating in the space. These two states along with Bihar ~46%) and West Bengal
(~54%) attracted the highest number of players over the two fiscal period.
Bihar has highest number of players operating in a single state with the number having doubled in the past two fiscals
Increasing penetration into the north-eastern markets by the players led to highest increase in the number of clients over the
two fiscal period in states such as Assam, and Meghalaya. While Karnataka used to be the top state in terms of number of
clients in fiscal 2017, ~46% growth in the number of existing players, and ~47% increase in the number of branches saw Bihar
take the top spot in fiscal 2019.
NBFC-MFIs retained their interest in north eastern markets in fiscal 2019
Remaining states grew at marginally faster pace as compared to top 10 states over the two fiscal period
Karnataka retained the top spot in overall gross loan portfolio as of fiscal 2019, with Bihar, Orissa, Maharashtra, and Uttar
Pradesh, being the top 5 states in terms of overall NBFC-MFI gross loan portfolio. Over the past two fiscal period, Assam grew
at the fastest pace at a CAGR of ~150%, while both Delhi (~101%) and Rajasthan (~100%) more than doubled their book.
Tamil Nadu saw relatively moderate growth which made it slip behind UP, West Bengal, and Maharashtra in overall GLP
Note: Data only for NBFC MFIs
While growth for top 10 states clocked in at ~48% in fiscal 2019, remaining states grew at a faster pace ~56%) based on a low
base and increasing penetration from NBFC-MFIs into newer geographies. Relatively underpenetrated states such as Assam,
Gujarat, Haryana, and Jharkhand drove growth over the two-fiscal periods and are expected to do the same over the coming
two fiscals based on strong interest from the players, amidst strong loan demand.
NABARD continues to refinance MFIs to encourage lending in rural areas
NABARD is the main facilitator and mentor of microfinance initiatives in the country, with a focus on rural areas. It assists
eligible NBFC-MFIs and SFBs by providing them with long-term refinance support. NBFC-MFIs having continuous profit during
the last three years and grading up to mfR2 (mfR3 in north eastern states and hilly areas) by CRISIL or equivalent are eligible
for refinance, subject to the fulfilling of other conditions. During 2018, refinancing to the tune of ~Rs. 139.55 billion was
disbursed to 19 MFIs.
Growth in business correspondents portfolio remains strong for NBFC-MFIs
As transactions through BCs have increased for banks due to lower operating costs, NBFC-MFIs are playing an important role
as BCs in micro-lending. A low base, along with entry of new players into the segment, has resulted in good growth numbers.
The BC portfolio comprises 30-40% of the overall off-balance sheet portfolio of NBFC-MFIs as of end fiscal 2019.
Share of BC originated portfolios increased significantly in fiscal 2019

BC portfolio growth of NBFC-MFIs to remain strong
Over the next two fiscals, we expect growth in BC portfolio of MFI industry to be muted on account of exclusion of SFB
portfolio, to book business on their books to fulfil their priority sector lending (PSL) targets. However, NBFC-MFIs might witness
healthy growth as overall banking credit growth recovers, the MFI industry stabilizes and competition from SFBs reduces.
Micro-lending through BCs has attracted banks, as it offers several benefits such as:
Meeting of PSL targets without any direct involvement of banks, as loans are sourced by MFIs, who are in direct contact
with borrowers
Better resource utilisation for banks, as rural branches are relieved from low-ticket size micro-lending obligations
Improved portfolio quality as NBFC-MFIs have expertise in micro-lending as part of their core portfolio, unlike banks
which focus on industrial and other high ticket-size lending
Securitisation volumes rose to nearly 5-year high as funding from banks for smaller players remained elusive
Implementation of RBI guidelines following the Andhra Pradesh ordinance helped improve overall risk perception towards the
microfinance sector. Also, decline in bank credit following the crisis in Andhra Pradesh prompted several large MFIs to tap the
securitisation route. Further, securitisation has helped bring down funding costs.
However, slowdown in growth of MFIs, increased risk perception on account of demonetization, slower bank credit growth
(banks invest in securities to fulfil their priority sector requirements) and conversion of some large players into SFBs had
reduced the overall share of securitisation to 14% in FY17. In 18, share of securitisation rebounded forming around 28% of
funding mix of MFIs.
In fiscal 2019, however, with the liquidity squeeze, funding from banking sources remained elusive for smaller NBFC-
MFIs (~12% of overall debt funding), and for mid-size NBFC-MFIs (~21% of overall debt funding), and these players
resorted to portfolio sell-outs to channel growth, based on which securitization volumes reached nearly five-year highs.
Bank loans and securitisation comprise majority of the NBFC-MFI funding mix
56.0 Microfinance: Profitability
Profitability for NBFC-MFIs after rising significantly in fiscal 2019, to decline by ~50 bps over the medium term
In fiscal 2019, spreads generated by NBFC-MFI saw substantial jump based on higher yields charged by the players. While
costs of borrowing improved for NBFC-MFI in fiscal 2019 over fiscal 2018 by ~15-20 bps, yields increased incrementally by
~130-140 bps, leading to sharp jump of ~150-160 bps on the spreads generated.
Operating expenses came down marginally despite NBFC-MFIs remaining aggressive in expanding their overall branch
network over the fiscal
Transition to Ind-AS accounting framework, and the subsequent ECL provisioning framework saw NBFC-MFI profitability
jump to near four-year high of ~4.4% as credit costs 45-50 bps
Other income jumped by ~110-120 bps as players up-fronted income from securitized porftolio (particularly direct
assignment), instead of accounting for the same over the fiscals
Going forward, industry profitability is expected to contract by ~15-20 bps in fiscal 2020, and by ~25-30 bps in fiscal 2021, as
provisioning cover improves, and income generated through securitized portfolio normalizes over the two fiscal
Profitability for NBFC-MFI at near four-year high largely due to higher yields and upfront booking of income from DA pools
Note: 1) Figures include data of NBFC MFIs with market share > 75% in total NBFC MFI portfolio 2) Figures for FY18 and FY19 are based on Ind-AS
SFBs, on the other hand, saw sharp improvement in overall profitability on account of reduced credit costs which was high in
2018 on account of demonetization. While costs increased marginally in the current fiscal, direct transfer of costs to the end-
user saw sharp jump in overall spreads generated by the players.
Operating expenses came down marginally as scale of efficiency came into play with players rapidly expanding their branch
network over the fiscal. Credit costs, which shot up significantly in the transition phase for these players, normalized as
movement to the new business was truly set in place. As a result, overall return made by the player group jumped sharply to
~1.8% in fiscal 2019.
Going forward, profitability is expected to stabilize as spreads are expected to remain range bound over the two fiscal scenario,
despite movement to other loan products such as auto, home, and MSME loans. Operating costs are expected to come down
gradually as benefits of digitiation, and cashless disbursements come into play. Credit costs are expected to remain range
bound over the coming fiscals, based on which, overall profitability is expected to remain range bound between ~1.7-1.8%.
Profitability for SFBs set to stabilize over the medium term

Note: 1) Figures are % of average assets 2) Figures include data of SFBs with market share > 75% in overall SFB portfolio; 3) Figures for NII, Opex, Other Income, Credit
Costs, and Tax exclude data for Jana SFB and North East SFB 4) Figures for FY18 and FY19 are based on Ind-AS
Profitability for the industry as a whole set to remain range bound over the medium term horizon
Note: Figures for FY18 and FY19 are based on Ind-AS
Asset quality remains unfazed despite farm loan waiver announcements in

three states
Portfolio at risk (PAR) is the primary indicator of risk for the sector, and it equals the percentage of loans overdue. PAR value
increased sharply in FY17 due to non-availability of cash and slowdown in business activities of individuals after
demonetisation. However, MFIs invested heavily in educating borrowers and helping them exchange old notes which improved
borrowing efficiency.
As a result of their borrower awareness initiatives, PAR (value above 90 days) has improved consistently despite farm loan
waiver announcement by three state governments namely Rajasthan, Chattisgarh, and Madhya Pradesh. Based on these
initiatives, Portfolio-at-risk (PAR) is slated to come down further, back to pre-demonetisation levels as the industry credit
discipline recovers further over the coming fiscals.
However, we do note that implementation of Fresh Start Guidelines could put a damper on the overall credit discipline. Under
these guidelines, small borrowers unable to repay loan amount up to Rs. 35,000, can file their inability to repay the loan under
the new IBC personal insolvency guidelines (if approved), which would in turn, be waived off. As per industry interactions,
implementation of such guidelines could put a stress on the borrower repayment discipline, and affect overall asset quality in
the segment.
Implementation of RBI guidelines on lending and greater co-operation amongst MFI players in sharing data with credit bureaus
partly limit the risk of over-leveraging of borrowers. The credit bureau data presently does not capture loans availed of by
borrowers through SHG-BLP and on-book lending by banks through business correspondents. Therefore, over-leveraging of
borrowers remains a key concern.
Nevertheless, inherent strengths of the operating model such as peer pressure exerted by JLG and regular engagement with
borrowers, and enhanced usage of technology in portfolio monitoring and tracking are expected to ensure that asset quality
remains under control despite rapid growth.
Also, the latest norm requiring customers to provide their Aadhaar number to avail of loans from MFIs will help address the
issue of over-indebtedness and provide a mechanism to reduce the risk of default as customer tracking will be easier.
However, it is imperative for MFIs to continuously ramp up investments in people, processes, and systems to manage risks and
maintain asset quality.
PAR 30 and PAR 90 improving as the effects of demonetization subside; expected to improve further
Digitalization to bring down costs, improve efficiency and profitability for MFIs
A strong backend technology platform helps companies scale up faster since the same processes can be easily replicated
across geographies.
To improve efficiency, many MFIs have provided tablets to their loan officers.
This has made life easier for the loan officers, who were earlier required to visit branches in the morning to get the
demand and disbursement sheet printed, and again in the evening to update data.
Digitalization is also helping the microfinance institutions in monitoring the already disbursed loans as the data on each
borrower is available in the digital form and can be accessed easily.
Paperwork has reduced with the use of tablets; entries are made in real time as and when the disbursement happens or
repayment is made.
Also, data entry errors have been reduced to a large extent. This has helped in a better understanding of the business,
reduced costs and improved productivity.
Direct update of information on the core platform also helps in better servicing of customers by usage of customer relationship
management applications, which help in the handling of customers over their credit life cycles.
It also helps in targeted marketing, cross-selling of products, and product customization. e-KYC and biometric scanners
do away with the requirement for physical documents and help lower turnaround time.
With numerous banking accounts opened through the Jan-Dhan Yojana and launch of other avenues like mobile wallets
for transfer of funds, MFIs have started disbursing loans directly into the accounts of customers and also accepting
repayments through electronic means, reducing cash requirements and resulting in cost savings.
The lower cost of serving customers, better productivity and lower credit costs through the use of technology are expected to
help MFIs improve profitability.
However, not all MFIs will be able to adopt technology; only those who have a sizable business will be able to invest in
technology and reap the full benefits.
Cashless disbursements high at ~80-85% over the past three quarters
Note: Above data is as per MFIN Micrometer (March, 2019) excludes SFBs. Data for Satin, Share and CreditAccess is not included in the analysis.

57.0 Fintech: Overview
Fintech is a contraction of finance and technology and is defined as the use of technology and innovative business models in
financial services. Fintech firms typically use technology to change or support ways of doing business and enhancing customer
convenience. They facilitate access to credit for hitherto unserved or underserved customer segments and/or improving
operating efficiency.
Key drivers of fintech globally
Increasing adoption of technology, rapidly changing customer expectations, regulatory support to innovation, and availability of
funding have supported the growth of fintech firms globally.
Key drivers of fintech globally
In India, too, the growth of fintech is being driven by a confluence of factors, such as:
Favorable demographics: By 2020, India will have a 495 million Generation Z or Gen Zers (~36% of the total
population), defined as those born after 2001. This generation, which has not seen the world before Internet, is more
likely to uptake digital products/ services, provided these are relevant to them
Rising internet penetration: CRISIL Research foresees 800 million subscribers (or three in five Indians) to be using
mobile internet by fiscal 2023, driven by high-speed internet services and increasing affordability
Availability of low-cost infrastructure: Payment service providers such as the National Payments Corporation of India,
MasterCard and Visa, and mobile phone manufacturers and internet service providers have been working towards
lowering the cost of digital infrastructure, which has spurred fintech solutions
Availability of huge amount of data and related intelligence: Connectivity and smart devices are helping capture
customer data via many flanks and building their social and psychological profiles, leading to efficacy of decision-making
and personalised offerings
Support of frameworks: The launch of unified payment interface (UPI) has brought payments service providers on to a
single platform enabling quick payment. The launch of IndiaStack has lowered the cost of consumer onboarding and
transactions significantly
Key technologies shaping fintech
Technological developments and continuous progress in the maturity of technologies have helped shape the fintech market.
Application programming interface (API) standards, for instance, have enabled different pieces of software from different
financial players to interact and exchange data in a secure environment, enabling comparisons and more competition. APIs are
the main reason start-ups are able to build their products faster.
However, there are challenges as well when it comes to usage of technology. Artificial intelligence (AI), for instance, is
dependent on credible and quality data. Therefore, service providers are putting in place structured mechanisms for collecting,
validating, standardising and archiving data to make it relevant for AI.
Application of technology by fintech
Imperatives for India's traditional financial institutions
Given the rapid strides being made by fintech firms, traditional financial service providers in India have to scale up capabilities
in five areas:
Judiciously leverage data: Data is the fulcrum of business models such as ride-sharing (real-time demand and supply
data helps set pricing and optimise revenue) and music-on-demand (personalised services). But traditional financial
institutions havent been able to do that, and will need sharper focus on leveraging the data available with them to provide
a differentiated value proposition and personalised offerings to their customers
Understand customer expectations: With rising incomes and awareness and the advent of technology, consumer
behaviour and expectations are changing rapidly. Consumers, used to an instant experience, whether for making
purchases (through e-commerce websites) or for traveling (through cab hiring firms), are demanding a superior
experience from other service providers such as lenders as well. Lenders need to reimagine the customer lifecycle
journey right from onboarding to loan processing, disbursement and subsequent engagement through multiple online and
offline channels to enhance customer experiences and ensure stickiness
Think beyond tech-savvy customers: There exists a huge untapped market of low-income customers for lenders
beyond the urban tech-savvy, digitally-literate customers. Lenders need to design products and solutions more relevant to
this unserved or underserved customer segment rather than merely offering services that have worked elsewhere. On the
distribution side, phygital a combination of digital channel and human touch at the front end to assist customers can be
looked at until consumers gain the requisite trust
Digital marketing is a crucial flank: Traditional financial service providers have to sharpen focus on, and invest in,
digital marketing for customer acquisition, engagement and lifecycle management. While traditional functions such as
operations, credit and risk would continue to define the success of lenders, technology and data strategy also needs to be
thought about and viewed in the same breath
View fintech firms as partners: Collaboration between conventional FIs and fintech firms and also among fintech firms
suffers due to differences in approach to business. Many banks and FIs still work on legacy technology and provide
fintech firms limited access to APIs, making technology integration challenging. Other challenges stem from the
perception of fintech firms as vendors, and not partners. This needs to change, and traditional FIs have to show
willingness to engage and collaborate with fintech players to develop capabilities that serve customers better
58.0 Fintech: Fintech adoption in Indias leading market
Impact of fintech across different lending segments
Fintech firms are mainly present in unsecured and niche retail loan segments such as first-time borrowers, students, self-
employed, and micro, small and medium enterprises (MSMEs) that are not fully serviced by existing lenders. They either
directly offer loans/ credit products to their target segment or help traditional lenders reach out to them in a more cost-effective
manner.
Despite enjoying the benefit of lower cost of funds due to current account and savings account (CASA) deposits, traditional
lenders have tapped a very small section of the addressable market for MSMEs and retail lending due to difficulty in reaching
out to various customer segments with little or no credit history and in assessing their creditworthiness.
Traditionally, high cost of penetrating and delivering services to these segments and credit risk in catering to the lower-income
segment within this spectrum have constrained the availability of credit from traditional lenders. Fintech firms, with their
technology-led solutions, have disrupted the process of lending to these segments, particularly the client acquisition, on
boarding and credit assessment processes.
Impact of fintech firms across different lending segments
Fintech lending models
Growth in digital lending has been augmented by various innovative models by fintech firms, technology giants and financial
aggregators. The four models that have emerged in the digital lending space are: own book lending, online marketplace service
providers or aggregators, Peer to Peer (P2P) lending and platforms facilitating credit scoring through non-traditional data and
ways to improve ones credit profile. The value proposition of these models revolves around simple documentation, automated
decision-making using data and algorithms, and better customer experience.
Overview of fintech lending models

Note: SFBs small finance banks
Role played by fintech firms in boosting MSME lending
Only about 10% of MSMEs in India have access to formal credit through the banking system. Despite the benefit of lower cost
of funds due to CASA deposits, traditional lenders have tapped only a small section of the addressable market. Given the small
ticket size and higher risk perception, and the burden of their legacy costs and systems, financial institutions feel the returns on
such loans are not commensurate with the operating costs and credit risk.
Fintech firms, on the other hand, make use of multiple surrogates, beyond just published financial statements that traditional
lenders rely on, and technology to enable faster decision-making, thereby enabling MSMEs to get the requisite funds at the
time needed. Their platforms are also easy to use, which makes it more attractive for MSMEs.
Currently, fintech firms operating in the MSME space mainly offer small ticket unsecured loans (loan size less than Rs 25 lakh)
either on their own books or through their tie-ups with partner financial institutions. Their usage for larger secured, collateral-
backed loans is limited, possibly indicating lenders are still taking small steps in this direction and would wait for credit history
of fintech-based loans to be built up before taking larger exposures.
In aggregate, digital lending defined as cases where loans are sourced, underwritten, and sanctioned digitally is estimated to
account for less than 5% of loans (in value terms) extended to MSMEs. This percentage is likely to grow exponentially,
supported by growth in both volume and ticket sizes, in coming years as lenders become more comfortable with alternate credit
assessment and availability of data improves further.
Traditional process versus the fintech-led process of SME lending

Implication of fintech firms on traditional lenders
Fintech firms are expanding the market by bringing on board customer profiles currently not tapped by banks. These players
cannot yet be termed as direct competition to banks/ traditional lenders due to their small book size, though some well-
capitalised ones can emerge as strong competition to traditional lenders in years to come.
On their part, traditional lenders have responded by making investments in data analytics and automation, rethinking the
consumer experience on digital ecosystem, and even participating in the fintech ecosystem through appropriate tie-ups. By
collaborating with fintech firms that are more fleet-footed and innovative, lenders hope to improve their reach, serve new target
markets, optimise operating efficiency and costs, and shorten their time to market.
Opportunities for collaboration between fintech firms and traditional financial institutions
The availability of alternative data points for credit assessment and innovation brought about by fintech firms will have a
profound impact on the credit markets in India.
Digital lending to expand addressable market for MSME and retail loans: Digital lending currently accounts for less than
5% of SME lending and 15-20% of retail lending. In the years to come, CRISIL Research foresees rapid growth in digital
lending, as firms retune processes, and both data availability and ability to mine customer data improves. Consequently, the
addressable market for MSME and retail loans will expand manifold.
Reduction in risk premiums and customer acquisition costs: By leveraging technology, financial service providers will be
able to reduce the cost of customer acquisition and cost-effectively provide credit to customers in far-flung and small towns.
Using a combination of traditional data (bureau data, financial statements, credit score), non-traditional data (digital payments,
social media, psychometric data, etc.) and government data (Aadhaar), lenders will be able to gain greater insights on their
customers, thereby increasing the accuracy of credit assessment. CRISIL Research believes this will, over time, lead to a
reduction in risk premium charged to customers due to information asymmetry, thereby boosting the ability of small businesses
and retail to avail credit.
Competitive intensity to increase: More players in consumer-facing businesses with a repository of data (such as e-
commerce companies and payment service providers) are expected to enter the lending business. Incumbent traditional
lenders, either on their own or in partnership with fintech firms, will increasingly leverage the digital ecosystem to cross-sell
products to existing customers, tap customers of other lenders, and also cater to new-to-credit customers. In fact, this trend is
already visible in select segments such as low-ticket unsecured loans, and could expand to more segments going forward.
Regulatory interventions can further boost the market: The proposal to set up a Public Credit Registry (PCR), as mooted
by a high-level task force set up by the Reserve Bank of India (RBI), will further aid development of credit markets. Once
established, it will provide consistent and reliable data on each borrowers aggregate debt exposure and real-time update on
default. Lenders, on the other hand, will benefit from availability of comprehensive credit-related data and simplification of data
reporting process, and will no longer need to report the data in different formats to different systems. The proposed linkage of
the PCR database and key data such as financial information for entities, tax filings, legal proceedings, etc, will enable the
financial systems to use alternative data for credit decisions.
59.0 Fintech: Issues related to cyber security and data privacy
Challenges faced by fintech firms
The challenges faced by fintech firms can be segregated into cyber-security, data-privacy, and infrastructure risks.
Cyber security refers to safeguarding of hardware and software systems or networks from security incidents and violation of
security policies as opposed to data privacy, which deals with lawful processing of user data based on their consent and
preferences.
Cyber security
Both fintech firms and traditional financial institutions face constantly evolving cyber security threats. Cyber attackers
continue to use innovative tools to target financial institutions. While firms today understand and appreciate the cyber
security imperative, they are grappling with shortage of skilled workforce in this area
Smaller firms may be using conventional processes and, hence, are more vulnerable to cyber attacks because:
They may use conventional authentication mechanisms, such as usernames, passwords,

personal identification numbers, and legacy systems for storing and securing personal information, thereby exposing
digital identities to security risks, including cloning of information
They may use unsecured processes instead of encryption for transmitting data across networks, i.e., from customers to
their own servers, and/ or transfer of data to third parties using unsecured public cloud and open Application
programming interface (API).
Data privacy
Fintech firms face the risk of non-compliance with data privacy rules as they sometimes fail to inform the users while collecting
their information from sources such as social media and mobile devices, sharing their data with third parties, and retaining their
data even after completion of service. Additionally, smaller fintech firms may lack adequate processes to dispose of or delete
customer data while migrating to advanced technology from unsecured legacy systems.
Infrastructure and risk management
In the pursuit of rapid growth and achieving profitability in a short span, fintech firms may use low-cost, unsecured legacy
hardware and software infrastructure, and under-invest in training of the workforce, which is required to safeguard systems
from cyber security- and data privacy-related issues. Fintech firms may also fail to conduct regular audits and ensure
implementation of adequate risk management practices by third parties, hence, making them more vulnerable to data security
risks.
Concerns of service providers collaborating with fintech firms
While traditional service providers collaborate and work with fintech firms, data security and customer privacy-related issues
continue to be of concern, compelling traditional service providers to tread cautiously.
Fintech firms need to give partners comfort on all these counts

Current cyber security and data protection legislation
Currently, the Information Technology Act, 2000 is the legislation in India for data protection and cyber security-related issues.
The Act addresses issues relating to electronic transactions, authentication of electronic records through digital signatures and
cybercrime. Personal data protection clauses, which were not defined in the Act initially, were inserted as part of amendments
to the Act in 2008-09. While the Act has been in place for two decades, its enforcement has not been stringent.
Further, in several areas such as seeking customer consent for usage of data and giving the customer the right to erase data
on deciding to move to another service provider, it was felt that data security and privacy regulations in India have not kept
pace with global trends. Various data breaches have also heightened the concerns of users about collection, storage and
usage of their data by various data processors/third parties, and policies of data fiduciaries (entities that collect and store
customer data).
To address these issues and strengthen customer rights over personal information and the right to privacy, the government, in
August 2017, appointed a committee led by former Supreme Court judge, Justice BN Srikrishna.
The Personal Data Protection Bill, 2018
In November 2017, the Justice Srikrishna Committee released a whitepaper on data protection framework for India in
accordance with the Global Data Protection Regulation, which took effect in the EU in May 2018. Then, in July 2018, the
committee released the draft - The Personal Data Protection Bill, 2018.
The draft bill proposes a legal framework for monitoring and supervising the processing of personal data and sensitive personal
data. Perhaps in a bid to enhance enforcement, the bill also lays emphasis on the architecture of the data protection framework
by recommending setting up of Data Protection Authority of India and an appellate tribunal.
Key features of the bill
Source: CRISIL Research, The Personal Data Protection Bill, 2018
Potential impact of data protection bill on fintech firms

The Personal Data Protection Bill, if enacted in its current form, is bound to have an impact on the operational cost and the
ability of firms to monetise customer data. While the impact on cost is difficult to quantify, and could vary significantly from firm
to firm, a moderate increase in cost does appear plausible. More importantly, both fintech firms and traditional financial service
providers need to build and maintain a culture of privacy and make investments in both building compliance and maintaining it.
Key aspects of the bill that will impact fintech firms include:
Right to be forgotten: Fintech firms may not be able to use or process customer data once the purpose for which it was
provided is met, unless the customer explicitly provides the data. This will impact the ability of fintech firms to mine customer
data and offer personalised products/solutions. Consequently, customer acquisition costs will increase.
Obtaining customer consent at regular intervals: Fintech firms need to obtain consent from data principles for processing of
personal data. By seeking fresh consent from customers at regular intervals, and asking for permission at every step, fintech
firms run the risk of annoying customers, who may decide not to accept sharing of data, resulting in lack of standard data
across customers, making analysis or profiling inefficient. Furthermore, the addressable market for fintech firms could shrink if
customers choose not to give their consent to receive marketing communication or to be profiled. Restrictions envisaged to
deal with the treatment of personal data of children will further reduce business volume for fintech firms that have profiling at
the heart of their model.
Data localisation could increase infrastructure cost: The digital economy, which currently allows firms to use global cloud
servers, will be forced to maintain servers in India due to the data localisation obligation. This is likely to increase the cost of
maintaining additional layers of infrastructure for small fintech firms, and, thereby, impact their operational expenses.
Employment of data compliance team to add to cost: Small fintech firms may have to employ a data compliance team as
directed by the committee, impacting their operational cost and profitability.
60.0 An Overview on NBFCs
Regulatory environment for NBFCs
NBFCs have been part of the informal loan disbursement setup since several decades in India. However, there were various
complaints from investors relating to NBFCs dubious functioning and loss to depositors. This threw up challenges for
policymakers and regulators to integrate NBFCs within the overall prudential regulatory framework of the financial system.
Amendments to the RBI Act in 1997 bestowed comprehensive powers on the RBI to regulate and supervise NBFCs. Prominent
features of the amendments include:
Making it mandatory for NBFCs to obtain certificate of registration from the RBI and maintain a minimum level of net
owned funds (NoF)
Requiring deposit-taking NBFCs to maintain a certain percentage of assets in unencumbered approved securities
Empowering the RBI to determine policy and issue directions with respect to income recognition, accounting standards,
etc
Empowering the RBI to order special audit of NBFCs
Further, asset liability management guidelines were introduced in 2001 to address credit risk and market risk faced by NBFCs.
Fair practices code for lending was prescribed in 2006, directed towards ensuring transparency in pricing of loans and ethical
behaviour towards borrowers. Corporate governance framework was introduced in 2007 to ensure professionalism in NBFCs
and know your customer norms were also made applicable to them.
In the backdrop of 2008s global financial crisis, the regulations were further amended in December 2011 with tighter norms on
asset classification, provisioning TierI capital adequacy and risk weights on exposure to sensitive sectors, among others.
Further, restrictions have been imposed on certain NBFC segments because of their business risk and size of assets. For e.g.,
gold loan NBFCs do not enjoy priority sector tag for assets securitised by them. There is also a cap on LTV at 75%, besides
they having to maintain Tier1 capital adequacy ratio of 12%. Similarly, for NBFC-IFCs (Infra Finance Companies) Tier-1 capital
adequacy is mandated at 10%. On November 10, 2014, the RBI released a revised regulatory framework, centred on the
following objectives:
Harmonising and simplifying regulations to make compliance easier
Focusing on activity-based regulations without impeding those segments within the sector that do not pose any significant
risk to the wider financial system
Addressing risks and regulatory gaps wherever these exist, and strengthening governance and disclosure standards
Some key changes made are:
Minimum NoF criterion for existing NBFCs (those registered prior to April 1999) has been increased to Rs 20 million.
To strike a balance between under-regulation and over-regulation of the sector, the RBI has raised the threshold asset
size for NBFCs that are considered systemically important, from Rs 1 billion and above, to Rs 5 billion and above. Thus,
all non-deposit-taking NBFCs with asset size of Rs 5 billion and above are termed systemically important (NBFC-ND-SI)
from July 2015, and focus of regulation and supervision of these entities has been sharpened. Furthermore, a simplified
framework for light touch regulation has been put into place for NBFCs that are not systemically important, i.e., NBFCs
with total assets less than Rs 5 billion.
For NBFCs-ND-SI and all NBFCs-D (deposit taking NBFCs) categories, tighter prudential norms have been prescribed in
line with those of banks: Minimum Tier I capital requirement has been raised to 10% from earlier 7% and asset
classification norms from 180 days to 90 days to be adhered in a phased manner by end March 2018; also, provisioning
requirement for standard assets has been increased to 0.40%, to be implemented in a phased manner by March 2018.
Exemption provided to asset finance companies (AFCs) from the prescribed credit concentration norms of 5% has been
withdrawn with immediate effect. Additional corporate governance standards and disclosure norms for NBFCs have been
issued for NBFCs-D and NBFCs-ND.
The revised regulatory framework has introduced a new concept of the leverage ratio as part of the limited prudential
norms, which will be applicable to all NBFCs-ND that are subject to limited prudential norms. Such NBFCs-ND need to
ensure a maximum leverage ratio of 7, i.e., total outside liabilities do not exceed 7 times their owned funds. This
additional requirement would link the asset growth of such NBFCs to the capital they hold.
To harmonise and strengthen deposit acceptance regulations across all deposit-taking NBFCs (NBFCs-D), credit rating
was made compulsory for existing unrated AFCs by March 31, 2016. Maximum limit for acceptance of deposits has been
harmonised across the sector to 1.5 times of NoF.
Under the revised guidelines, the RBI has tightened corporate governance and disclosure norms for NBFC-D and NBFC-
ND-SI. Certain requirements, such as rotation of audit partners and constitution of nomination and risk management
committees, which under erstwhile regulations were only recommendatory in nature, have now been made mandatory in
the case of NBFC-D and NBFC-ND-SI.
IND AS implemented for all NBFCs and HFCs since April 2018
Regulatory evolution for NBFCs

Key regulations pertaining to NBFCs

Given the importance of NBFCs in financial system especially by accessing public funds and inter-connectedness with banking,
they are subject to prudential regulations by the Reserve Bank of India (RBI) as given below
Regulatory distinction between banks and NBFCs

Note : n.a: not applicable Min. net owned funds for NBFC-MFI and NBFC -Factors is Rs 50 million, while for IFC it is Rs 300 crore #currently 10% for Infrastructure
finance companies and proposed to be increased to 10% for all NBFCs except - gold loan NBFCs who will have to maintain 12% ^Under phase-wise implementation of
Basel III by March 2019; numbers are excluding capital conservation buffer of 2.5% *Union budget 2015-16 allowed NBFCs to use Sarfaesi act, NBFCs with asset base
of 500 crore or above, in respect of loans 1 crore or above
Source : CRISIL Research
NBFCs lend and make investments akin to banks; however, there are a few differences: NBFCs cannot accept demand
deposits or issue cheques drawn on themselves; they do not form part of payment and settlement system; and deposit
insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in
case of banks.
Non-banking financial institutions structure in India
Note: The regulatory authority for the respective institution is indicated within the brackets. All-India financial institutions including NABARD, SIDBI and EXIM Bank
Classification of NBFCs
NBFCs have been classified on the basis of kind of liabilities they access, type of activities they pursue and their perceived
systemic importance.
Liabilities-based classification
NBFCs are classified on the basis of liabilities in to two broad categories a) deposit taking and b) non-deposit taking. Deposit
taking NBFCs (NBFC D) are subject to requirements of stricter capital adequacy, liquid assets maintenance, and exposure
norms etc.
Further, in 2015, non-deposit taking NBFCs with asset size of Rs 5 billion and above were labeled as systemically important
non-deposit taking NBFCs (NBFC ND SI) and separate prudential regulations were made applicable to them.
Classification of NBFCs based on liabilities
Note: Figures in brackets represent number of entities registered with RBI as of 31st May 2018.
Government & RBIs measures to support Non banks

Easing of Bond holding norms for Banks to release liquidity
The FALLCR (i.e. securities that can be reckoned, both for SLR and LCR), was increased on two occasions (September 27,
2018 and April 4, 2019) by two per cent each, thereby enabling banks to raise additional liquidity by selling their excess SLR
securities.
A special FALLCR of 0.5 per cent exclusively for lending to NBFCs was introduced in October 2018.
FALLCR, or Facility to Avail Liquidity for Liquidity Coverage Ratio, is a facility for banks to carve out a portion of their bond
holdings in statutory liquidity ratio (SLR) to be counted for the so called liquidity coverage ratio (LCR), a regulatory norm. 1 per
cent increase in FALLCR facilitate additional liquidity of Rs11 trillion for banks.
Increasing refinance limit from NHB
National Housing Bank (NHB) increased refinancing limit for HFCs by Rs. 60 billion in September 2018 making it 300 billion for
the year against earlier proposal of 240 billion.
In August 2019, Finance minister revised NHBs refinance limit to HFCs from 100 billion proposed in budget to 300 billion for
current year.
Easing of norms for bank lending to NBFCs
In October 2018, the exposure limit of banks to non-infrastructure NBFCs has been raised to 15 per cent from the earlier 10 per
cent. In August 2019, RBI again increased banks exposure limit to a single NBFC from 15% to 20% of its Tier-I capital.
In February 2019, RBI relaxed norms for Banks assignment of risk weights for exposures to NBFCs depending on ratings
instead of 100 per cent risk weight earlier. RBI also harmonized categories of NBFCs to ease the classification.
Relaxation on minimum holding period for securitisation
In November 2018, Reserve Bank of India reduced minimum holding period (MHP) from one year to six months for assets to
be securitised or assigned by NBFCs with original maturity above 5 years. Relaxation of MHP enables NBFCs and HFCs to
raise funds by securitising their originations without having to wait for a longer period.
One-time partial credit guarantee scheme
One-time partial credit guarantee scheme announced in the budget 2019 and introduced in August 2019. Government offering
guarantee to PSU banks on default of purchased pooled asset up to Rs. One trillion from NBFCs.
Easing of ECB norms for NBFCs
In August 2019, RBI relaxed norms for NBFCs to raise long term External Commercial Borrowings (ECBs) for repayment of
rupee loans availed domestically, working capital ale="height:274px; width:556px" />
In recent years, NBFC sector has seen a fair degree of consolidation, leading to emergence of larger companies with
diversified activities. Consolidation and acquisition have increased number of NBFCs with asset base in excess of Rs 5 billion.
To ensure sound development of these companies, the regulatory response has been to introduce exposure and capital
adequacy norms for NBFCs with assets of Rs 5 billion and above (termed as NBFC ND SI). Given their dominant share in
NBFC assets, large size, and dependence on public funds including bank borrowings, RBI has time and again come out with
prudential regulations aiming at their convergence with banking regulations.
Number of NBFCs registered with RBI
Number of NBFC-D registered with RBI

61.0 Infrastructure finance
Regulatory framework
Overview of NBFCs
A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956, and is engaged in
business of loans and advances; acquisition of shares/stock/bonds/debentures/securities issued by government or local
authority or other securities of marketable nature; leasing; hire-purchase; insurance business; and chit business. An NBFC
does not denote any institution whose principal business is agricultural or industrial activity or sale/purchase/construction of
immovable property.
NBFCs have been classified based mainly on two parameters:
1) The liabilities they access, i.e., deposit- and non-deposit accepting. Non-deposit-taking NBFCs are further categorised by
their size into systemically important (NBFC-ND-SI) and other non-deposit-holding companies (NBFC-ND).
2) The activity they conduct
The different types of NBFCs are as follows:
Asset financing company (AFC)
Investment company (IC)
Loan company (LC)
Infrastructure finance company (IFC)
Systemically important core investment company (CIC-ND-SI)
Infrastructure debt fund (IDF)
Micro-finance institution (NBFC-MFI)
Factors (NBFC-Factors)
Evolution of infrastructure finance NBFCs
Before December 2006, NBFCs were classified (on the basis of their type of business) into equipment leasing, hire purchase,
investment companies, and loan companies. In December 2006, their classification was revised. Equipment-leasing and hire-
purchasing NBFCs were clubbed and classified as asset-financing companies.
In February 2010, the Reserve Bank of India (RBI) added infrastructure finance companies (IFC) to the NBFC category. An IFC
is defined as a non-deposit-taking NBFC that fulfills the following criteria:
I. Minimum 75% of its total assets to be deployed in infrastructure loans

II. Net owned funds of Rs 300 crore or higher
III. Minimum credit rating of A or equivalent
IV. Capital to risk (weighted) assets ratio (CRAR) of 15% with minimum 10% Tier-I capital
Regulatory framework for infrastructure finance companies
The following regulations are presently applicable to non-deposit-taking NBFCs. These regulations also apply to infrastructure-
financing NBFCs.
(i) Loan classification
Credit facility extended by the NBFCs to borrowers for exposure in the following infrastructure sub-sectors will be treated as
infrastructure loans.
(ii) Capital adequacy requirements
NBFCs are required to have a capital-to-risk weighted ratio of 15% with Tier I capital of 10% as of March 2017.
iii) Asset classification

Infrastructure finance companies shall, after taking into account the degree of well-defined credit weaknesses and extent of
dependence on collateral security for realisation, classify their loans and advances and other forms of credit into:
1. Standard assets
2. Sub-standard assets
3. Doubtful assets
4. Loss assets
iv) Provisioning requirements
The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D has increased to 0.40%. Compliance to the revised
norm will be phased:
0.30% by end of March 2016
Provisioning norms for loans and advances
v) Concentration of credit
According to RBI guidelines, a non-deposit-taking, systematically important NBFC should not lend amounts exceeding 15% of
its net owned funds to any single borrower and exceeding 25% to any single group of borrowers. However, an infrastructure
finance company may exceed the norms by 5% of its net owned funds for a single borrower and 10% for a group of borrowers.
vi) External commercial borrowings (ECB)
NBFC-IFCs are permitted to avail of ECBs for lending to infrastructure sector under the automatic route. These NBFCs can
avail of ECBs up to 75% of their net owned funds through the automatic route and must hedge 75% of their currency risk
exposure. The ceiling on the rate of interest for such borrowings is 450 basis points over six months LIBOR (London inter-bank
offer rate) for average maturity periods of three to five years and 500 basis points for maturity periods exceeding five years.

Providing an additional funding source for infrastructure projects, infrastructure debt funds (IDFs) have tapped private capital
pools over the past three years. IDFs essentially act as vehicles for refinancing the existing debt of infrastructure companies,
thereby creating headroom for banks to lend to fresh infrastructure projects. IDFs are investment vehicles which can be
sponsored by commercial banks and NBFCs in India in which domestic/offshore institutional investors, especially insurance
and pension funds, can invest through units and bonds issued by IDFs. An IDF can be set up either as a trust or a company. A
trust-based IDF would normally be a mutual fund regulated by the Securities and Exchange Board of India and can be
sponsored by banks and NBFCs, whereas a company-based IDF would normally be an RBI-regulated NBFC. Only banks and
infrastructure finance companies can sponsor IDF-NBFCs. Till date more than Rs 90 billion has been raised through IDF-NBFC
and approximately Rs 20 billion raised through IDF-MF route.
One of the key advantages of IDF-NBFCs that have helped draw investors is they are allowed to invest only in infrastructure
projects that have successfully completed one year of commercial production. Hence, there is no risk of failure to complete
projects.
An NBFC-IFC will need to meet the following conditions for sponsoring an IDF-NBFC:
Sponsor IFCs would be allowed to contribute maximum 49% to the equity of the IDF-NBFCs with a minimum equity
holding of 30% of the equity of IDF-NBFCs.
Post investment in the IDF-NBFC, the sponsor NBFC-IFC must maintain minimum CRAR and net owned fund (NOF)
prescribed for IFCs.
There are no supervisory concerns with respect to IFCs.
Ujwal Discom Assurance Yojana (UDAY)

Despite implementation of the financial restructuring package (FRP) in 2012-13, outstanding debt shot up to Rs 4.3 trillion as in
March 2015 from Rs 2.4 trillion in March 2012. To address these issues, the Union Cabinet approved a new scheme - Ujwal
Discom Assurance Yojna (UDAY) - that aims to improve the financial health of discoms through initiatives such as reduction in
interest cost, reduction of cost of power, and improvement in operational efficiencies. Under the scheme, 75% of the debt of
state discoms up to September 30, 2015 will be transferred to respective state governments. States have issued UDAY bonds
worth Rs 2.32 trillion covering 86% of the debt (to be taken over by them) under the UDAY scheme as of June 2017. With the
issuance of UDAY bonds, the financial liquidity of discoms has improved owing to reduced interest burden after transfer of debt
to the respective state governments. As per the latest notification, for the government-owned NBFCs, the entire discom debt
eligible under UDAY will be converted into UDAY bonds and simultaneously into cash by selling those bonds in the market.
CRISIL Research believes the UDAY scheme is a mixed bag for the financial sector. Public sector banks, which have
significant exposure to discoms, will have to bear loss in interest income since they would now earn lower yield of about 8-9%
on state government bonds instead of 12-13% that they charged discoms; NBFCs will also feel pressure on their overall
profitability.
Key growth drivers
Focus on infrastructure by the government and consistent efforts for ease of doing of business
The governments continuing focus on infrastructure has been one of the major success factors for infrastructure finance
companies over the years. As per the Twelfth Five-Year Plan (2012-13 to 2016-17), investments in the infrastructure sector
were expected to be around Rs 30 trillion. The limited fiscal legroom available with the government to increase budgetary
allocations to this sector and ceilings on bank lending to this sector imply huge opportunities for NBFCs in the infrastructure
financing space.
The government has also launched various schemes in past year which may help in the growth and betterment of different
infrastructure sectors. Some of these schemes are:
Smart Cities Mission

Bharatmala and Sagarmala project
Atal Mission for Rejuvenation and Urban Transformation (AMRUT)
Power for All
Ujwal Discom Assurance Yojana (UDAY)
Introduction of tax-free bonds
Given the long-term nature of infrastructure projects and their importance to the economy, these projects have been funded
primarily by government through budgetary allocations. Apart from government, banks and NBFCs have been other large
financiers, meeting over a third of the sectors funding needs. NBFCs typically depend on market borrowings, particularly the
bond market, to meet their funding requirements, with bond issuances accounting for over three-fourths of their funding mix.
Introduction of tax-free bonds by the government has made it easier for these companies to raise funds from the market in
recent years.
Key risks
Project-related risks
Infrastructure projects are complex, capital-intensive, and have long gestation periods that involve multiple and often unique
risks for project financiers. Hence, NBFCs with exposure in the infrastructure space need strong project appraisal teams to be
successful.
Extent of competition
NBFCs face strong competition from banks that have access to low-cost funds through current account and savings account
deposits, which NBFCs lack. However, with many banks reaching their internal limits for various infrastructure segments and
their capital for high growth being scarce, they would pose lower competition to NBFCs in the near term.
62.0 Housing finance
Key regulations and policies impacting the sector
Government incentives for housing finance
Pradhan Mantri Awas Yojana (PMAY)
The Housing for All by 2022 scheme (launched in June 2015) aims to construct more than 20 million houses across India by
2022. The schemes target beneficiaries would be the poor, economically weaker sections (EWS), and low income groups (LIG)
in urban areas.
PMAY progress status as of end-March 2019
Source: Urban Transformation Report, Ministry of Housing and Urban Affairs, Government of India
Four components of the scheme
1. Slum redevelopment
Land as a resource with private participation

Extra floor space index (FSI)/ floor area ratio (FAR) and transfer of development rights (TDR), if required
Grant of Rs 1 lakh per house provided by the central government
Developers to benefit from "free sale component"
2. Affordable housing in partnership
With private sector or public sector agencies

Central assistance of Rs 1.5 lakh per EWS category house in projects where the project has at least 250 houses and
35% houses are for EWS category
3. Affordable housing through credit-linked subsidy
4. Subsidy for beneficiary-led housing
For individuals of EWS category, for own house construction or enhancement

Central assistance of Rs. 1.5 lakh per beneficiary
Credit-linked subsidy scheme (CLSS)
Under the 'Housing for All' mission, the central government implemented CLSS as a demand-side intervention to expand
institutional credit flow to the housing needs of people residing in urban regions
Under the mission, affordable housing through CLSS will be implemented through banks/financial institutions
Credit linked subsidy is provided on home loans taken by eligible urban population for acquisition and construction of
houses
Housing and Urban Development Corporation (HUDCO) and National Housing Bank (NHB) were identified as central
nodal agencies to channelise this subsidy to lending institutions and monitor progress of this component
CLSS revised guidelines
Source: PMAY website, CRISIL Research
For all income slabs, any additional loan taken by the beneficiary up to a maximum tenure of 20 years will be at non-
subsidised rates
The interest subsidy amount will not be the differential of interest amount (of actual and subsided rate) but will be the net
present value (NPV) of the interest subsidy amount
It is to be calculated at a discount rate of 9%
Assuming that a person has an income of up to Rs 18 lakh, maximum subsidised loan amount of Rs 12 lakh;
market interest rate: 9%; tenure: 20 years; EMI to be paid is Rs 10,796
At 6% interest rate (i.e, 3% subsidy) on Rs 12 lakh loan amount, EMI to be paid: Rs 8,597
NPV (9% interest rate) of the difference in the above EMIs amounts to Rs 2.4 lakh. This amount gets deducted from
the principal and the reduced loan amount is then amortised at 9% interest rate. Eventually the EMI reduces by ~Rs
2,200 for the above case.
Threefold increase in no. of houses completed with governments aggressive push to affordable housing
Source: Ministry of Housing and Urban Affairs; CRISIL Research
As per the government data, as on March 2019, a total of ~4 lakh houses had been constructed under the PMAY. To achieve
the target of construction of 20 million houses across India by 2022, the pace of construction work will increase and
subsequently lead to higher demand for loans. Also, the inclusion of MIG group (whose household income is between Rs 6-18
lakh per annum) under the CLSS will boost loan disbursements in the medium to long term.
Infra status to affordable housing companies
A long-pending wish of the real estate industry was partially realised with the government granting infrastructure status to
affordable housing sector, thereby entailing relatively lower finance costs
Grant of infrastructure status, coupled with priority sector status accorded to retail loans for affordable housing projects by
the Reserve Bank of India (RBI) in July 2014, ensures adequate demand and supply-side impetus to the sector
Sectors enjoying infrastructure status can also avail of loans under external commercial borrowings route. However, this
facility was already granted to the affordable housing sector in 2014 by the RBI.
Infrastructure bonds available to banks
To encourage infrastructure development and affordable housing, the RBI, in July 2014, exempted long-term bonds from
regulatory mandatory norms such as cash reserve ratio and statutory liquidity ratio if the money raised was used for funding
such projects. Banks are now allowed to raise bonds of a minimum maturity of 7 years for lending to:
Long-term projects in infrastructure sub-sectors; and

Affordable housing
Atal Mission for Rejuvenation and Urban Transformation (AMRUT)
The purpose of AMRUT is to provide basic services (e.g., water supply, sewerage, urban transport) to households, build
amenities in cities, and to improve the quality of life for all, especially the poor and the disadvantaged.
Key components of the mission
Access to a tap with assured supply of water for every household

Assured sewerage connection per household
Better amenities in cities by developing greenery and well-maintained open spaces (e.g., parks)
Lower pollution by switching to public transport or constructing facilities for non-motorised transport (e.g., walking and
cycling)
Action plan of AMRUT
Source: CRISIL Research, media updates
AMRUT implementation progress
Source: Urban Transformation Report, Ministry of Housing and Urban Affairs, Government of India
Real Estate (Regulation and Development) Act (RERA)
The year 2017 stands out for policy initiatives in the real estate sector. One such initiative was implementation of RERA,
which had a direct impact on the supply-demand dynamics in the real estate sector. RERA is expected to lead to
improved transparency, timely delivery, and organised operations
The Act does not permit developers to launch new projects before registering them with the authority. This is a major shift
from the practices followed earlier by developers, wherein they managed to sell part of the project through soft/pre-launch
activities
RERA is also expected to put an end to fund diversion
With effective implementation of RERA, developers will have to disclose project-related information, such as project plan,
layout, government approvals, carpet area of units, construction status and delivery schedule. This will enable
prospective buyers to make informed decisions.
Impact of RERA on different stakeholders
Framework of RERA
Transparency
Compulsory registration of all ongoing and upcoming real estate projects; existing under-construction projects
where completion certificates are not received will be covered under the Act
Developers to disclose project related details including: project plan, layout, and government approvals related
information to the customers such as sanctioned FSI, number of buildings and wings, number of floors in each
building, etc.
Buyers to pay only for the carpet area
Consent of two-third allottees to be taken for any major addition or alteration
Liability
Delivery of the project to be on time, as mentioned in the agreement

Any structural defect, or any other obligations of the promoter as per the agreement for sale, brought to notice of
promoter within 5 years from possession to be rectified free of cost
No false statements or exaggerated commitments to be given in advertisements
Buyers have to comply with payment schedule mentioned in model sale agreement (which mandates them to pay
up to 30% of total consideration on execution of agreement, an additional up to 15% of total consideration on
completion of plinth work; and remaining payment as per clauses mentioned in the model sale agreements)
Security
70% of the money received from buyers for a particular project to be transferred to an escrow account
Withdrawals to be in accordance with project completion and needs to be certified by engineer, architect, and a
practicing chartered accountant
Discipline
Developers have to register their projects with RERA before advertising or marketing
Brokers/ agents to be registered with RERA
Project details to be updated quarterly on RERA website
Project accounts to be audited annually by a CA
Compliance
In case of delay, developers have to pay interest to home buyers at State Bank of India's highest marginal cost of
lending rate plus 2%
Developer may terminate the agreement in case of three payment defaults by buyers (by giving 15 days' notice)
Monetary fines/ penalties for not registering the projects and continuous default/ non-compliance with any provision
of the Act/ non-compliance with the order of Appellate Tribunal (does not mention imprisonment penalties to
developers)
Justice
The complaint at the initial stage will be handled by the Authority, with further appeal resting with the RERA
Appellate Tribunal. A second appeal is also allowed to be filed before a High Court
Source: Maharashtra-notified RERA documents
Initiatives by regulators to support affordable housing finance
NHBs revised guidelines announced in June 2019 have made the following key amendments:
The minimum Tier 1 capital adequacy to be maintained by HFCs has been increased from 6% to 10%arch 2022.
The overall capital adequacy ratio requirement has been increased from 12% to 15% in a graded manner, by March
2022.
The maximum leverage that HFCs can take up has been reduced to 12 times from 16 times over three years, by March
2022.
The ceiling on deposits that HFCs can mobilise has been lowered to three times of net-owned funds from five times
NHBs revision of interest spread cap for the Rural Housing Fund (RHF)
NHB has been allocated a sum of Rs 6,000 crore under RHF for fiscal 2018 and Rs 3,000 crore under Urban Housing
Fund (UHF)
The NHB revised interest rate and on-lending cap under the RHF this fiscal
CRISIL Research believes the on-lending cap of 3.5% is better than the previous 2% cap that made financing
unattractive, because of higher operating cost incurred to serve rural areas. The new norms for lending under RHF and
UHF are given below:
Revised interest rates and on-lending caps
Source: NHB, CRISIL Research
Reduction in risk weights
The regulators (RBI for banks, and NHB for HFCs) have been progressively reducing the risk weights for housing loans, taking
into cognisance the healthy asset quality of the asset class. The following chart captures the reduction in risk weights for HFCs
over the years:
Regulations pertaining to risk weights for housing loan by HFCs

Source: CRISIL Research, NHB
Poaching of regular customers by banks
One of the biggest risks to housing players is threat from banks, which have the details of borrowers banking behaviour and
repayment histories. Banks can poach these customers by offering lower interest rates (compared with smaller HFCs) and zero
processing fees. In doing so, banks save on the operating cost and get customers with good credit histories.
Collateral frauds
The rising number of collateral frauds in the sector is becoming a serious issue. As a result, lending institutions are being
forced to implement additional controls, thus increasing their underwriting expenses.
HFCs catering to low-ticket housing segment have funding disadvantage
Most small HFCs have a disadvantage versus large banks and HFCs such as HDFC and LIC Housing Finance in their cost of
funds due to the mix of funding (mid-size and small HFCs are largely bank-funded) and higher cost (as credit ratings are
lower). However, CRISIL Research believes securitisation and NHB funding could help to an extent.
Delay in project approvals and construction
Cash flows of HFCs are largely dependent on timely completion of a development in which customers have bought apartments.
If the project gets delayed, the borrower may start defaulting on loans. Project delays also tend to impact loan-book growth.
Lack of proper title
Lack of a proper title can be a risk, especially on the outskirts of large cities, and semi-urban and rural areas. With better
availability of information and proper due diligence by the technical team, CRISIL Research believes HFCs are trying to
mitigate this risk.
Liquidity risk
The apartment culture has still not caught on in many semi-urban and rural areas, hence, financing is tilted towards individual
standalone properties. CRISIL Research believes this makes it harder to sell a property that is built according to the needs of
the borrower. Also, in rural areas, due to cultural issues, it may become challenging to find a buyer for a repossessed property.
This leads to the liquidity risk.
Employee attrition
As the market is growing faster and new players are emerging in the housing finance space, the risk of existing employees
switching to another company is increasing. CRISIL Research believes this risk is especially pertinent in sales roles in
affordable housing finance segment.
Insufficiency of data for credit appraisal
Credit score availability in India is still at a nascent stage, despite the presence of credit bureaus. In several cases, borrowers
lack formal proof of income documents. CRISIL Research believes this makes it difficult to judge the ability of the borrower to
repay.
Economic scenario
The financial performance of an HFC depends on the overall macroeconomic factors: GDP growth, economic cycles, and the
health of the securities markets. CRISIL Research believes any trend or event that has a significant impact on Indias economy,
including a rise in interest rates, could impact the financial standing and growth plans of HFCs, leading to a slowdown in
sectors important to the business.
63.0 Low cost housing finance
Definition
Low-cost housing in India refers to housing for economically weaker sections (EWS) and lower income group (LIG)
households. CRISIL Research defines low-cost housing as a housing market within a ticket size of less than Rs 1 million.
Segmenting the housing finance market:
Indias mortgage market can broadly be split into three categories by ticket size of the mortgage loan:
1) > Rs 2.5 million: generally metro/urban markets; 2) Rs 1.0-2.5 million: generally catchment areas of urban/metro cities and
semi-urban towns; and 3) <Rs 1.0 million ticket size for rural and semi-urban market.
Of these three segments, the >Rs 2.5 million market (prime mortgage market) is the most competitive as the bulk of lending in
this segment is to salaried individuals in urban/metro cities, and underwriting challenges in this category are fairly low. We have
seen mortgage yield differences with bank MCLR rate come down to almost nil in this category. As low interest rates is the key
differentiator, most large banks/HFCs dominate this market.
The Rs 1.0-2.5 million loan category is most suitable for semi-urban and satellite towns around large cities. Pricing competition
is limited only to the upper end of this segment where larger HFCs like HDFC, LICHF and IBHFL operate. Mid-sized HFCs are
present more in the lower end of this category, where pricing competition is lower and yields are ~50 bps higher than the >Rs
2.5 million category.
The <Rs 1 million segment: This is the low-income housing segment which was the least serviced, with reach/assessment skill
requirements differing sharply from traditional lending in the > Rs 2.5 million category. Some niche NBFCs like Gruh Finance
and Mahindra Rural Housing Finance operate in this segment.
Source: Company reports, CRISIL Estimates
For ticket sizes > Rs 2.5 million, cost of funding is the key differentiator, and for ticket sizes < Rs 1.0 million, the ability to
assess credit and contain operating costs is the key differentiator.
Low cost housing segment focused players: differentiators
HFCs are able to garner marketshare in the low-cost housing finance segment due to following
Strong origination skills and focused approach
Creation of niches in catering to particular categories of customers
Relatively superior customer service and diverse channels of business sourcing
Non salaried customer profile around (80% of customers)
Presence in smaller cities
These factors will help them capture market share in the future as banks have become risk averse and are focussing on high
ticket customers with good credit profiles.By virtue of being largely present in metros and urban areas, ticket sizes of banks and
large HFCs have followed rising property prices.
A focus on the urban salaried segment by banks and large HFCs has left non-salaried as well as Tier III, and rural market
open to anyone with the capability to operate in that segment.
Exploring the low-cost housing (<Rs 1.0 million) segment
Low-cost housing finance is constrained mainly by the inability of banks to accurately access credit risk associated with low-
income borrowers and lower profit margins, lack of land titles and uncertainty of repossession. Below are the key areas of
different financiers, based on target customers.
Competitive scenario and strategy
Most of the niche HFCs source their business through employee-based sourcing or through referrals and direct sales agents,
whereas banks and large HFCs rely mostly on branches and direct sales teams (DSTs) to source business.
Note - * means the information recorded in respective section is typically based on the basis of key players.
Business model
The high costs of serving this category of customers prompted financiers to adopt innovative models to source business. An
HFC targeting the low-income, informal sector customer assumes a hub and spoke model where retail branches of the HFC
operate as hubs in urban areas, while project site kiosks follow up on low-income construction projects to source customers.
Although this model is popular and largely followed by financiers, a developer-based model where the HFC is present at the
low-income housing project site and business takes place directly alongside developer-partners is not uncommon. Financiers
also spread awareness about their products in rural areas by setting up kiosks at gram sabhas and arranging loan melas for
potential customers.
Business model for low-income housing finance players

Direct customer contact enables better visibility and helps limit fraud, thus making for reliable customer assessment. Moreover,
all critical functions like origination, verification and credit appraisal are performed in-house, while certain non-core activities
like loan documentation and processing may be outsourced. This allows a start-up HFC to allocate more internal resources
towards vital aspects of lending such as verification and credit appraisal.
Customer risk: Assessing the person, not the document
HFCs are aware of the challenges in serving low-income customers, and, the informal sector in particular. There are
fundamental differences as compared to traditional housing finance as this income group rarely has proof of income and
expenditure documents that conventional mortgage lenders rely on to assess credit. Thus, evaluating these customers requires
more of a field-based approach to verify cash flow using surrogates and building up knowledge about customer sub-segments
to increase assessment reliability. The person, and not just documents, helps in identifying credit quality.
Risk assessment procedure
Government Schemes
Pradhan Mantri Awas Yojana: Housing for all by 2022
The recent push by the government to provide Housing for All by 2022 and its implementation are expected to boost sales of
affordable, low-cost housing units and consequently, their financing.
Four components of the scheme

The centre has implemented the credit-linked subsidy component under the Housing for All mission as a demand-side
intervention, to expand institutional credit flow to the housing needs of people residing in urban regions
Credit-linked subsidy will be provided on home loans availed of by an eligible urban population, for acquisition and
construction of houses
Housing and Urban Development Corporation (HUDCO) and National Housing Bank (NHB) have been identified as
central nodal agencies to channelise this subsidy to the lending institutions, and to monitor the progress of this
component
Credit-linked subsidy scheme (CLSS)
Under the 'Housing for All' mission, the central government has implemented the credit-linked subsidy component as a
demand-side intervention, to expand institutional credit flow to meet the housing needs of people residing in urban
regions.
Credit-linked subsidy will be provided on home loans availed of by an eligible urban population for acquisition and
construction of houses
Details of the revised CLSS
For all the income slabs, any additional loan taken by the beneficiary up to a maximum tenure of 20 years will be at non-
subsidised rates.
The interest subsidy amount will not be the differential of interest amount (of actual and subsided rate), but the net present
value (NPV) of the interest subsidy amount - to be calculated at a discount rate of 9%.
CRISIL research analysis of PMAY benefit

Keeping no maximum loan limit, increasing the subsidised loan amount to Rs 12 lakh, salary slab to Rs 18 lakh and
repayment tenor to 20 years will ease the EMI burden and get more people under the ambit of this scheme.
The subsidy benefit decreases materially as the loan amount increases -
EWS category home seekers to benefit the most as relative saving (with regards to aspirational property value) is
the highest for them
The extension of benefit to MIG may not prove materially beneficial on account of higher aspiration property cost
against the saving (CLSS benefit) of Rs 2.3 lakh.
For example, in the case of Bengaluru, typically, there is good demand (from middle income households) for
projects with ticket sizes between Rs 60 lakh and Rs 80 lakh. Here, CLSS benefit of Rs 2.3 lakh will not
materially impact the demand situation (benefit of 3-4%). The scenario is similar in other cities and worse in
prime micro-markets.
A 60 sq m carpet area is close to 100 sq m of built-up area as the difference between them is nearly 30-50%. In sq ft, 100
sq m is nearly 1,000 sq ft, which could be the equivalent of a 2 bedroom hall kitchen (BHK) in many locations. The move
to increase the size of apartments called affordable homes will enhance developer interest in this segment and eventually
make housing more accessible to people living in urban areas.
The PPP model: An attractive prospect
To provide further impetus to the Housing for All 2022 mission, the Ministry of Housing and Poverty Alleviation, on September
21, 2017, announced a public-private partnership (PPP) policy, segregated into eight models to promote private investment in
affordable housing.
The eight PPP models aimed at tapping private and public lands for affordable housing are:
Private investment in private land:
1. Extension of CLS S to affordable housing projects

2. Central assistance of Rs 1.5 lakh per house
Private investment in government land:
1. Design, build and transfer model: Developer to handover built units to public authorities
2. Cross-subsidised model: Cross-subsidising cost of affordable project from revenue from high-end house or commercial
development
3. Annuity-based subsidised housing: Deferred annuity payments by the government
4. Annuity-cum-capital grant-based housing: Share of project cost as upfront payment plus deferred annuity payment by
the government
5. Direct relationship ownership housing: Promoters will directly deal with buyers and recover cost
6. Direct relationship rental housing: Recovery of cost by builders is through rental income from houses built on
government land
Source: Ministry of Housing and Urban Poverty Alleviation (MHUPA), CRISIL Research
NHB refinancing to aid borrowing cost for HFCs catering to affordable housing segment
While access to debt markets allows large HFCs to mobilise resources at competitive rates, niche HFCs have benefited from
the National Housing Bank's (NHB) refinance schemes. NHB runs various schemes under which it re-finances banks and
HFCs.
Refinance schemes launched by NHB

Source: NHB
NHBs revision of interest-spread cap for the Rural Housing Fund
For 2017-18, NHB has allocated Rs 6,000 crore under Rural Housing Fund (RHF) and Rs 3,000 crore under Urban Housing
Fund (UHF). Also, NHB revised the interest rate and on-lending cap under RHF in 2017-18. CRISIL Research believes the on-
lending cap of 3.5% is better, as the previous 2% cap made financing unattractive because of higher operating cost incurred to
serve rural areas.
Revised interest rates and on-lending caps
Limit raised for Priority sector lending credit and affordable housing
Over the last six months, the government has announced several regulatory changes that demonstrate its commitment towards
the sector. To promote the affordable housing segment, the Reserve Bank of India (RBI) has revised the risk weightage criteria
for lenders and reduced it to even below 50% for low ticket housing loans. This will help conserve capital and result in more
lending to the smaller-ticket home loan segment.
Grant of SARFAESI license to HFCs would help minimize losses
Access to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI) means that HFCs do not have to seek recourse through the tedious and time-consuming conventional legal route.
This allows HFCs to lend more freely and permits them to increase their exposure to the affordable informal sector customers,
who are mostly situated in small towns where legal action is costly and time-consuming. Further, SARFAESI will act as a
deterrent to defaulters.
Other regulatory incentives include:

Viability gap funding
To encourage infrastructure development and affordable housing, the RBI in July 2014 exempted long-term bonds from
regulatory mandatory norms such as cash reserve ratio and statutory liquidity ratio if the money raised is used to fund such
projects. Banks are allowed to raise bonds of minimum maturity of seven years for lending to:
Long-term projects in infrastructure sub-sectors
Affordable housing
Key risks
Poaching of regular customers by banks
One of the biggest risks to low-cost players is the threat from banks, as banks have details of borrowers banking behaviour and
their repayment history. Banks can poach these customers by offering lower interest rates (compared to small HFCs) and zero
processing fee. In doing so, banks save operating cost and get customers with good credit history. Hence, HFCs have to be
able to devise ways to enjoy long-term cash flows.
Collateral frauds
Collateral fraud in the sector is becoming a serious issue. As a result, lending institutions are being forced to implement
additional control measures, which increases their underwriting expenses.
Less than Rs 1 million ticket size has highest risk
In rural and semi-urban (tier III and IV) regions, the median cost of a house is Rs 0.5-1.0 million, with smaller saleable area and
lower property prices. Also, against the backdrop of unknown risks associated with the profile of the customers, financiers
extend a lower loan-to-value (LTV) to this segment as compared to their formal, salaried counterparts. The LTV is typically
45-55%, hence disbursements are lower, which is an opportunity loss for financers.
HFCs catering to low-cost housing segment have funding disadvantage
Most small HFCs are at a disadvantage vis--vis large banks and large HFCs such as HDFC and LIC Housing Finance with
regards to cost of funds due to the mix of funding (mid-size and small HFCs are more bank-funded) and higher cost (as credit
ratings are lower). However, securitisation and NHB funding could help to a certain extent.
Delay in project approvals and construction
Cash flows of HFCs are largely dependent on timely completion of the project in which its customers have bought apartments.
If the project is delayed, the borrower could start defaulting on loans. Additionally, project delays tend to impact the growth of
the loan book.
Lack of proper property title
Lack of proper property title is a risk, especially on the outskirts of large cities, semi-urban and rural areas. With better
availability of information and proper due diligence by the technical team, HFCs are actively mitigating this risk.
Liquidity risk
The apartment culture has still not caught on in many semi-urban and rural areas, hence financing is more for individual
standalone properties. This makes it harder to sell a property that is built according to the needs of the borrower. Also, in rural
areas, due to cultural issues, it may become difficult to find a buyer of a repossessed property. This leads to liquidity risk.
Insufficient data for credit appraisal
Credit score availability in India is still at a nascent stage, despite the presence of credit bureaus. In several cases, borrowers
lack formal proof of income document. This makes it challenging to judge the ability of the borrower to repay.
Employee attrition
As the market is growing faster and new players are emerging in the housing finance space, the risk of existing employees
switching to another company is increasing. CRISIL Research believes this risk is especially pertinent in sales roles in
affordable housing finance segment.
Economic scenario
The financial performance of an HFC depends on overall macroeconomic factors, such as GDP growth, economic cycle and
health of the securities markets. Any trend or event that has a significant impact on the Indias economy, including rising interest
rates, could impact the financial standing and growth plans of HFCs, and lead to a slowdown in business.
64.0 Auto finance
Underlying asset dynamics
Commercial vehicles
The commercial vehicles (CV) industry can be classified into light commercial vehicles (LCV) and medium and heavy
commercial vehicles (MHCV). Demand for CVs is driven by various macroeconomic indicators, but is generally cyclical in
nature. MHCV sales are relatively more volatile than LCV sales and more susceptible to economic cycles.
Growth trend in CV sales
Source: SIAM, CRISIL Research
Commercial vehicles (CVs) sales slowed to 19% in 2018-19 from 25% a year ago. Within CVs sales of new LCVs grew by 21%
y-o-y, driven by increase in private final consumption expenditure (PFCE). MHCV sales volume grew by 15% in 2018-19
driven mainly by demand from mining and road sectors.
Demand drivers for CV industry
Growth in economic activity
The CV industry transports over half of the total freight handled in the country. As transportation is linked to all sectors, demand
for CVs is closely linked to overall economic growth. Over the long term, along with sustained economic growth, CV demand is
also driven by growth in industrial and agricultural production, freight movement, rising share of roadways in freight movement
and changes in freight rates.
CV financing
Majority of vehicles purchased by transporters require funding assistance from financial institutions. Hence, finance availability
is a critical parameter. Disbursements depend on sales of CVs, which in turn, depends on overall economic growth. Slowdown
in economy leads to reduced freight availability, lowering CV operator earnings. Rising fuel costs squeezs operators
profitability. Low visibility on future orders and existing capacity force operators to put off fleet replacement, affecting sales of
CVs. Decline in profitability of operators affects repayment capacities, leading to increased delinquencies of financiers.
Entry of new players to intensify competition

Entry of international players likes Daimler and Forton expansion of product portfolio by local players like Ashok Leyland,
Mahindra & Mahindra and Tata Motors is expected to intensify competition and accelerate product development. These factors
are also likely to drive the launch of technologically advanced products, which will enable Indian players to compete on a global
scale.
Other long-term drivers
Besides factors mentioned above, infrastructure development, structural changes and government initiatives are other long-
term drivers for the CV industry. Governments strong focus on road infrastructure improvement will further broaden road
transport share in total freight.
Improvement in road infrastructure raises level of connectivity on trunk routes that would facilitate sale of higher-tonnage
vehicles like multi-axle vehicles (MAV). Growth in the CV industry is also led by higher price realisations in the MHCV segment,
as medium commercial vehicles (MCV) are being substituted by higher-tonnage vehicles. Also, higher-end LCVs and MCVs
are being substituted by intermediate commercial vehicles (ICV), which offer better cost economics.
Cars and utility vehicles

Passenger vehicles (PVs) drastically ffell by 4%, driven by less demand form the domestic markets exports didn't pick
up. Sales of cars grew by 3.3% and sales of UVs grew by 16.8%.
Growth trend in car and utility vehicle sales
Source: SIAM, CRISIL Research
Demand drivers for passenger car industry
Increase in addressable households
Between 2011-12 and 2017-18, the number of households that could afford a car increased at about 14-16% CAGR as
consumers disposable incomes went up. We expect the number of these households to grow at 9-11% CAGR over next five
years, boosted by a good monsoon and wage hikes for government employees.
Car buyers in India are getting younger

People are buying cars young and early in their careers. Majority of car buyers in India still continue to be male, though the
trend of women researching and deciding the car to be bought is also increasing.
Low penetration
India is under-penetrated compared to its global peers in terms of car ownership. As per SIAM, in India penetration level of PVs
is low, currently pegged at 21 vehicles per 1000 people, compared to China 76 per 1000, UK 455 per 1000, USA 360 per 1000,
Mexico 203 per 1000, Brazil 227 per 1000. Penetration is expected to increased to 27 vehicles per 1000 people by 2021-22.
Entry of new players and model launches aids growth
Over the past decade, a host of global players have established their production facilities in India to capitalise on growth
opportunities. These players have not only brought their international best-selling models to India, but also found great value in
introducing India-specific models. Availability of new and India-specific models against the backdrop of rising incomes will aid
industry growth in the longer term.
Car sales have risen significantly after new models were introduced, as these launches encourage customers to prepone their
decisions to purchase cars. Such car launches made across segments, by both existing and new players at competitive rates,
will continue to drive demand, given the low penetration. Auto-makers continue to attract sales with special editions and new
variants.
Increase in dealerships, urbanisation and access to finance
Greater distribution reach will push up sales of passenger cars, as a large number of households will be added to the target
population. Typically, these households have potential to buy a car, but defer the decision due to absence of car dealerships
and service infrastructure in the area. With most urban centres covered by dealership networks, car manufacturers are setting
up new dealerships in smaller towns to increase penetration and sales in semi-urban and rural areas.
Enhanced penetration of financing can improve passenger car sales across segments. Most manufacturers are targeting rural
and semi-urban areas to increase sales volumes. Apart from increasing the number of dealerships, manufacturers are
improving access to finance in these markets to enable more customers to purchase cars. Maruti has crossed the 2000 sales
outlets mark in 2016-17 and plans to have 4000 outlets by 2020.
Shorter replacement cycle
Shorter replacement cycles will also boost passenger car sales, mainly in mainstream/small-car/mid-size segments. Average
replacement cycle has shrunk to four years in 2017-18 from 5 years a decade ago, implying frequent upgradation to another
model from the same segment or a higher-end model. A growing middle class with larger disposable income and more feature-
led choices, is driving replacement demand. Also, concept of a second car is increasing in urban areas with more than one
working member in a family.
Evolution Financing for commercial vehicles

Pre-1997: The market was highly fragmented in 1995-1997, with NBFCs dominating the financing market for commercial
vehicles, followed by PSU banks, co-operative banks and unorganised sector.
1998 to 2001: Downturn in demand for commercial vehicles forced many small NBFCs such as 20th Century, GLFL and
Anagram to either close down or significantly curtail their operations. A few strong players such as Sundaram Finance,
Ashok Leyland Finance, Citicorp Finance, GE Capital and others survived. Share of foreign NBFCs rose as they
purchased assets of weaker domestic NBFCs.
Post 2001: The market became less fragmented, as weaker NBFCs exited the market due to increasing pressure on
margins. Private banks capitalised on the above opportunity and entered the market in a big way.
2003 to 2006: Organised players started focusing on refinance markets, which had traditionally been serviced by the
unorganised sector.
2007 to 2011: During 2008-09, the commercial vehicles industry was significantly hit by reduction in freight availability
and unfavourable credit environment. Rising defaults led to deterioration in asset quality, with players curtailing their
exposure to small fleet operators (SFO) and first-time users.
2012 to 2016: Most vehicle financiers focused on tie-ups with vehicle manufacturers, to expand and diversify their
offerings. Some captive financiers turned aggressive, to push sales of their LCV models, disbursing loans at very high
loan-to-value (LTV) ratios. However, with consequent sharp rise in delinquencies, these financiers incurred losses and
halted their aggressive disbursements.
2017: Pan-India BS IV implementation from April 1, 2017 resulted in advance buying in last quarter of FY 17 and
expected to increase vehicle prices
Financing for cars & utility vehicles
Late 1980s: NBFCs were mainly involved in leasing activity. Citibank was the first organised player to offer auto loans in
1987. It introduced the first branded scheme called Citimobile, which proved more profitable than leasing and encouraged
other NBFCs to enter the auto finance market.
Early 1990s: The country's largest car manufacturer, Maruti Udyog Ltd (MUL), launched models like Esteem. Vehicles
were overbooked, auto finance companies made mass purchases and sold them at a premium. NBFCs such as
Anagram, Apple Finance and Gujarat Lease Finance were led the auto finance market. NBFCs helped widen acceptance
of finance and develop the market.
1996 to 1998: NBFCs continued to be the only players in the organised market.
1998 to 2003: Post 2000, entry of banks intensified competition. The concept of reverse subvention was born when
financiers started offering subventions (dealer payouts) to increase business volumes.
2003 to 2008: Public sector banks also became aggressive in this sector. State Bank of India (SBI) launched the 2599
scheme to boost sales of Maruti 800. By end of 2005-06, banks completely dominated the auto finance market with
around 65% market share.
2007-2008: ICICI Bank and HDFC Bank hiked interest rate for auto loans by 75 bps in April and Kotak Bank by 50 bps.
Others followed suit. Most manufacturers also hiked car prices 2-3%.
2008 to 2011: Liquidity crunch resulting from the economic crisis caused several players to exit auto loans market or
reduce their exposure significantly due to large-scale defaults. In second half of 2008-09, interest rates rose on account
of liquidity crunch, to reduce in 2009-10 with economic revival.
2012 to 2016: Most vehicle financiers focused on tie-ups with vehicle manufacturers, to expand and diversify their
offerings. Despite the economic slowdown, adequate borrower appraisal and CIBIL score checks have helped financiers
report very low NPA levels.
2017: Pan-India BS IV implementation from April 1, 2017 resulted in advance buying in last quarter of FY 17 and
expected to increase vehicle prices
Car financing NBFCs value proposition
Commercial vehicle financing NBFCs value proposition

Success mantras in vehicle financing
Key growth drivers
Steady economic growth and favorable business environment

The Indian economy is projected to grow steadily, going forward, as consumption and investment activity increases and
business environment becomes favourable. Economic growth will galvanise demand for underlying assets, benefitting the auto
finance industry.
Increasing dealership network and access to finance in market
Greater distribution reach will push up vehicle sales, as a large number of households will be added to the target population.
Typically, these households have the potential to buy a vehicle, but defer their decisions due to absence of dealerships and
service infrastructure in the area. With most urban centres covered by dealership networks, manufacturers are setting up new
dealerships in smaller towns to increase penetration and sales in semi-urban and rural areas. Manufacturers are also
improving access to finance in these markets to enable more customers to purchase vehicles.
Broader customer base in comparison with banks
Banks currently hold close to 53% share of auto finance outstanding loans and NBFCs account for the rest. Banks largely lend
to large fleet operator (LFO) segment, while NBFCs lend to all categories: LFOs, as well as medium fleet operators and SFOs
which are perceived to have weaker credit profiles. Catering to relatively less credit-worthy customers, strong presence in used
vehicles (where banks have very limited presence), faster processing and lower documentation requirements have enabled
NBFCs to increase market share from 40% in 2011-12 to about 49% in 2017-18.
Key challenges
Regulatory environment
Changing regulatory framework for auto finance companies has been crucial in determining growth path of NBFCs. Over the
years, regulations of NBFCs have been converging with those of banks; this could lead to increasing competition in future.
Also, higher provisioning requirements will impact profitability of these companies.
Managing cost of funds
NBFCs in auto financing do not have access to low-cost deposits, i.e., current account and saving account deposits (CASA),
like banks. Hence, cost of funds for NBFCs is always higher than banks and more susceptible to liquidity squeeze in financial
markets. Therefore, managing cost of funds is vital for NBFCs to be competitive in this space.
Overview of NBFC sector

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956, and is engaged in
business of loans and advances; acquisition of shares/stock/bonds/debentures/securities issued by government or local
authority or other securities of marketable nature; leasing; hire-purchase; insurance business; and chit business. An NBFC
does not denote any institution whose principal business is agricultural or industrial activity or sale/purchase/construction of
immovable property.
NBFCs have been classified mainly on two parameters:
1) Kind of liabilities they access, i.e., deposit and non-deposit accepting. Non-deposit-taking NBFCs are further categorised by
their size into systemically important (NBFC-ND-SI) and other non-deposit-holding companies (NBFC-ND).
2) Kind of activity they conduct:
1. Asset financing company (AFC)

2. Investment company (IC)
3. Loan company (LC)
4. Infrastructure finance company (IFC)
5. Systemically important core investment company (CIC-ND-SI)
6. Infrastructure debt fund (IDF)
7. Micro-finance institution (NBFC-MFI)
8. Factors (NBFC-Factors)
Auto-financing companies are classified as asset finance companies.
Regulatory framework for auto financing NBFCs
The following regulations are presently applicable to non-deposit-taking NBFCs. These also apply to auto-financing NBFCs.
i. Requirements pertaining to capital adequacy
NBFCs are required to have capital-to-risk weighted ratio of 15% with Tier-I capital of 10%.
ii. Asset classification
Auto finance companies shall, after taking into account degree of well-defined credit weaknesses and extent of dependence on
collateral security for realisation, classify their loans and advances and all other forms of credit into the following classes:
1. Standard assets
3. Doubtful assets
4. Loss assets
iii. Provisioning requirements
In a recent review, the provision for standard assets for NBFCs-ND-SI and for all NBFCs-D is increased to 0.40%.
iv. NPA recognition norms

NBFCs were hitherto required by the RBI to recognise NPAs as loans in which either interest or principal payment has been
outstanding for 180 days or more. In November 2014, RBI revised guidelines, requiring NBFCs to adopt 90-day NPA
recognition, at par with banks, by March 2018.
65.0 Wholesale finance
Industry Information
Wholesale finance represents lending services to medium-to-large-sized corporate, institutional customers, real estate
developers by banks and other financial institutions. It encompasses long and short-term funding, with long-term loans
accounting for majority of the loan book.
Wholesale financing products
High risk on account of sectoral and customer concentration with relatively

unseasoned portfolio
Chunky portfolio
The portfolio in this segment is fairly concentrated with top 10 exposures accounting for 25-30% of the loan outstanding.
Consequently, a few slippages in this segment can result in high level of gross NPAs. For example, one of the leading
financiers, around 75% of the portfolio comprised of real estate lending
Cyclicality in real estate sector

Due to high exposure of top players in developer funding, downturn in the sector due to its cyclical nature can result in high
delinquencies.
Market volatility
Products offered by wholesale NBFCs like promoter funding is backed by shares as collateral from its founders or promoters.
The price of this collateral fluctuates due to change in market value of shares which can reduce the loan to valueof the
collateral.
Risk associated with developer lending

The risk in developer finance is a function of developer quality and the time that financing is done. NBFCs catering to this
segment have a significant loan book in land financing and pre-approval stage financing which are considered riskier delay in
approval can lead to borrowers defaulting on loans.
The portfolio is relatively unseasoned

Given the high growth in recent years, the portfolio is also relatively unseasoned.
Managing risk is critical in the business

NBFCs mitigate the risk in high ticket size loans by adopting stringent structuring of financial product offered and putting in
place adequate covenants. Following are the risk mitigates adopted by financiers:
1. Selection of clients
Approval process involves reference checks, financial due diligence of the company. Micro market analysis for the
geography where potential clients located is also done.
For a leading financiers in the segment approval ratio ranges between ~20-30%. This reflects the diligence adhered
to in approving a loan
Leading financiers on construction financing work in top cities (~10) with few leading developers only
Most of the construction financing goes for residential developments
For a leading financier ~79% book is against residential projects
2. Structuring as per the cash flows of the client
Financiers have to estimate the cash flows at the time of underwriting loans
Based on present value of projected cash flows, financiers determines loan amount to ensure that they have
adequate collateral at any point of time during the tenure of loans
Repayment schedule is based on cash flow availability and achievement of predetermined EBITDA growth/margin
level
3. Strong collateral cover required by financiers

All cash flow are escrowed
For a leading financier ~85% book is cash flow backed
Cross collaterisation with personal assets of the promoter is done
Minimum security cover is 1.5 to 2 times of loan amount
4. Setting of maximum limit for exposure to a single borrower
Financiers sometimes have a maximum limit for exposure to a single borrower
For a leading financiers in developer finance maximum single borrower exposure limit is of Rs 300 Cr
5. Stringent, regular monitoring of projects
Stringent risk monitoring process is adhered to with tracking of early warning signals across all projects
Projects are placed in multiple buckets based on the potential risks and then actions taken are monitored
6. Selling of loans originated by financiers
Financiers sometimes also sell their loans to other financiers to mitigate the risks taken on their balance sheet.
7. Aggressive provisioning
On account of high volatility in the business some financiers have a policy of maintaining 2% provision on standard assets as
against the regulatory requirement of 0.4%. So at any point of time they remain adequately provided for bad loans.
not seen any real loss, but still has earmarked some accounts as NPAs and provided for those
Higher yield on account of structuring of loans as per the borrowers cash flow
availability
The ticket size of loans vary from Rs 50-500 crore. Some NBFCs take collateral cover as high as three times depending on the
structure of the loan. Loan to value is typically 50-60% in order to alleviate the risks of high ticket size loans.
On an average, it takes 45-60 days for a NBFC to disburse a large ticket loan. Average loan tenure is 36 months while some
NBFCs offer loans up to five years. Interest rates charged generally vary between 11-19%, with the average rate being in the
range of 12-15%. Key considerations influencing the interest rate include: the promoters background, financial health, payment
structure and collateral offered.
High reliance on direct sales team (DST) to source large-ticket size deals
Business is generally sourced through the in-house sales team which constitutes 90-95% of overall sourcing
Sourcing mix for NBFCs

Wholesale finance players diversifying into SME and retail segments to bring
granularity to their book
Wholesale finance is a business which is largely concentrated in top 10 cities. All the leading financiers are present in these
markets and aggressively targeting customers, therefore resulting in margin pressure. For growth these financiers have started
to diversify into SME, LAP and individual housing.
For example
A leading player moving to retail housing segment and exposure to hospitality

Another financier increasing focus on retail (consumer durable loans) and SME
One of the financiers (Tata Capital) is expected to increase focus on SME lending and channel financing (mainly to SME
and mid corporates) to dealers, vendors of its group companies
66.0 Microfinance
Microfinance and micro-credit: Grounds and limits
The term microfinance refers to small-scale financial services, both credit and savings, offered to eligible borrowers (annual
income bracket of up to Rs 100,000 for rural households and up to Rs 160,000 for urban and semi-urban households) in rural,
semi-urban, and urban areas. It includes a host of services such as savings account, insurance and micro-credit.
Microfinancing aims to help the under-privileged in undertaking economic activity, smoothening consumption and mitigating
vulnerability to income shocks (in times of illness and natural disasters), thereby increasing their savings and making them self-
empowered.
Microcredit is the most common product offering of the microfinance industry. It refers to loans of very small amounts to
borrowers who typically lack collateral, steady employment and any verifiable credit history. Microfinance in India is
synonymous with microcredit; this is because savings, thrift, and micro-insurance constitute a miniscule segment of this space.
Priority sector lending - primary tool for providing credit to the poor
Initially, the extent of bank lending to "priority" sectors was not stipulated. (The definition of 'priority sector' was formalised in
1972, based on a report submitted by Informal Study Group on Statistics, relating to advances to priority sectors, constituted by
RBI in May 1971). The requirement was set at 33.3% in 1979 and was raised to 40% in 1985, which is the level at which it
remains till date.
Targets and sub-targets for banks were further classified under the priority sector; these have also undergone revisions at
intervals. As per the latest revision, medium enterprises, social infrastructure and renewable energy will now form part of
priority sector, in addition to the existing categories. Also, non-achievement of priority sector targets will be assessed on
quarterly average basis at the end of the respective year from 2016-17 onwards, instead of on an annual basis. As per RBI,
these sub-divisions include:
Agriculture: For all scheduled commercial banks, 18% of adjusted net bank credit (ANBC) or credit equivalent amount of
off-balance sheet exposure, whichever is higher, is to be extended for agriculture purpose; within the 18% target for
agriculture, a target of 8% of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher, is
prescribed for small and marginal farmers. Foreign banks with 20 branches and above have to achieve the agriculture
target within a maximum period of five years, starting from April 1, 2013 and ending on March 31, 2018 as per the action
plans submitted by them and approved by RBI. The sub-targets for small and marginal farmers would be made applicable
post 2018 after a review in 2017.
Social infrastructure: Bank loans will be given up to a limit of Rs 50 million per borrower, for building social
infrastructure for activities, namely schools, healthcare facilities, drinking water facilities and sanitation facilities including
construction/ refurbishment of household toilets and household-level water improvements in Tier II to Tier VI centres.
Bank credit to MFIs, extended for on-lending to individuals and also to members of SHGs/JLGs for water and sanitation
facilities, will be eligible for categorisation as priority sector under social infrastructure
Renewable energy: Bank loans up to a limit of Rs 15 crore will be given to borrowers for purposes such as solar-based
power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy-
based public utilities, namely, street lighting systems, and remote village electrification. For individual households, the
loan limit will be Rs 10 lakh per borrower
Micro credit: 7.5% of ANBC or credit equivalent amount of off-balance sheet exposure for all scheduled commercial
banks should be given in the form of micro-credit. The sub-target for micro-enterprises for foreign banks with 20 branches
and above would be made applicable post 2018 after a review in 2017.
Advances to weaker sections: 10% of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is
higher, needs to be extended to weaker sections. Foreign banks with 20 branches and above have to achieve the weaker
sections target within a maximum period of five years, starting from April 1, 2013 and ending on March 31, 2018 as per
the action plans submitted by them and approved by RBI.
Education loans: Education loans include loans and advances granted to individuals, only for educational purposes
including vocational courses, up to Rs 1 million. These loans and advances will be considered as eligible for priority
sector
Introduction to microfinance institutions
NBFC-MFIs (including SFBs) are the major players in microfinance space in India. They are defined as non-deposit taking non-
banking finance companies (other than a company licensed under Section 25 of the Indian Companies Act, 1956) with
minimum net owned funds of Rs 50 million (for NBFC-MFIs registered in the north-eastern region of the country, it is Rs 20
million) and having not less than 85% of net assets as qualifying assets. Qualifying assets for NBFC-MFIs mean non-collateral
loans given to eligible borrowers. Other players who extend microfinance services, in addition to their core businesses, include
banks and insurance companies, agricultural and dairy co-operatives, corporate organisations such as fertiliser companies and
handloom houses and the postal network. Additionally, there are specialised lenders called apex MFIs that are wholesale
organisations which channel funding (grants, loans, guarantees) to multiple MFIs in a single country or region. They may also
provide capacity-building or technical support to MFIs.
MFIs in India are less than two decades old. They have seen a spurt in growth and penetration only over past six years post
the 2010 Andhra Pradesh crisis (refer: Historical growth for more details on the Andhra Pradesh crisis). The post-crisis period
was one of consolidation and improvement in funding environment leading to current phase of tighter regulation, higher
emphasis on responsible finance practices and expectation of a more stable growth trajectory. GLP of MFIs in India has grown
more than five times since then. In India, as per MFIN data for 2016-17, NBFCMFIs, including SFBs, have a footprint in 32
states and union territories, and serve as many as 39 million clients. They have a total loan portfolio of Rs 684 billion as of
March 2017. As per Sa dhan Report of 2015-16, NBFC-MFIs including SFBs covered 588 districts. Expansion into additional
services such as pension and insurance, and government intervention with schemes such as National Pension Scheme and
Prime Ministers Jan Dhan Yojana, along with revised regulatory guidelines to expand the eligible target population, have driven
this change in environment and approach.
Business models
For-profit MFIs dominate industry in India
MFIs in India can be broadly classified into for-profit and not-for-profit MFIs. Further, after RBI released guidelines for MFIs in
2011, for-profit MFIs were to function as microfinance non-banking finance companies (NBFC) while not-for-profit institutions
could operate through trusts or Section 25 companies. NBFC-MFIs dominate the Indian microfinance industry.
Break-up of loans outstanding for MFIs, classified based on their legal structure FY19
Note: Data includes figures for NBFC-MFIs, NBFCs and SFBs which have been considered as part of the For-profit MFIs
Source: Bharat Microfinance Report, CRISIL Research

MFIs can also be classified on the basis of their operating structure, depending on whether they lend to joint liability groups
(JLG), also known as the Grameen model, or self-help groups (SHG).
Under the JLG lending model, the primary task is to identify a prospective village, based on parameters such as total
population, total income, and population of poor individuals. Subsequently, potential members (usually women) are identified,
based on factors such as total household income and number of members in the household. These candidates are then
organised into groups of 5-7 members each and 3-5 such groups come together to form a centre; the amount is lent to an
individual borrower. In the event that the individual borrower defaults on payment, the concept of social collateral comes into
play, and the other group members repay the loan amount due. In case of a default, the group is blacklisted and deemed
ineligible to receive further loans from any MFI. This model ensures that the individual borrower is subject to constant peer
pressure that urges him/her to make timely repayments. In the JLG model, at least 90% of group members need to be present
during loan disbursal.
A brief description of key participants in the micro finance lending business is as follows:
Banks-SHGs refers to banks which provide microcredit under the Self Help Group linkage programme
Banks (direct and indirect through business correspondents (BCs)) include portfolios for direct and indirect lending
(through BCs) by banks; private banks are key constituents here
NBFC-MFIs include MFIs exclusively focused on the microfinance business and accordingly registered as NBFC-MFIs
with the RBI. Major players in this category include Bharat Financial Inclusion Ltd, Satin Creditcare Network Ltd, and
CreditAccess Grameen Ltd (formerly known as Grameen Koota Financial Services), Spandana Sphooty Financial Ltd,
Annapurna Microfinance Private Ltd, and Arohan Financial Services Private Ltd.
SFBs: This category includes eight players (ESAF Small Finance Bank, Equitas Small Finance Bank, Fincare Small
Finance Bank, Jana Small Finance Bank, North East Small Finance Bank, Suryoday Small Finance Bank, Ujjivan Small
Finance Bank and Utkarsh Small Finance Bank), which were formerly NBFC-MFIs but have now been converted into or
are becoming SFBs.
NBFCs include companies such as ASA, Fullerton, L&T Finance, Reliance Commercial Finance Ltd and Sarvodaya
Nano, each of which has a microcredit lending business, in addition to other lending businesses.
Non-profit MFIs refer to those registered as not for profit organisations, such as Cashpor.
Flowchart - Lending mechanism via different MFI operating models

An SHG is a financial intermediary, formed by 15-20 local members (mostly women). These members contribute small
amounts on a regular basis for few months to build the base capital in the group, and subsequently commence lending
activities. Once a credit history is in place, the SHG gets linked to a bank and becomes a channel for microfinance.
The SHG lending model differs from JLG in the following ways
Members are trained to calculate interest rates for lending within the group and maintain books of accounts
The loan is disbursed to the group, after which, members decide the method of distribution and interest rates
The SHG needs to have a minimum saving and borrowing history of six months to be eligible for a loan
In comparison, the JLG model does not necessitate a minimum duration for the group's existence and credit history, resulting in
a shorter turnaround time for disbursements. Hence, for-profit NBFC MFIs prefer the JLG model for lending. On the other hand,
not-for-profit MFIs generally lend to SHGs.
Individual micro-lending
Individual micro lending by NBFC-MFIs is basically to tap new markets and improve reach by serving the underserved
customer segment with better margins in overall lending. As of now, individual lending is a fresh concept for MFIs and there is
no proper model available with them to lend in this segment in a planned way.
However, many MFIs have started targeting such customers with specific needs for their various ventures. The portfolio for
individual lending varies from 10-15% of total outstanding loans, for most MFIs. As per RBI guidelines, MFIs can charge higher
rate of interest on individual loans, which can improve their margins; the rate of interest on individual loans may exceed 26%,
but the maximum variance permitted for individual loans between the minimum and maximum interest rate cannot exceed 4%.
The average interest paid on borrowings and charged by the MFI is to be calculated on average monthly balances of
outstanding borrowings and loan portfolio, respectively.
Currently, most MFIs give individual loans between Rs 10,000 and Rs 15,000. However, some large NBFCs also give big ticket
size loans, even in excess of Rs 50,000 for special purposes such as micro-enterprises, housing and education.
Regulations
Andhra crisis and post Andhra crisis developments
In Indias microfinance history, 2010 was a turbulent year. Allegation of suicides due to unethical means of loan recovery,
charging of higher rate of interest by MFIs, and over-indebtedness in Andhra Pradesh resulted in the enactment of Andhra
Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010. The objective of the Act was to protect poor
borrowers from MFIs who were allegedly responsible for suicides in Andhra Pradesh in 2010 due to coercive recovery
practices.
Provisions of the Act related to recovery of loans hampered the recovery rate, and caused it to fall from 99% to 10%.
Uncertainty and risk made banks reluctant to give loans to MFIs. Liquidity crunch affected the client base, profitability and
sustainability of MFIs. The crisis affected the portfolio quality of MFIs so badly that it became the worst performer on a global
platform.
Microfinance sector governed by RBI guidelines
MFIs were operating largely unregulated till 2010, when the Andhra Pradesh (AP) Ordinance came into effect. This ordinance
addressed issues such as alleged coercive recovery practices and absence of a social objective among MFIs to help the poor.
Post the ordinance, AP saw a sharp decline in MFI activity. In 2011, RBI released guidelines that defined NBFC-MFIs and
provided an operating and regulatory framework for MFIs in India. Going forward, the draft bill on microfinance is likely to
provide clarity on certain regulatory aspects.
RBI guidelines issued in December 2011
In November 2010, RBI set up a sub-committee under the chairmanship of Mr Y H Malegam to address issues concerning the
domestic microfinance industry. This was in light of heightened perceived risk towards the sector, after the AP ordinance was
enacted. Based on the committee's recommendations, the NBFC-MFI directions (2011) issued by the RBI came into effect in
December 2011. The RBI regularly made modifications in these guidelines whenever the need arises.
The guidelines defined an NBFC MFI as "a non-deposit-taking NBFC with parameters shown below.
NBFC-MFIs regulation guidelines

*For NBFC-MFIs registered in north-eastern region of the country, minimum net owned fund (NOF) requirement shall stand at
Rs 20 million.** Net assets are defined as total assets other than cash and bank balances and money market instruments. ***
Refer to the table for Qualifying Asset.
Qualifying asset
The guidelines defined an NBFC MFI as "a non-deposit-taking NBFC with minimum net owned funds of Rs 50 million (Rs 20
million in case of MFIs in the north-eastern region) and not less than 85% of its net assets in the nature of qualifying assets. As
per the latest guidelines, a 'qualifying asset' refers to a loan satisfying the following criteria:
Loan must be disbursed by an NBFC-MFI to a borrower in rural India with household annual income not exceeding Rs
100,000 (changed from Rs 60,000) or a borrower living in an urban or a semi-urban region, with household income not
more than Rs 160,000 (changed from Rs 120,000).
Loan amount does not exceed Rs 60,000 in the first cycle and Rs 100,000 in subsequent cycles which is changed from
Rs 35,000 in the first cycle and Rs 50,000 in subsequent cycles as per the earlier guidelines.
Total indebtedness of the borrower does not exceed Rs 100,000 (changed from Rs 50,000) provided that loan, if any
availed of towards meeting education and medical expenses, shall be excluded while arriving at the total indebtedness of
a borrower.
The loan must be extended without collateral. Maximum of two MFIs can lend to a customer.
Tenure of the loan has to be at least 24 months for a loan amount exceeding Rs 30,000 (changed from Rs 15,000
earlier), where prepayment does not attract any penalty (as per RBI directive on November 26, 2015).
The aggregate amount of loans, given for income generation purposes, is not less than 50% (changed from 70%) of the
total loans disbursed by the entity.
The loan can be repaid through weekly, fortnightly or monthly installments at the borrower's discretion. The
guidelines also provided an operating framework for MFIs:
Registration was made mandatory for NBFC-MFIs who comply with net-owned funds requirement
An NBFC that does not qualify as an NBFC-MFI shall not extend loans to the microfinance sector, exceeding 10%, in
aggregate, of its total assets.
NBFC-MFI shall not collect any security deposit/ margin from borrowers.
Entities have to maintain a minimum capital adequacy ratio (CAR) of 15%.
Aggregate loan provision maintained at any point of time shall not be less than the higher value between the following
three parameters:
1. 1% of outstanding loan portfolio, or

2. 50% of aggregate loan installments overdue for more than 90 days, but less than 180 days, or
3. 100% of aggregate loan installments overdue for 180 days or more.
Margin cap imposed at 10% for large MFIs (loan portfolios exceeding Rs 1 billion) and 12% for small MFIs (loan portfolios
below Rs 1 billion)
Transparency in interest rates charged
Maximum variance between minimum and maximum interest rates for individual loans capped at 4%
Processing charges to not exceed 1% of gross loan amount
No penalty to be charged on delayed payments
Restrictions on multiple-lending and over-borrowing to be imposed
Methods of recovery to be strictly non-coercive
Every NBFC-MFI has to be the member of one credit information company (CIC) and furnish timely and accurate data to
the CICs.
With effect from April 1, 2014, the interest rate charged by an NBFC-MFI to borrowers will be lower of the following:
The cost of funds plus 10% for large MFIs (size of Rs 100 crore and above) and cost of funds plus 12% for others (size
less than Rs 100 crore), or
The average base rate (as advised by RBI) of the five largest commercial banks by assets multiplied by 2.75
Farm-loan waiver in FY17
Four large states Uttar Pradesh, Maharashtra, Karnataka, and Punjab announced farm-loan waivers with varying
coverage in FY17.
These debt waivers impacted collections initially, but the efforts put in by MFIs to educate borrowers about the
applicability of the scheme led to a gradual pick-up in loan collection.
The government and industry associations helped the players by making related announcements through media to
educate borrowers. Thus, the collection improved after March 2017.
Other than these farm loan waivers, Chhattisgarh chief minister Raman Singh waived the interest of loans taken by
farmers in drought-affected regions of the state in 2015.
The government also converted the short-term loans for kharif season 2015 into medium-term loans.
Note: The number of operational holdings assumed as a proxy for the number of registered farmers. *Reported by state governments in press statements
Source: National Sample Survey Office (NSSOs) situation assessment survey of agricultural households (2013), newspaper reports, CRISIL Research
Regulatory clarity by RBI rekindles investor interest

Guidelines issued by RBI following the AP ordinance led to an improvement in MFI operations. A new category of NBFCs,
NBFC-MFIs, was created along with a clear framework in terms of target borrower group, lending norms, collection procedures
and amount of capital to be maintained by these players, to carry out operations in the country. Involvement of credit bureaus
also helped improve asset quality in the sector.
The microfinance industry in India has gained a lot of investor attention over the past half-decade with the top players posing
high returns and sustainable growth numbers. Resultantly, many NBFCs have been launched in the space with support from
private equity players, venture capitalists as well as banks themselves.
Credit bureaus and their role in microfinance space

Credit bureaus or credit information companies (CICs) collect complete MFI information in their databases, except for lending
information pertaining to SHGs. As per RBI, every NBFC-MFI has to be a member of at least one credit bureau established
under the CIC Regulation Act, 2005.
The presence of a number of credit bureaus ensures that MFIs have access to more data on their borrowers to make informed
lending decisions in the long run. As per current norms, a borrower cannot avail of a loan from a MFI if there are already two
NBFC-MFI loans live. This is where the role of credit bureau is critical, as it is able to provide information on two levels, viz.,
number of credit lines that a borrower is already availing of, as well as their previous credit history in terms of repayment track
record, defaults, etc.
Role of MFIN
The Microfinance Institutions Network (MFIN) was officially recognised as a self-regulatory organisation (SRO) for NBFC
microfinance institutions in India in June 2014. As an SRO, MFIN has been authorised by RBI to exercise control and
regulation on its behalf, in ensuring compliance to regulatory prescriptions and the industry code of conduct. With this, MFIN
became the first network to attain such recognition not only in India, but also in Asia and perhaps in the world. MFINs role as
SRO also includes research and training responsibilities and submission of MFI financials to RBI.
MFINs current membership consists of more than 50 leading NBFCMFIs in the country which, in aggregate, constitute over
90% of Indias microfinance industry in terms of client outreach and gross loan portfolio.
Cross-selling by MFIs
MFIs have built a large distribution network in urban and rural India. Now these MFIs are leveraging this network to distribute
financial and non-financial products of other institutions to members at a cost lower than competition. Their network also allows
such distributors to access a segment of the market to which many do not otherwise have access. While these MFIs continue
to focus on their core business of providing micro-credit services, they seek to diversify into other businesses by scaling-up
certain pilot projects involving fee-based services and secured lending, and will gradually convert them into separate business
verticals or operate them through subsidiaries. The objective of MFIs in these other businesses is to focus on lending that will
allow them to maintain repayment rates, increase member loyalty and also provide economic benefits to their members and
families. Such other products and services offer higher operating margins as compared to micro-credit under the new
regulatory framework and also helps MFIs increase their overall return on assets (RoA). Some of the existing initiatives in
relation to financial products and services other than micro-credit include providing:
Loans to members for purchase of mobile handsets and solar lamps in association with original equipment manufacturers
Secured loans to members against gold as collateral
Loans to members to facilitate purchase of sewing machines, solar lanterns, bio-mass stoves, etc.
Product financing
Microfinance companies lend for both consumption as well as productive purposes. The proportion of people in our country
living below poverty line (BPL) is huge, especially in the rural areas. These people usually use loans from MFIs for their
consumption needs and emergency requirements instead of their livelihood. Hence, it being difficult for such people to repay
their loans on time, they remain trapped in a debt cycle for the rest of their life. In 2011, RBI regulations stipulated that a
minimum of 70% of MFI loans were to be deployed for income generating activities. Agriculture and trading are major sub-
sectors where income generation loans are deployed. Non-income generation loans are used for consumption, housing,
education, water and sanitation, health etc.
As per RBIs latest regulation, a part (i.e., maximum of 50%) of the aggregate amount of loans may be extended for other
purposes such as housing repairs, education, medical and other emergencies. However, aggregate amount of loans given to a
borrower for income generation should constitute at least 50% of the total loans from the NBFC-MFI.
MFIs maximum exposure for agricultural activities, followed by trading and services activities (FY19)
The product-wise exposure of MFIs shows that most of the share of the total loan portfolio is in non-agri activities that are a
part of income generation loans, and which include trading and manufacturing activities. However, the share of agricultural-
based borrowing has increased significantly and now accounts for nearly 50% of the overall borrowings in FY18.
Demand drivers
Huge potential market, sustainable model - growth drivers for MFIs
Given the sheer size of the Indian population and considering that a large section still lacks access to formal banking services,
driving financial inclusion has always been a key priority for the government. The banking system and 'priority sector' lending
have been the most explored channels to bring majority of the population under the ambit of formal credit institutions.
India is on the threshold of a high-growth trajectory, hence financial inclusion is imperative for sustaining equitable growth. In
fact, there is nothing unique about the phenomenon - financial access strongly underpins economic opportunity. In India, the
major reasons for financial exclusion are poverty and low income, financial illiteracy, high transaction cost, and lack of
infrastructure, primarily IT infrastructure. Consequently, a significant proportion of the population still does not have access to
formal banking facilities.
The global average of adult population with an account (at a bank, financial institution or with mobile money providers) is about
62%. India is far behind at about 53%. However, its average is above that of South Asia, which is relatively low at about 46%
due to poor financial inclusion, especially in some of Indias neighbours. As per the global Findex database (2014), 21% of the
worlds unbanked adults are from India, constituting almost 420 million unbanked adults. This is the highest in the world, much
higher than Chinas 240 million unbanked adults, considering the total global unbanked population as 2 billion.
Financial inclusion is a comprehensive exercise that constitutes several products and services, such as provision bank
accounts, insurance facilities, payment and remittance mechanisms, financial counselling, and most crucially, affordable credit.
The government undertook several initiatives, which were orchestrated by NABARD and executed through entities such as
regional rural banks, cooperatives and commercial banks. During the late 1970s, these lending institutions achieved significant
reach and increasing number of individuals did avail of credit facilities. However, major delinquencies in repayment severely
impaired the financial health of the entities. Furthermore, despite the rapid expansion in the scale of the institutions, several
households continued to face difficulties in accessing credit facilities.
Within the large suite of products and services under financial inclusion, microfinance institutions have a major role to play in
the provision of credit. The sheer size of the market (in terms of financially-excluded households), a business model that offers
sustainable credit to the poor at affordable rates and a repayment cycle spread over a longer duration, have been key growth
drivers for MFIs operating in India.
Group lending model helps MFIs widen reach to low-income households

Even as banks have been the traditional source of funds, constraints in the form of varying income levels, absence of collateral
and significant fixed operational cost in proportion to small-ticket loans have limited their geographical and demographic reach.
In a bid to effectively tackle issues faced by conventional bank lending models, MFIs adopted an alternative operating
mechanism in the form of group lending models, such as JLGs and SHGs.
These models are based on certain common principles, such as identifying individuals with similar credit requirements and
using peer pressure to curb delinquencies. Under JLG, the amount is lent to individuals, who subsequently repay the amount
directly to the lender. Under the SHG model, funds are lent to groups, which are trained to maintain financial records and are
responsible for collections required to repay loan amounts to lenders. If a member defaults within a group, other members can
pool in funds to ensure timely repayment and prevent the group from getting blacklisted.
Furthermore, in comparison with banks, MFIs are able to charge higher interest rates to cover the financing and operational
costs, and yet maintain sustainable profit margin. In a nutshell, MFIs have been able to provide a viable alternative mechanism
to drive the financial inclusion agenda.
Key success factors
Geographically diversified portfolio helps MFIs mitigate risks,
Given that fixed operating costs are relatively higher, considering the value of the loan amount, scale of operations is a crucial
factor for MFIs. Firstly, a large, well-diversified portfolio in different geographies enables players to mitigate risks associated
with a concentrated portfolio. Apart from this, having a wider scale of operations helps them cut down on operating expenses
as a percentage of outstanding loans.
Technology to be major enabler for MFIs to monitor portfolios and maintain asset quality
Apart from the cost benefits arising from automated documentation processes, having a robust back-end technological set up
enables players to effectively monitor their loan portfolio. Technology is also likely to play a major role in preventing internal
accounting lapses and facilitate a better monitoring mechanism for collections.
Credit risk mitigation by credit bureaus
Credit bureaus such as Equifax and Highmark are engaged in collecting data from several MFIs and building a comprehensive
database that captures the credit history of borrowers. These databases are updated on a weekly basis. But there is lack of
availability of data from banks on self-help groups (SHGs) borrowers. The integration of the MFI credit bureau and CIBIL
databases will further strengthen credit assessment of borrowers.
Managing local stakeholders - key determinant of MFIs' success
Considering the sensitive nature of operations, MFIs must ensure that their activities do not antagonise local leaders and
government authorities. Apart from adherence to legal and regulatory guidelines, maintaining amicable relations with key
stakeholders in their respective geographies is a key determinant of MFIs' success.
Key risks for MFI industry
Exposure to low-income households raises MFIs' vulnerability to political intervention
MFIs are exposed to a unique set of risks and challenges, owing to their business model and the nature of their customer base.
MFIs typically lend to low-income households, living in rural and semi-urban areas, which are extremely sensitive to political
intervention. These households do not have financial savings to rely upon in case of personal emergencies and medical crises,
making them vulnerable to volatility in their cash flows. Exposure to this section of society makes MFIs vulnerable to inherent
political actions, in case their activities are viewed to be detrimental to social interests. The impact of the Andhra Pradesh
Ordinance, which aimed to address the alleged coercive collection practices used by MFIs operating in the state, reflects this
risk. RBI guidelines have provided a uniform operating framework for NBFC MFIs across the country. However, in addition to
complying with these guidelines, MFIs also have to ensure that their practices align with 'accepted' norms as per the respective
state and local governments.
Natural calamities could impair borrowers' repayment ability
Occurrence of natural calamities, such as droughts and floods, pose a major threat to MFIs. As agriculture is the source of
livelihood for a majority of the rural population, either directly or indirectly, natural calamities could adversely impair the
repayment capabilities of these borrowers.
Cash-in-transit losses
Cash is the most widely used channel for a majority of transactions between MFIs and borrowers. This leads to the risk of
borrowers losing cash in transit (either due to fraud or theft by third parties) at the time of repayment, a key concern for MFIs.
While some players have opted to transfer this risk to borrowers, others have sought cash-in-transit insurance.
Inadequate monitoring mechanisms pose risk for MFIs
Given the nature of their business, MFIs require robust monitoring mechanisms, both prior to lending and later, to ensure timely
collections. Simultaneously, they also need to control operational expenses, given the small ticket size of loans.
MFIs with concentrated portfolios face local political and event-related risks
The risk of adverse local government policy is magnified for players with concentrated portfolios in certain geographies. Lack of
geographical diversification further exposes these players to event risk, in the form of droughts, floods and other natural
calamities, which could severely impair the repayment capacity of borrowers and groups in the affected regions. Nevertheless,
it is worthwhile mentioning here that several smaller MFIs with an established local presence in certain districts or states have
enjoyed strong collections over a considerable duration of time.
Players converting into SFBs to face risk of not meeting stringent regulatory norms, as well as
expected decline in profitability and market share
Players turning into small finance banks (SFBs) will face major challenges in terms of meeting the stringent regulatory norms
applicable to banks. Most players who have won SFB licences have high foreign holdings but have to raise a high amount of
domestic equity to reach the minimum domestic holding requirement in order to comply with norms.
Also, players with SFB licences have to expand their overall reach by opening up new branches, hiring new staff and
implementing technology to streamline the overall process and any additional work pressure. Hence, the conversion into a SFB
will increase their overall operating cost and have a negative effect on their profitability. As players converting into banks will
have to focus on liability side products as well to build a portfolio, their business growth in the microfinance sector may be
impacted; in turn, other NBFC-MFI players may have a chance to take advantage of the situation to gain market share.
Difficulties in securing funding
The Andhra Pradesh (AP) Ordinance of 2010 sharply accentuated the perceived risk towards the sector, due to which bank
lending to MFIs declined sharply. After the ordinance came into effect, most players who had sizeable exposure to the AP
market were forced to write-off significant portions of their portfolios. In 2011, the release of RBI guidelines brought the
microfinance industry under a stronger regulatory purview. This helped arrest the declining trend of bank finance to the sector
to a certain extent. Such events could make it difficult for MFI to secure funding immediately after the event.
Managing operating expenses - critical for MFIs
The RBI guidelines released in 2011 have regulated the maximum lending rates and have imposed a margin cap of 10-12% for
NBFC MFIs. Further, MFIs also need to ensure strong flow of disbursements and timely collections. However, amongst all the
key areas of concern, management of operating expenses remains the key to maintaining profitability levels.
67.0 Gold Finance
Gold loan - One of the most reliable credit sources for rural customers
People of all classes buy gold in the form of jewellery, gold coins and bars during good times or on auspicious occasions.
Sentimental value is associated with gold and people are very averse to the idea of selling their gold possessions. 65% of gold
is held by people in rural areas.
Gold loan has emerged as one of the most reliable credit sources
Rural residents and low-income groups are the major customers of gold loans, as gold is usually the only asset they
possess in some quantity. They also typically lack access to banking facilities.
They pledge their gold with local moneylenders or pawn brokers in times of need, or to tide over financial crises, such as
crop failure and medical exigencies.
High liquidity of gold makes it a readily acceptable collateral
Unlike microfinance institution loans, gold loans can be availed for just about any reason: medical expenses, education,
repair of household assets, etc.
Gold loans are typically small-ticket, issued for a short duration, convenient and provide instant credit. Though moneylenders
and pawn brokers understand the psyche of local borrowers and offer immediate liquidity without any documentation
formalities, customers are left vulnerable to exploitation, due to the absence of regulatory oversight. Such players also give
lower loan-to-value ratio compared with organised ones. As banks and non-banking finance companies (NBFCs) aggressively
moved in to seize this vast untapped market, they cornered a significant market share from unorganised lenders.
In India, gold plays a pivotal role in peoples social and economic lives. Besides, individuals are highly sentimental about gold,
as buying gold is considered auspicious. Possessing gold has always been a symbol of prosperity in India. However, as times
change, the yellow metal is also being viewed as an investment as its value appreciates over years and provides a hedge
against inflation. Gold is also considered an asset that can be liquidated easily or pledged to avail of funds in an emergency.
For low-income households, gold loan has emerged as one of the most reliable sources of credit. . Uncertainty in real estate
and equity markets also enhances attractiveness of gold as an investment option. Indias gold market accounts for ~10%
(22,000 tonne) of global gold stock.
Trend in demand and prices of gold in India
Source: World Gold Council
India meets most of its gold requirement through imports. Robust demand and high gold prices weigh heavily on the country's
current account deficit (CAD), especially at times when export growth decelerates. Hence, to curtail CAD, the government,
along with the Reserve Bank of India (RBI), took a number of steps in terms of raising import duty and restricting gold imports.
Since the beginning of 2013, the government has consistently hiked import duty from 4% to 6% in January 2013 to 8% in June
2013 and 10% in August 2013. The union budget announced in July 2019 proposed to hike import duty on gold to 12.5%.
Regulations and their impact on gold loan companies
Growth of specialised gold loan NBFCs could be broadly divided into three phases
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Reduction in cash disbursement limit to Rs 20,000 in May 2017 has affected the industry and the small ticket customers
equally as the average ticket size of gold loans is Rs 35,000-40,000. With imposition of the Goods and Services Tax (GST) on
jewellery, jewellery sales in cash have come down and the sector is shifting from unorganised small jewellers to organised
players. Regulatory changes have further strengthened and stabilised the industry.
Features of gold loan
A gold loan is financial assistance given by a bank or a financial institution against total gold pledged by the borrower. Gold
loans are generally availed of by people who need fast cash to fulfill sudden financial needs such as medical emergencies/
education or a start-up loan (in case of small and medium enterprises (SME) etc). However, today, a gold loan is also used as
an instrument to unlock economic value of the yellow metal which generally sits as an idle asset in individuals hands.
How does pledging gold benefit
How gold loan NBFCs compare with banks and moneylenders
Personal loan v/s gold loan
Typical gold loan disbursement process (NBFCs)


An NBFC is a company registered under the Companies Act, 1956, and is engaged in the business of loans and advances;
acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of
marketable nature; leasing; hire-purchase; insurance business; and chit business. An NBFC does not denote any institution
whose principal business is agricultural or industrial activity or sale/purchase/construction of immovable property.
NBFCs have been classified mainly on two parameters:
1. Kind of liabilities they access, i.e., deposit and non-deposit accepting. Non-deposit-taking NBFCs are further categorised
by their size into systemically important (NBFC-ND-SI) and other non-deposit-holding companies (NBFC-ND).
2. Kind of activity they conduct:
a. NBFC - Investment and Credit Company (NBFC - ICC)
b. Infrastructure finance company (IFC)
c. Systemically important core investment company (CIC-ND-SI)
d. Infrastructure debt fund (IDF)
e. Micro-finance institution (NBFC-MFI)
f. Factors (NBFC-Factors)
Gold loan companies are classified as NBFC-ICC.
Regulatory framework for gold loan NBFCs
Regulations presently applicable to non-deposit-taking NBFCs also apply to gold loan NBFCs. These are:
Requirements pertaining to capital adequacy

Gold loan NBFCs are required to have capital-to-risk weighted assets ratio of 15%. Tier-I capital requirement for gold loan
NBFCs is set at 12%.
Asset classification
Gold loan NBFCs shall, after taking into account the degree of well-defined credit weaknesses and extent of dependence on
collateral security for realisation, classify their loans and advances and any other forms of credit into the following classes:
1. Standard assets
3. Doubtful assets
4. Loss assets
Provisioning requirements
The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D is being increased to 0.40%. Compliance with the
revised norm will be phased:
NPA recognition norms
NBFCs were hitherto required by the Reserve Bank of India (RBI) to recognise non-performing assets (NPA) as loans in which
either interest or principal payments were outstanding for over 180 days. In November 2014, RBI revised its guidelines,
requiring NBFCs to adopt 90-day NPA recognition from March 2018, at par with banks.
Key growth drivers and risks
Key growth drivers
Organised players capturing market share from unorganised segment
Until a couple of decades ago, the market was entirely peopled by unorganised private players who would give loans against
gold at usurious interest rates. Though moneylenders and pawn brokers understand the psyche of local borrowers well and
offer immediate liquidity without formalities/ documentation, absence of regulatory oversight leaves customers vulnerable to
exploitation. However, this scenario changed with the entry of organised sector players such as banks and NBFCs. Organised
lenders (banks and NBFCs) tapped the vast potential market through aggressive focus, annexing substantial market share
from unorganised lenders.
Gold finance market significantly untapped
India has 10% of the worlds gold stock (largest gold stock of 22,000 tonnes) as per the World Gold Council. As per industry
sources, less than 3% of this stock has been used in the gold finance market, which presents huge scope for gold finance
companies.
Changing customer attitude
Shift in customer perceptions towards pledging gold will be the biggest success factor for gold loan companies in future.
Traditionally, in India, people are reluctant to pledge jewellery or ornaments for borrowing money. However, as more people
are now viewing gold as an important savings instrument that is also liquid, demand for gold loans will rise steadily.
Low penetration in north and west and broadening customer base
Approximately, 61% of the gold loan market is concentrated in Karnataka, Andhra Pradesh, Kerala and Tamil Nadu. However,
the vastly underpenetrated northern and western markets provide huge expansion potential for gold loan companies. Also, a
shift from the predominant customer base (farmer households, low and middle-income households) to businessmen (who avail
of gold loans to meet regular working capital requirements) offers a broader customer base in future.
Key risks
Fluctuation in gold prices
Volatility in gold prices tends to affect lenders as gold is an underlying asset in this business. Rising prices of gold tend to boost
both demand and supply of gold loans, as households holding gold are encouraged to seek credit by pledging gold. Moreover,
banks and NBFCs are encouraged to lend more against gold as it is deemed to be a safe collateral. On the other hand, falling
gold prices discourage customers from availing gold loans as the amount received against the gold get reduced. A sharp
decline in gold prices increases the original LTV. The declining trend in gold prices can increase defaults as instances of loan
outstanding exceeding the value of pledged security rise. Recovering the value of pledged gold (of a default account) through
auction takes time and the lender is vulnerable to price risk over this period. Since the loan tenure is short, any increase in
short-term volatility of gold prices could impact profitability of gold loan companies.
Change in regulatory environment
The regulatory environment plays a crucial role in performance of gold loan companies. Given the sectors high exposure to the
low-income category, specific regulatory actions (similar to those seen in the case of microfinance institutions) can disrupt the
market. Regulatory interventions between 2012 and 2014 such as capping LTV ratio, mandating issuance of high-value loans
only through cheques, and requiring prior RBI approval for opening branches in excess of 1,000 for NBFCs, negatively
impacted specialised gold loan NBFCs who lost ground to banks and the unorganised market. The interventions also had some
positive impact on the sector from a long-term perspective, in terms of strengthening its ability to withstand price risk, improved
customer care, and standardisation of processes related to valuation of security. Regulations issued in January 2014 for banks
and NBFCs, pertaining to LTV ceiling and standardisation of valuation of collateral, have created a level-playing field for
NBFCs vis--vis banks. Regulatory interventions compel players to reconsider their strategies.
Competition
Traditionally, banks were leaders in granting gold loans as it helped them meet stipulated priority sector lending targets.
However, seeing the enormous growth potential in the market, several NBFCs also became very active and have been
successful in competing with banks. NBFCs single-product focus enables them to develop strong appraisal and valuation
expertise which results in faster and better customer service. Specialised gold loan NBFCs have witnessed exceptional growth,
driven by aggressive branch expansion, heavy marketing spend and fast customer acquisition. Stability in gold prices over the
past couple of years has reduced delinquencies and improved spreads and margins. Restoration of regulation parity between
banks and NBFCs and exit of some non-specialised players has reduced competition intensity in gold loan finance, but with
small finance banks foraying in the segment, the competitive intensity could increase in the future.
Changing business dynamics
NBFCs placing more focus on delinking gold business from gold prices
Gold loan NBFCs used to give loans for up to one year. The bullet repayment method was used for loan repayment. As
gold prices fell, delinquencies rose, and NBFCs started incurring interest loss.
This led NBFCs to shorten their loan tenures to 3-9 months, and thereby delinked the gold business with volatility in
the market prices of gold.
Customers get gold loans at a lower interest rate for 3 months, and hence, also favour shorter tenure
NBFCs diversifying their business by offering complementary products
Over the years, the top two players in the industry have delved into newer territories in order to de-risk their businesses
from extreme volatility in the gold loan business domain
There has been significant movement in the synergistic domain such as microfinance, housing finance, and vehicle
finance domains by one of the major players in the space, with the overall gold loan business now accounting for
~75% of the overall pie for the player
The major reasons behind these diversification include the vision to provide new products to the existing retail
customer base, and to develop and leverage the brand equity developed by the players
Specialised gold loan NBFCs diversifying by offering complementary products

How an online gold loan works
Step 1: The customer enters the amount of loan required on the online portal
Step 2: The customer compares various plans for factors such as interest rate, rate per gram, monthly outgo, processing fees,
etc.
Step 3: Loan applicant must confirm the application so that it is processed at the nearest branch and the customer will be
informed about documents required for completing the KYC process.
Step 4: The customer is supposed to visit the nearest branch to get the gold valued, submit documents, and get the loan
processed (customers can also avail of doorstep pick-up of the jewellery if the NBFC/start-up offers that facility)
Step 5: The customer gets the amount of loan credited to his bank account immediately, or can get disbursement at the time
convenient to him by using mobile apps or online portals
68.0 Construction Equipment Finance
Construction equipment are used to execute infrastructure and industrial projects. Broadly, there are two categories of
construction equipment earth moving construction equipment (EME) and material handling construction equipment (MHE).
Types of construction equipment
Earth moving construction equipment (EME)

EME are used in the construction, mining, agriculture, waste management, logging and defence sectors. EME consists of a
basic machine or heavy vehicle equipped with tools to perform various functions, including preparation of the ground,
excavation, haulage of material, and dumping/laying material in a specified manner for infrastructure projects, and other
activities such as mining, etc. The types of earthmoving equipment include backhoe loaders, excavators, wheeled loaders,
dozers, skid steer loader and graders.
Share of different types of EME

Material handling construction equipment (MHE)
MHE are machines that enable the movement and storage of materials within a facility or at a site. MHE can be further
classified into unit load MHE and bulk MHE. Unit load MHEs such as forklifts, are usually used to handle materials that are
packed into a definite size. Bulk MHEs are used for transportation of materials that are in loose or in bulk form, such as iron
ores and cereals.
Growth in demand for MHE is linked to capital investment made in user industries such as power, ports, steel, cement and
coal, involving continuous movement of raw material.
MHE demand based on utilization by end-user industries
Structure of industry
Organised: The construction equipment industry (EME and MHE) is highly organised, with a few large players
dominating the industry. Some of the major players are JCB India, Bharat Earth Movers Ltd, Voltas, Escorts Construction
Equipment Ltd, Caterpillar India Pvt Ltd and Schwing Stetter.
High technology intensive: The construction equipment industry is technology intensive. This is one of the main
reasons for technical collaborations or joint ventures (JVs) between domestic manufacturers and global players. In return,
international companies gain access to local customers, distribution and services.
Entry of new players: About 6-7 years ago, manufacturers used to focus only on a few types of equipment, given their
limited manufacturing capacity. However, over the years, many new players have entered the industry, both on a
standalone basis and through JVs. Several global original equipment manufacturers (OEMs), having access to more
sophisticated technology and expertise, have entered the domestic industry through JVs with domestic manufacturers.
Global players entered the Indian market primarily because of increasing demand for equipment in India, driven by
increased investments for infrastructure and industrial development.
Fragmented end-users: Construction equipment are bought by both direct users and leasing companies. Leasing
companies, in turn, lease the equipment to construction companies, contractors and sub-contractors. The end-users of
construction equipment are fragmented.
Delays in projects execution slowed down industry growth over the last two years
There are different types of construction equipment, but, in value terms, the industry is dominated by the MHE segment. In
2016-17, the segment comprised about 53% of the construction equipment industry.
Trend in market size of construction equipment industry
E: Estimated
During 2011-12 and 2015-16, the industry declined by 5% y-o-y. The market revived in 2016-17 and the sales grew by 3%.
Equipment sales during these years fell owing to a slowdown in investments amid weak demand and delays in execution of
infrastructure projects owing to land acquisition and clearance issues. In the last two years, the government has taken policy
measure to resolve long-standing issues; additionally the governments strong focus on infrastructure growth is expected to
drive construction equipment growth.
Since 2015-16, however, due to economic upturn, and governments efforts to fast-track projects, the demand for construction
equipment saw an upturn as it increased from Rs. 470 billion to Rs. 528 billion in 2017-18.
Going forward, we expect the demand for EMEs to improve and reach Rs. 299 billion in 2018-19 and further to Rs. 343 billion
in 2019-20. On the other hand, demand for MHEs is expected to reduce to Rs. 278 billion in 2018-19 and to Rs. 255 billion in
2019-20 as decline in demand from the power sector leads to slowdown in the overall demand for MHEs.

A non-banking finance company (NBFC) provides loans and advances, acquires shares/stock/bonds/debentures/securities
issued by the government or a local authority or other securities of marketable nature; and is into hire-purchase, insurance and
chit fund businesses. However, an institution whose principal business is that of agriculture, industrial,
sale/purchase/construction of immovable property, cannot be an NBFC.
NBFCs have been classified on the basis of the kind of liabilities they access, i.e., deposit and non-deposit accepting; non-
deposit taking NBFCs, by their size, into systematically important and other non-deposit holding companies (NBFC-ND-SI and
NBFC-ND); and by the kind of activity the NBFCs conduct.
Asset financing company (AFC)

Investment company (IC)
Loan company (LC)
Infrastructure finance company (IFC)
Systemically important core investment company (CIC-ND-SI)
Micro finance institution (NBFC-MFI)
Factors (NBFC-Factors):
However, there is no separate classification for construction equipment financing companies. These are classified as AFC.
Regulatory framework for construction equipment financing NBFCs
The following regulations are applicable to non-deposit taking NBFCs. These regulations also apply to construction equipment
financing NBFCs:
I. Requirements as to capital adequacy
NBFCs are required to have a capital-to-risk weighted ratio of 15% with tier I capital of 10%.
The compliance to the revised Tier 1 capital will be phased as follows:

10% by end of March 2017
II. Asset classification
Equipment finance companies need to, after taking into account the degree of well-defined credit weaknesses and extent of
dependence on collateral security for realisation, classify their loans and advances and any other forms of credit into the
following classes:
1. Standard assets
3. Doubtful assets
4. Loss assets
III. Provisioning requirements
The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D is being increased to 0.40%. The compliance to the
new norm will be phased in as given below:
0.30% by the end of March 2016

IV. NPA recognition norms
NBFCs were, hitherto, required by the Reserve Bank of India (RBI) to recognise NPAs as loans in which either interest or
principal payments were outstanding for over 180 days. In November 2014, RBI revised the guidelines, requiring NBFCs to
adopt a 90-day NPA recognition by March 2018, which is at par with banks. NBFCs would be required to progress to 150-day,
120-day and 90-day recognition by March 2016, March 2017 and March 2018, respectively.
Key success factors
Customer relationships
The construction equipment financing industry is highly dependent on client relationship. Therefore, customer relationship is
one of the major success factors in the industry. The importance is highlighted from the fact that financing schemes are often
customised depending upon client relationship.
Memorandum of understanding
Manufacturers (OEMs) and financiers enter into different types of memorandums of understanding (MoUs), which benefit both
the players. For equipment manufacturers (OEMs) the benefit would translate into increased sales of their equipment.
Financiers, in return, get access to potential clients as the MoUs are long term in nature and, hence, manufacturers direct end-
users to financiers they have a tie-up with.
Value-added services
Since players in the construction equipment financing industry depend substantially on customer relationship to generate
business, besides offering customised finance schemes, construction equipment finance players also offer various value-
added-services (VAS) to their customers. One major VAS offered by financiers is general insurance for the equipment that is
being financed. It is compulsory to buy insurance while purchasing construction equipment.
Therefore, offering insurance is beneficial for both, financier and customer, because the customer is able to save time by opting
for the insurance offered by the financier instead of going to another insurance company. Besides this, banks also offer VAS
such as bank guarantee, working capital facility, letter of credit, cash management system, life insurance to the applicant, etc.
Challenges for industry
Spend on industrial projects is expected to be lower
Spend on industrial projects is expected to be lower as companies dealing in metals, petrochemicals, and cement slow
expansion plans amid low utilisation levels and muted demand. The material handling equipment (MHE) industry has been
unable to contain the fallout of subdued investments in end-user sectors such as power, cement and steel. The MHE industry
has been plagued by weak demand from end-user industries since 2013-14. A gradual pick up in revenues is expected post
2017-18 only.
Clearance and land acquisition
Delays related to forest and environment clearance and delay as a result of land not being acquired escalate project costs,
discourage lenders to finance the projects, send negative signals to investors.
Managing cost of funds
NBFCs in the equipment financing space do not have access to low cost deposits, i.e., current and savings account deposits
like banks. Hence, cost of funds for NBFCs is always higher as compared to banks, and they also do not enjoy the flexibility to
transfer the increase in cost of funds to their customers. Therefore, managing their cost of funds is vital for NBFCs to be
competitive in this space.
Repossession and resale of assets

One of the major issues faced by NBFCs in the construction equipment financing space is the storage of repossessed
equipment from the loans that have turned NPAs (non-performing assets). Captive NBFCs do not face this risk, as they have
the support of their parent company, which is generally an equipment manufacturer. Along with storage of repossessed
equipment, resale is also one of the major concerns for construction equipment financing companies.
69.0 Auto Finance: Arman Financial Services Ltd
Arman Financial Services Limited Arman was incorporated as a private limited company, Arman Lease & Finance Pvt Ltd
(ALFPL), in November 1992, with its registered office in Ahmadabad (Gujarat). In December 1993, ALFPL was reconstituted as
a public limited company under the name of Arman Lease and Finance Ltd, and in August 1995 it came out with its public
issue; the companys name was changed to the current one in 2008. AFSL is a deposit-taking nonbanking financial company,
but does not mobilize public deposits. Arman offers finance for purchase of two-wheelers and three-wheelers, and personal
loans (micro loans) and micro finance services.
Shareholding Pattern as on June 2019
Portfolio Mix 2017-18
Profit and loss account

Balance Sheet

Profitability Ratio
Borrowing Mix

70.0 Auto Finance: Berar Finance Ltd
Berar Finance Limited Berar Finance is a deposit taking non-banking financial company based out of Nagpur, Maharashtra.
The company has been operating for more than two decades and is predominantly engaged in two wheeler financing. Berar
Finance primarily finances brands like Hero and Honda due to their better resale value. The company had a branch network of
38 branches as on March 31, 2018.
Credit Rating Information
Note: The rating is outstanding as on Sep 2018.
Portfolio Mix
State-wise Portfolio Mix
Key Financial Indicators

Balance sheet
Profitability Ratio
Borrowing Mix

71.0 Auto Finance: BMW India Financial Services Pvt. Ltd
BMW India Financial Services Private Limited BMWIFS is a wholly owned subsidiary of BMW International Investment B V,
which is a wholly owned subsidiary of BMW AG. BMWIFS, a non-deposit taking non-banking financial company (NBFC), began
operations in October 2010. It offers finance to customers and dealers of BMW India; it also offers finance for non-BMW
premium cars through the Alphera brand.
Note: The rating is outstanding as on Jan 2018.
Portfolio Mix
Note: Data for FY18 and FY19 is not available

Note: Data for FY19 is not available

Balance Sheet

Profitability Ratio
Borrowing Mix

72.0 Auto Finance: Bussan Auto Finance India Pvt. Ltd
Bussan Auto Finance India Private Limited
Bussan Auto Finance India Pvt. Ltd. (BAF India) is a nonbanking finance company. BAF India is a joint venture of Mitsui & Co.,
Ltd and Yamaha Co.,Ltd and established with a view to finance Yamaha Two Wheeler Vehicles across India.
Portfolio 2017
Source: Company Reports, CRISIL research

Balance Sheet

Profitability Ratio
Borrowing Mix

73.0 Auto Finance: Ceejay Finance Ltd
Ceejay Finance Limited Ceejay Finance Limited (CFL), incorporated in 1993 as Heritage Packaging Limited, is an Ahmedabad-
based deposit-taking NBFC (Asset Financing Company registered with RBI) that is primarily into the business of vehicle
financing. The name of the company was changed from Heritage Packaging Limited to Ceejay Finance Limited in August 2001.
The Company is a part of the C.J. Group that undertakes manufacturing and marketing of beedis, tobacco and tendu leaves
and is also into construction of Commercial and Residential Real Estate.
Source: BSE
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

74.0 Auto Finance: Daimler Financial Services India Pvt. Ltd
Daimler Financial Services India Private Limited Daimler Financial Services India Private Limited, a Chennai based company,
operates as a subsidiary of Daimler AG. The company was incorporated in 2010. Company was established to support the unit
sales of the Daimler Group and increase brand loyalty of customers and dealers.
Portfolio Mix (2017-18)
Note: The rating is outstanding as on Nov 2018.

Balance Sheet
Profitability Ratio
Borrowing Mix

75.0 Auto Finance: L&T Finance Ltd (Erstwhile Family Credit Ltd)
L&T Finance Limited (Erstwhile Family Credit Limited) L&T Family Credit Ltd. (FCL) was originally incorporated as Apeejay
Finance Group Ltd. in 1993. In September, 2006, Societe Generale Consumer Finance (SGCF), acquired 45% stake in the
company and gradually increased its stake to 100% by October 2007. Subsequently, the companys name was changed to
Family Credit Limited. In December 2012, L&T Finance Holding Limited (LTFHL) acquired 100% shareholding in FCL.
Companys registered office is in North 24 Pargana (West Bengal). FCL loan portfolio mainly comprises of two wheeler loans,
car loans, mid corporate loans and loan against shares.
Note: The rating is outstanding as on May 2019.

Balance Sheet
Profitability Ratio
Borrowing Mix

76.0 Auto Finance: Manba Finance Ltd
Manba Finance Limited Manba Finance Ltd. (MFL) is a Mumbai-based small-sized RBI registered NBFC, engaged in two-
wheeler (2W) financing in Mumbai. MFL started operations in 1996 and its business is concentrated in Mumbai for 2W
financing and in Ahmadabad for three-wheeler (3W) financing. In FY15 (refers to period April 1 to March 31), MFL stopped 3W
financing in Ahmadabad due to increase in competition intensity.
Portfolio Mix
Note: Data as on Dec-18 is available
Note: The rating is outstanding as on Apr 2019.
Profit and Loss account

Balance Sheet

Profitability Ratio
Borrowing Mix

77.0 Auto Finance: Muthoot Capital Services Ltd
Muthoot Capital Services Ltd
Established in 1994, Muthoot Capital Services Ltd. is one of India's Most Progressive Automobile Finance Companies. With an
aspiration to empower Indians and human ambition, It offers fund and non-fund based financial services to retail, corporate and
institutional customers through the wide network of branches of Muthoot Fincorp Ltd.
Muthoot Capital Services Ltd. promoted by the Muthoot Pappachan Group is a Non-Banking Finance Company (NBFC)
registered with the Reserve Bank of India and its equity shares listed in Bombay Stock Exchange (BSE) and National Stock
Exchange of India (NSE). Company's portfolio includes retail finance products such as Two Wheeler Loans, Used Car Loans
and Investment Product in the form of Fixed Deposits.
Shareholding Pattern as on June 2018,
Source: BSE
Note: The rating is outstanding as on Jul 2018.
Portfolio MIx 2018-19


Balance Sheet
Profitability Ratio
Borrowing Mix
78.0 Auto Finance: Sundaram Finance Ltd
Sundaram Finance Ltd Sundaram Finance Limited, a subsidiary of Sundaram Finance Group, was established in the year
1954. It is the financial services arm of the USD 5 billion Sundaram Finance Group. The company is registered with
the Reserve Bank of India(RBI) as a Systematically Important Deposit Accepting Non-Banking Financial Company. Sundaram
finance offers services like commercial finance, investment banking, consumer loans, private equity, treasury advisory, and
credit cards. It serves corporate, retail, and institutional customers through its Investment Arm.
Sundaram Finance Limited is a financial and investment service provider in India. It is based in Chennai and has more than
640 branches across the country. The company offers Vehicle loan, construction equipment loan, consumer loans, wealth
management, commercial finance, and infrastructure finance, among others.
Source: BSE
Portfolio Mix
Disbursement Mix
Region-wise Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

79.0 Auto Finance: Kamal AutoFinance Ltd
Kamal AutoFinance Ltd Kamal Auto Finance Limited is a deposit taking NBFC, and it was incorporated in 1994 and the
company is a part of Kamal & Company Group which has wide presence in the vehicle dealership business since
1936. Kamal Auto Finance Limited provides vehicle loans (2-wheeler, 3-wheeler and 4-wheelers) and micro finance loans to
customers in Rajasthan.
Note: The rating is outstanding as on Jan 2019.

Balance Sheet
Profitability Ratio
Borrowing Mix

80.0 Auto Finance: Khushbu Auto Finance Ltd
Khushbu Auto Finance Ltd. (Khushbu Auto Limited (AAL), the leading manufacturer of three wheeler automobiles which holds
significant stake in the Company.Atul) was incorporated in 1994 as a Private Limited Company in Gujarat. The Company was
subsequently converted into Public Limited (Closely Held) on March 26, 2003. The company is promoted by KAFL Auto
Finance Limited
Note: The rating is outstanding as on Oct 2018.
Balance Sheet
Profitability Ratio
Borrowing Mix

81.0 Auto Finance: S M L Finance Ltd
S M L Finance Limited SML finance started operations in the year 1980 in the state of Kerala. SML finance provides of auto
finance for two wheeler, three wheeler, four wheeler and commercial vehicles. As on March 2018 the company had 50
branches and loan portfolio of Rs 2.35 billion
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

82.0 Auto Finance: Kogta Financial India Ltd
Kogta Financial India Limited Kogta Financial (India) Ltd operates as a non-banking finance company. The Company offers
loan for commercial vehicle, car, and wheeler, as well as small and medium enterprises loan. Kogta Financial India also
provides loan against property. Kogta Financial serves customers in India.
Source: BSE

Balance Sheet

Profitability Ratio
Borrowing Mix

83.0 Auto Finance: Mahaveer Finance India Ltd
Mahaveer Finance India Limited Mahaveer finance was set up in 1981 and was registered as a deposit taking NBFC with the
RBI. In 2015 the company surrendered its deposit taking license to the RBI and was reconstituted as a non-deposit taking
NBFC. The company has been in used commercial vehicle financing business in the state of Tamil Nadu and recently
expanded its operations to the state of Andhra Pradesh.
Balance Sheet

84.0 Auto Finance: Deccan Finance Ltd
Deccan Finance Limited Deccan Finance Limited started operations in the year 1978 and was involved in the business of asset
financing. The company is registered as a NBFC with the RBI. The company has business presence in Chennai, Nashik,
Aurangabad, Nanded, Walajabad and Solapur. The company is involved in all kind of vehicle financing like commercial
vehicles and cars.
Balance Sheet
Profitability Ratio
Borrowing Mix

85.0 Auto Finance: Rakesh Credits Ltd
Rakesh Credits Limited Rakesh Credits Limited (RCL) is a non-deposit taking NBFC incorporated in the year 1993. It operates
in the state of Kerala in southern India. The company provides loans for purchase of used vehicles like cars, commercial
vehicles, two wheelers and three wheelers.
Note: The rating is outstanding as on Jul 2019

86.0 Diversified: IFMR Capital Finance Pvt. Ltd
IFMR Capital Finance Limited IFMR Capital is a non-banking finance corporation, founded in 2008 and headquartered in
Chennai, Tamil Nadu. IFMR Capital is part of the IFMR Trust group of companies, which were specifically created to drive
financial inclusion in India. IFMR Capital operates across a number of sectors which includes microfinance, small business
loans, affordable housing finance, vehicle finance and agriculture finance.

Balance Sheet

Profitability Ratio
Borrowing Mix

87.0 Diversified: MAS Financial Services Ltd
MAS Financial Services Ltd MAS Financial Services Limited is an India-based non-banking financial company. The Company
is engaged primarily in the business of Financing and all its operations are in India only. The Company is focused on fulfilling
the requirements of lower income and middle-income groups of the society. The Company offers various products, such as
Micro Enterprise Loan (MEL); Two Wheeler Loan; Small and Medium Enterprises Loan; Commercial Vehicles Loan; Used Car
Loan, and Tractor Loan. The Company's Small and Medium Enterprises Loan includes Machinery Loan, Industrial Shed Loan,
Working Capital Loan and Loans against Property (LAP). A micro-enterprise under this loan category is usually a small
business with a turnover ranging from 25 Lakhs to 2 Crores, engaged into manufacturing, trading or services. The Company's
network has over 70 branches in major cities of Gujarat, Maharashtra, Rajasthan, Madhya Pradesh, Tamil Nadu and
Karnataka, through which over 3200 centers are catered.
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

88.0 Diversified: Electronica Finance Ltd
Electronica Finance Limited Electronica Finance Limited (EFL), a part of the "SRP Electronica Group" is one of the most
diversified finance company in India. Initiated in 1990, EFL was amongst one of the first few in the country to be registered as a
Non-Banking Finance Company (NBFC) to provide loans for Machinery purchase. In its long and successful journey of over 26
years with 33 offices across India, EFL now caters to a large product portfolio including Business loans, Working Capital loans
& Industrial Property loans in addition to its flagship product of Machinery loans.
Note: Data for FY17, FY18 and FY19 is available
Note: The rating is outstanding as on Jun 2019.

Balance Sheet
Profitability Ratio
Borrowing Mix

89.0 Diversified: Home Credit India Finance Pvt. Ltd
Home Credit India Finance Private Limited Home Credit India Finance Pvt. Ltd. is a leading consumer finance provider that is
committed to drive credit penetration and financial inclusion by offering financial solutions that are simple, transparent and
accessible to all. It has operations in 89 cities across 19 states in the country. The company has a strong network of over
19,000 points-of-sale through which it services over 4 million customers through an employee base of over 17,000.
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

90.0 Diversified: Clix Capital Services Pvt. Ltd
Clix Capital Services Pvt. Ltd Headquartered in Gurugram, India, Clix Capital was launched with the acquisition of commercial
lending and leasing business of GE Capital in India with the backing of AION capital partners. They cater to three major
segments for business - consumer loans, SME (Small and Medium Enterprise) lending and commercial/corporate lending.
Within consumer lending there are multiple segments - consumer durables, used car loans, personal loans, education loans,
school loans.
AUM Break-Up 2018-19

Balance Sheet
Profitability Ratio

Borrowing Mix

91.0 Diversified: Karvy Financial Services Ltd
Karvy Financial Services Limited Karvy Financial Services Limited (KFSL) serves the financially under served in the Micro &
Small Business segment. KFSL a network of 75+ branches in 40 locations with a complete bouquet of financial products that
includes Secured Business Loans against property, Business/Personal loan against Gold, Small Commercial Vehicle Loans.
Note: The rating is outstanding as on Mar 2019.
Source: CRISIL research
Balance Sheet
Profitability Ratio
Borrowing Mix

92.0 Diversified: Pudhuaaru Financial Services Pvt. Ltd
Pudhuaaru Financial Services Private Limited Pudhuaaru Financial Services Private Limited (PFSPL), wholly owned subsidiary
of IFMR Rural Channels & Services Private Limited (IRCS), is a non-deposit taking NBFC engaged in providing financial
services (mainly lending at present) in remote rural areas. As on March 31, 2016, IFMR Holding Private Limited held 81.82%
stake in IRCS and the rest is held by Tata Capital (18.18%). IRCS had six KGFS (Pudhuaaru, Vellaaru, Thenaaru and
Thenpennaiaaru in Tamil Nadu; Dhanei in Odisha and Sahastradhara in Uttarakhand) operating through 236 branches as on
March 31, 2016.
Note: FY19 data is not available
Balance Sheet
Note: FY19 is not available
Profitability Ratio
Borrowing Mix

93.0 Diversified-LAP: HDB Financial Services Ltd
HDB Financial Services HDB Financial Services (HDBFS) is a leading Non-Banking Financial Company (NBFC) that caters to
the growing needs of an Aspirational India, serving both Individual & Business Clients.
Incorporated in 2007, we are a well-established business with strong capitalization. HDBFS is accredited with CARE
AAA & CRISIL AAA ratings for its long-term debt & Bank facilities and an A1+ rating for its short-term debt & commercial
papers, making it a strong and reliable financial institution.
Portfolio Mix

Balance Sheet

Profitability Ratio
Borrowing Mix

94.0 Diversified-SME: Capri Global Capital Ltd
Capri Global Capital Ltd Capri global capital limited (CGCL) incepted in 1997, is a non-deposit taking systematically important
NBFC, listed on Bombay stock exchange and national stock exchange. It offers MSME loans through its SME & Retail Lending
vertical whereas its wholesale lending vertical offers construction funding to Real Estate Developers along with Project
Funding, Acquisition Financing, Structured Debt Financing, Receivables Discounting, Inventory Funding and Advisory to
corporate. In past few years CGCL attracted investments from Wellington Management Company LLP, Morgan Stanley,
Fidelity, Goldman Sachs, etc. The registered office of CGCL is in Mumbai.
Portfolio Mix
Disbursement Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

Diversified-SME: Paisalo Digital Ltd (Formerly Known As S. E.
95.0
Investments Ltd
Paisalo Digital Limited Paisalo Digital Limited is registered as a category B Non Deposit taking NBFC with Reserve Bank of
India. Initially, it was promoted as a private limited company under the Companies Act, 1956, on 05th March, 1992. On
01.03.1995, fresh certificate of incorporation, consequent upon conversion to Public Limited Company was granted by the
office of the Registrar of the Companies, Uttar Pradesh, Kanpur.
Source: BSE
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

96.0 Diversified-SME: Shriram City Union Finance Ltd - Consolidated
Shriram City Union Finance Ltd Shriram City Union Finance Ltd. (SCUFL) was incorporated on March 27, 1986 as Shriram
Hire Purchase Finance Pvt Ltd. The company was renamed as Shriram City Union Finance Pvt Ltd on April 10, 1990. It
converted into a public limited company on October 29, 1996. The registered office of the company is located in Chennai, Tamil
Nadu. It was initially engaged in providing financial services to small road transport operators (SRTO) for purchase of used
commercial vehicles till 2002. Post 2002, the operations expanded to financing of consumer durables, two-wheelers, three-
wheelers, tractors, commercial vehicles, non-commercial vehicles, personal loans, loan against gold and enterprise loans for
small business units.
Source: BSE
Note: The rating is outstanding as on Dec 2018.
Portfolio Mix

Disbursement Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

97.0 Diversified-SME: Vistaar Financial Services Pvt. Ltd
Vistaar Financial Services Private Limited Vistaar Financial Services Pvt Ltd is a Bengaluru based non-deposit taking non-
banking financial company. It is incorporated in year 1991. The company focuses on the MSME business and offers small
business hypothecation loan, small business mortgage loan, bill discounting and equipment finance to serve the requirements
of small businesses i.e. shops, traders, manufacturers, services units, out of home based enterprises.
Disbursement Mix
State-wise Branches

Balance Sheet
Profitability Ratio
Borrowing Mix

98.0 Diversified-SME: Blue Jay Finlease Ltd
Blue Jay Finlease Limited Blue Jay Finlease Limited provides online loans for small businesses. The company develops a
proprietary scorecard that include credit history, transactional data, business performance, identity validation, machine
learning, and data analysis to underwrite small businesses requirement. Blue Jay Finlease Limited was incorporated in 1996
and is headquartered in New Delhi, India.
Balance Sheet
Profitability Ratio

99.0 Diversified-SME: NeoGrowth Credit Pvt. Ltd
NeoGrowth Credit Private Limited NeoGrowth is a NBFC registered with RBI and started commercial operations in 2013. It
caters to under-served market by adopting an innovative approach and validating the creditworthiness of the business. The
company has been promoted by Dhruv Khaitan (DK) & Piyush Khaitan (PK) and is backed by Omidyar Network, Aspada
Investment Company, Khosla Impact and Accion Frontier Inclusion Fund (AFIF) - Mauritius, IIFL Seed Ventures Fund I and
WestBridge Crossover Fund, LLC.
Note: The rating is outstanding as on Aug 2019.

Balance Sheet
Profitability Ratio
Borrowing Mix

100.0 Diversified-SME: Veritas Finance Pvt. Ltd
Veritas Finance Private Limited Veritas Finance Private Limited (Veritas), a Non-Banking Finance Company, registered with
Reserve Bank of India is focused on meeting the financial needs of the micro small and medium enterprises (MSME) in India,
which has remained largely underserved despite several initiatives. Veritas Finance has been promoted with a primary purpose
of meeting the working capital and business credit requirements of the small businesses in the MSME sector. It is classified as
Non-government Company and is registered at Registrar of Companies, Chennai. Its authorized share capital is Rs.
300,000,000 and its paid up capital is Rs. 261,000,000.

Balance Sheet
Profitability Ratio
Borrowing Mix

101.0 Diversified-SME: Lendingkart Finance Ltd
Lendingkart Finance Limited LendingKart Finance Limited is a non-deposit taking NBFC providing working capital loans and
business loans to SMEs across India. It gives you an access to capital in a completely online, quick process with minimum
documents and no collateral needed.

102.0 Gold Loan: Kosamattam Finance Ltd
Kosamattam Finance Ltd Kosamattam Finance Ltd. was incorporated on March 25, 1987 as Standard Shares and Loans Pvt.
Ltd. It took its present name on June 08, 2004. The registered office of the company is located in Kottayam district of Kerala.
The company provides loans against gold and its customer base is entirely comprised of individuals. The company is
registered with the Reserve Bank of India (RBI) as a non-banking finance company (NBFC).
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

103.0 Gold Loan: Manappuram Finance Ltd
Manappuram Finance Ltd Manappuram Finance Ltd. (MAFIL) was incorporated on July 15, 1992 as Manappuram General
Finance & Leasing Ltd. It took its present name on June 27, 2011. The registered office of the company is located at Valapad
in the Thrissur district of Kerala. MAFIL is one of Indias leading gold loan NBFCs. The company provides loans against gold.
The loans are mostly micro credit loans as the majority of the company's disbursements are below Rs.50,000. The company is
registered with the Reserve Bank of India (RBI) as a non-banking finance company (NBFC).
Gold AUM - Region_wise Breakup
AUM Breakup
Key financial Indicators

Balance Sheet

Profitability Ratio
Borrowing Mix

104.0 Gold Loan: Muthoottu Mini Financiers Ltd
Muthoottu Mini Financiers Limited Muthoottu Mini Financiers Limited, is a trusted Non-Banking Financial Company (NBFC)
founded by the visionary Mr Mathew Muthoot, as the common mans financier way back in 1921. A business set up by Mr
Mathew Muthoot to fuel a common mans dream with finance at the right time has today grown into a large NBFC (Incorporated
1998) with close to 750+ Branches. Easy access Gold Loans and Micro Finance form the core business of the Company.
The wide branch network established over the years and now in states of Kerala, Karnataka, Andhra Pradesh, Telengana,
Tamilnadu, Puducherry, Maharashtra,Goa, Delhi, Uttarpradesh and Haryana making it easily accessible to the common man .

Balance Sheet

Profitability Ratio
Borrowing Mix

105.0 Housing finance: Bajaj Housing Finance Ltd
Bajaj Housing Finance Limited BHFL the housing finance arm of Bajaj Finance was incorporated as a wholly owned subsidiary
of Bajaj Finserv Limited in the year 2008. During FY 2015 the company became the fully owned subsidiary of Bajaj Finance. In
2015 BHFL received a certificate of registration national housing board to set up its housing finance company
Portfolio Mix

Balance Sheet

Profitability Ratio
Borrowing Mix

106.0 Housing finance: Can Fin Homes Ltd
Can Fin Homes Ltd Can Fin Homes Limited (CFHL) was promoted in 1987 by Canara Bank in association with financial
institutions, including HDFC and UTI. CFHL is the first bank-sponsored housing finance company in India. The company
provides long-term finance to individuals for construction or purchase of residential houses/flats and to companies or
corporations or societies or associations for the purpose of construction or purchase of houses/flats. The company has also
diversified by launching non-housing finance products like premises loan for practicing professionals (venture), mortgage loans
(net worth) and loan against rent receivables (N-Cash). It is listed on the BSE and the NSE.
Shareholding Pattern as on August 2019,
Source: BSE
Portfolio MIx

Balance Sheet
Profitability Ratio
Borrowing Mix

107.0 Housing finance: Housing Development Finance Corporation Ltd
Housing Development Finance Corporation Ltd Housing Development Finance Corporation Limited (HDFC) was incorporated
in 1977 as India's first specialised housing finance institution. It also offers property-related services and deposit products. The
financial conglomerate also has subsidiaries and associates in insurance (general and life), asset management, education
finance, venture funds, banking services, etc. Its equity shares are listed on Bombay Stock Exchange (BSE) and National
Stock Exchange (NSE).
Shareholding Pattern as on August 2019,
Source: BSE
Portfolio MIx
Balance Sheet
Profitability Ratio
Borrowing Mix

108.0 Housing finance: Indiabulls Housing Finance Ltd (Consolidated)
Indiabulls Housing Finance Ltd
Indiabulls Financial Services Ltd (IBFSL), established in January 2000, is a systemically important non-banking financial
company. The company is focused on secured asset classes, such as mortgages, commercial vehicle, and commercial credit
loans. IBFSL has now been reverse merged with IHFL and given that majority of IBFSLs business pertains to mortgage-related
lending, post the merger, IHFL will continue to operate as a housing finance company registered with National Housing Bank.
The company has also applied for banking license in 2013.
Shareholding Pattern as on August 2019
Source: BSE
Portfolio Mix

Balance Sheet

Profitability Ratio
Borrowing Mix

109.0 Housing finance: L&T Housing Finance Ltd
L&T Housing Finance Ltd L&T Housing Finance Limited (LTHFL) (erstwhile Indo Pacific Housing Finance Limited) is a wholly
owned subsidiary of L&T Finance Holdings Limited. It was originally incorporated as Weizmann Homes Limited on 31st August
1994 under the Companies Act, 1956 (No. 1 of 1956). It is registered as a housing finance company with the National Housing
Bank under the National Housing Bank Act, 1987. LTHFL offers a wide range of housing finance products like home loans,
home improvement loans, loan against property, balance transfer and top-up loans to salaried and self-employed customers
predominantly across the middle and premium segments. Construction finance is also available to real estate developers and
builders.
Credit rating Information
Portfolio Mix

Balance Sheet

Profitability Ratio
Borrowing Mix

110.0 Housing finance: LIC Housing Finance Ltd
LIC Housing Finance Limited
Part of the LIC group, LIC Housing Finance Limited (LICHFL) was incorporated in 1989. The company was listed in 1994.
LICHFL mainly provides housing loans to individuals for purchase / construction / repair and renovation of new / existing flats /
houses. The company also provides finance on existing property for business/personal needs and gives loans to professionals
for the purchase/construction of clinics/ nursing homes, diagnostic centres and office space. It is listed on the BSE and the
NSE. The company has also applied for banking license from RBI.
Shareholding Pattern as on August 2019
Source: BSE
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix
111.0 Housing finance: Magma Housing Finance
Magma Housing Finance Limited

Magma Housing Finance company, was initially promoted as GE Money Housing Finance (GEMHF) by GE Capital Corporation
which is a 100% subsidiary of General Electric Company, USA. The name of GEMHF was changed to its present name in
March, 2013. MHF is engaged mainly in providing housing loans and home equity loans to individuals. The company is
registered with National Housing Bank (NHB) as a non-deposit taking Housing Finance Company.
Portfolio Mix

Balance Sheet

Profitability Ratio
Borrowing Mix

112.0 Housing finance: Sundaram BNP Paribas Home Finance Ltd
Sundaram BNP Paribas Home Finance Ltd
Sundaram Home is the Sundaram Finance groups vehicle for its housing finance business. Sundaram Home was promoted as
Sundaram Home Finance Ltd in July 1999 by Sundaram Finance, with equity participation from International Finance
Corporation (IFC), Washington, and the Netherlands Development Finance Company (FMO), the Netherlands. While
Sundaram Finance finances mainly commercial vehicles and cars, Sundaram Home extends Sundaram Finances retail lending
business domain to the housing finance space.
Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix
113.0 Infrastructure Finance: L&T Infrastructure Finance Ltd
L&T Infrastructure Finance Company Limited
L&T Infrastructure Finance Company Limited (L&T Infra Finance) is promoted by the engineering and construction
conglomerate Larsen & Toubro Limited (L&T) and L&T Finance Holdings Limited (a subsidiary of L&T). L&T Infra Finance,
incorporated in 2006, is registered as a Non-Banking Financial Company (NBFC) under the Reserve Bank of India (RBI) Act
1934, and is among the select few financial institutions classified as an Infrastructure Finance Company (IFC). Since 2011 it
has been classified as a Public Finance Institution (PFI) by the Ministry of Corporate Affairs.
Segment-wise Loan Book

Balance Sheet
Profitability Ratio
Borrowing Mix
114.0 Infrastructure Finance: Power Finance Corporation Ltd
Power Finance Corporation Ltd Power Finance Corporation Ltd (PFC) was incorporated in 1986 as a development financial
institution dedicated to the power sector. Working as a public financial institution its thrust area is to incentivize reforms and
restructuring of public sector. Range of services offered by it are term loan for power projects, lease financing, renovation and
modernization of power plants, bill discounting, energy conversation schemes, working capital loans etc. The organization
offers its services in majority of the states throughout the country.
Source: BSE
Segment-wise Portfolio Mix
Sector-wise portfolio Mix (2018-19)

Balance Sheet
Profitability Ratio
Borrowing Mix

115.0 Infrastructure Finance: Rural Electrification Corporation Ltd
Rural Electrification Corporation Ltd Rural Electrification Corporation Ltd. was incorporated on 25 July 1969 at New Delhi as
Rural Electrification Corporation Pvt. Ltd. (REC) with the main objective of developing power infrastructure in rural India. The
tag 'private' in the company's name was removed by the Registrar of Companies (Delhi) on 3 June 1970 and the company
became a deemed public limited company from 1 July 1975. A fresh certificate of incorporation was issued to the company on
18 July 2003 and the name of the company was changed to Rural Electrification Corporation Ltd.
REC is promoted by Ministry of Power, Government of India. REC's main business is to finance and promote rural
electrification projects all over the country. It funds large rural power generation, transmission and distribution projects.
Source: BSE
Segment-wise Portfolio Mix

Balance Sheet
Profitability Ratio
Borrowing Mix

Infrastructure Finance: West Bengal Infrastructure Development
116.0
Finance Corporation Ltd
West Bengal Infrastructure Development Finance Corporation LTD
West Bengal Infrastructure Development Finance Corporation Ltd. (WBIDFC) was incorporated on 23rd May 1997 promoted by
the Government of West Bengal to cater to the growing need of infrastructure facilities in the State. The Corporation is owned
by the Government of West Bengal under the administrative control of the Finance Department It is also registered as a
deposit-taking NBFC with the Reserve Bank of India and categorized as a Loan company (LC). WBIDFC has provided able
and timely fund support to the State Govt. for creation of infrastructure facilities for primary, secondary and tertiary sectors in
West Bengal. The Corporation has coordinated with the concerned Government Agencies, district planning committees, local
bodies and other agencies for infrastructure financing activities. It has been of considerable assistance to the Government for
obtaining securitised loans (e.g. loans against govt. cess receivables).

Balance Sheet
Profitability Ratio
Borrowing Mix

117.0 Low Cost Housing: Aptus Value Housing Finance India Ltd
Aptus Value Housing Finance India Limited Aptus Value Housing Finance India Limited (AVHFIL) is housing finance company
registered with National Housing Bank (NHB). The Company was incorporated in December 2009. AVHFIL caters to the
housing finance needs of self-employed, informal segment of customers, belonging to middle/low income group, primarily from
semi urban and rural markets. The non-housing loan portfolio is constituted by SME (Small &Medium Enterprises) business
loans. The company is one of the early private sector entrants in South India catering to the affordable housing segment.
AVHFIL has 143 branches in the states of Tamil Nadu, Karnataka, Telangana and Andhra Pradesh as on March 31, 2019.
Portfolio Mix

Balance Sheet

Profitability Ratio
Borrowing Mix

Low Cost Housing: AAVAS Financiers Ltd (Formerly Au Housing
118.0
Finance Ltd)
AAVAS Financiers Limited AAVAS is primarily engaged in the business of providing housing loan to customers belonging to
low and middle income segment in semi-urban and rural areas. AAVAS is engaged in the business of providing housing loan to
customers belonging to low and middle income segment in semi-urban and rural areas. These are the people who are either
self-employed, running small businesses like providing transportation facilities in auto rickshaw or other vehicles, running
grocery shops, tiffin centers, beauty parlous and other businesses or these customers are carrying out business of agri or
animal husbandry products in rural areas or salaried class people who are carrying out small jobs in private or public sector.
The company is presently operating out of 8 states, Rajasthan, Maharashtra, Madhya Pradesh, Haryana, Gujarat, UP, Delhi,
Chattisgarh and Haryana through a network of 210 branches covering around 100 locations and almost 75% of the portfolio
consisted of housing loans and balance being top-ups and loans against property as on March 2019.
Portfolio Mix
Customer Profile
State-wise Branches

Balance Sheet
Profitability Ratio
Borrowing Mix

119.0 Peer comparison: Auto finance
Among auto financing NBFCs, top three players account for over half of the auto financing
Shriram Transport Finance Co Ltd (STFC) is the current leader among auto finance NBFCs. There are several players in the
fray, but the top three players have carved a niche for themselves and hold 50% of the market share. STFC leads the market,
with its established position in used CV (commercial vehicles) segment, large branch network, superior understanding of
valuation of assets and large customer base.
Share of leading financiers in auto financing outstanding as on fiscal 2019
A comparison of portfolio mix of leading financiers as on fiscal 2019

AUM growth of NBFCs

There has been significant variations in player wise y-o-y AUM growth in fiscal 2019. Cholamandalam Finance posted the
highest AUM growth of 30% driven mainly by AUM growth of commercial vehicle (new as well as old) segment. Shriram
Transport Finances AUM also grew healthy at ~22% on account of growth in used CV segment. Growth in CV financing also
supported growth of Sundaram Finance. With revival in economic growth demand for CVs saw an uptick in fiscal 2019 which in
turn benefitted all the financiers in CV financing space. Passenger vehicles (new and used) supported growth for Mahindra
Finance. Kotak Mahindra Prime also grow at a steady pace supported by growth in PV segment.
Growth in AUMs for leading financiers

Note: STFC - Shriram Transport Finance Corporation, Mahindra - Mahindra Fianance, Cholamandalam - Cholamandalam Finance, Sundaram - Sundaram Finance, KMP
Kotak Mahindra Prime, Magma- Magma Fincorp
Source: Company Reports, RBI, CRISIL Research
Assets quality of financiers have improved in fiscal 2019

As NBFCs lend to customers with weak credit profiles, risk of customer default is higher compared to banks.
Accelerated recognition of gross non-performing assets (GNPAs) led to sharp increase in GNPAs in fiscal 2017.
Consequently, players tightened their appraisal criteria and adopted cautious approach in lending. Improved focus on
collection and improvement in economy helped financiers to reduce their GNPAs in fiscal 2018.
GNPAs (%) of leading financiers in auto financing as on fiscal 2019
Note: STFC- Shriram Transport Finance Corporation, Mahindra- Mahindra Fianance, Cholamandalam - Cholamandalam
Finance, Sundaram- Sundaram Finance, KMP Kotak Mahindra Prime, Magma- Magma Fincorp
Financials of players (fiscal 2019)

CV financing accounts for a substantial share of all top auto financing players portfolios, except for Magma Finance
and Kotak Mahindra Prime. Players who enjoy highest interest incomes have a large share of high yielding product
segments in their portfolio. STFC is mainly into the used CV finance segment. Mahindra Finance has 42-45% of its
portfolio in tractors, pre-owned vehicles, and CV financing. CVs, three wheelers, older vehicles, and tractors account
for ~50% of Cholamandalam Finances portfolio.
Interest expense for most players is between 6.5%-7.0%. Management of opex and control over credit costs are the
critical factors for profitability.
Sundaram Finance and Kotak Mahindra Prime have high Post tax RoA numbers on account of low opex and low
credit costs among top players.
STFC has been able to lower its opex significantly because of its scale of operations. However its credit cost is
highest, as it lends to the riskier used CV segment.
Opex remains high for Magma, Cholamandalam Finance, and Mahindra Finance. However, Cholamandalam Finance
has been able to control credit costs, and thereby improve margins.
Capital adequacy of auto finance NBFCs remains above the regulatory

minimum
With healthy earnings and adequate Tier-I capital, auto finance NBFCs are sufficiently capitalized not only for future growth
but also for cushioning any adverse shocks that may arise in the portfolio. Overall capital adequacy of most auto finance
NBFCs is well above regulatory minimum of 15%, as shown in the chart below.
Capital adequacy of select NBFCs as on fiscal 2019

120.0 Peer comparison: Housing finance
Among HFCs, top five players accounts for around 80% of the market
The housing finance industry remains concentrated, with top five players accounting for ~80% of outstanding loans as of
March 2019. However, the extent of concentration has reduced with mid and small-sized HFCs gaining market share by
growing faster, albeit on a low base.
Source: Company reports; CRISIL Research
Growth comparison
Note: YoY growth: growth between fiscal 2018 and 2019

Large HFCs have managed to grow at 19 CAGR between fiscals 2016 and 2019, as against 35% CAGR for mid and
small HFCs for the same period
We expect higher growth for mid and small size HFCs, given their focus on affordable housing projects and relatively
higher concentration in Tier-II and smaller cities, where growth has been higher over the past years
Asset quality of top five players (fiscal 2019)
As the demand for home loans largely comes from first-time buyers, asset quality in this segment has remained
strong. Gross non-performing assets (GNPA) ratio of the overall industry is ~1.2%, which is much better than other
segments.
However, due to the seasoning of portfolios of rapidly growing HFCs, many of which are focused on self-employed
customers and give low ticket size loans, there could be an increase in delinquency in that segment. Asset quality
in the non-individual segment will also need to be closely monitored, given the pressure on real estate developers.
Comfortable capital position of all HFCs (fiscal 2019)
Note: Capital adequacy ratio represented in the top in box indicator
Financials of leading players

Note: For DHFL data is for fiscal 2018, for rest of the players it is for fiscal 2019

121.0 Peer comparison: Infrastructure finance
Peer comparison of key infrastructure players
Key NBFCs in infrastructure financing space are PFC and REC. Both of these entities are government owned and account for
more than 75-80% of the overall financing done by NBFCs. L&T Infra and SREI Infra are other key private sector lenders in this
space. Most of these NBFCs managed to grow at a strong double digit pace in fiscal 2019 post slowdown in growth in fiscal
2018. Stronger growth in fiscal 2019 was partly aided due to banks cautious approach towards lending to this segment.
Outstanding loans (Rs Mn)
Company wise Gross NPA ratio (%)
In FY18, Industry GNPA further increased to 8.6% based on receding asset quality of REC as it applied new RBI norms on
stressed assets resolution mandated for banks to its books. RECs GNPA increased from 2.4% in FY17 to 7.3% in FY18 due to
this. However, PFCs GNPA decreased from 12.5% in FY17 to 9.6% in FY18, as a result of which, the overall impact on the
Industry GNPA has been 100 bps points in FY18.
In FY19, Companies witnessed a massive spike in GNPA (%) in FY19, L&T infrastructure witnessed a spike of 15.8% in FY19
as compared to 5.7% in FY18. PFC and REC witnessed a rise in GNPA in FY19.
Company wise Gross NNPA ratio (%)
Company wise return on assets (%)

In FY19, PFC witnessed significant increase in profitability based on declining provisioning on the back of transition to the new
90 days past due regime. However, the other big player, REC, witnessed 100 bps decrease in the return on assets based on
declining net interest incomes, and increasing credit costs. Other smaller players such as SREI Infra, L&T Infra witnessed a
mixed bag in terms of return on assets in FY19. SREI Infra witnessed improvement in profitability due to stable net interest
income and declining credit costs.

122.0 Peer comparison: Microfinance
Peer comparison of major Microfinance players
Shifting Dynamics in the Micro finance Industry
In FY19 saw 8 NBFC-MFIs namely Janalakshmi Financial Services, Ujjivan Financial Services, Equitas Microfinance, ESAF,
Utkarsh, Fincare (formerly Disha Microfinance), Suryoday and North East (formerly RGVN microfinance) start full-fledged Small
Finance Bank operations. Janalakshmi Financial Services, (now Jana Small Finance Bank) which used to be the market leader
in terms of microfinance loans given, heavily reduced its disbursements in FY18 to improve its collection efficiencies. Gross
loan portfolio (GLP) of NBFC-MFIs and small finance banks (SFBs) grew at a robust pace of ~37.4% YoY in fiscal 2019, faster
than ~25.6% YoY growth witnessed in the previous fiscal (2018).
As these players switched to the new business models, the existing stalwarts such as Bharat Financial, Satin Creditcare,
CreditAccess Grameen and others ate up the market pie. Bharat Financial emerged as the market leader in microfinance
lending in FY18 with a total GLP of nearly Rs. 126 billion. Other major players included Satin Creditcare, CreditAccess
Grameen, Spandana, and Muthoot Microfinance among others which had market share of 9%, 8%, 7% and 6% respectively.
GLP and growth rates for Top-10 NBFC-MFIs as on FY19
Note: Bubble size represents Loan amount (in Rs. Cr.) as on FY19
Gross Loan Portfolio for FY19 for Top NBFC-MFIs
NBFC-MFIs and their respective market share
Bharat Financial emerged as the market leader in FY18 as Janalakshmi Financial Services commenced operations as a Small
Finance Bank and subsequently, reduced disbursements to improve collection efficiency. Besides the market leader, there
exists immense competition for market share among the remaining players.
NBFC-MFI profitability over the 4-fiscal period

Bharat Financial enjoys efficiencies with respect to scale and enjoys lower costs of borrowing vis-a-vis other market players
and hence, enjoys greater profitability. Companies like Asirvad, cashpor and Satin witnessed a promising increase in
profitability in FY19.
Source: Company Reports, MFIN, CRISIL Research

123.0 Peer comparison: Diversified finance
Peer comparison of top diversified players
Diversified financial players mainly lend to micro, small and medium enterprises (MSME) and mid-corporate companies. They
also do retail lending for consumer durables, two wheeler and housing. Bajaj Finance, Edelweiss finance and HDB financial
services are key large players in this segment. Shriram city union finance is also a key player in this segment mainly catering to
MSME and two wheeler loans. All the companies in this segment have been growing at a strong pace over past three years.
Capri Global and Bajaj Finance have grown fastest among the peers, it grew by 73% and 62% CAGR over FY16-19 .
Company wise gross loans
Companies which cater to niche customers or niche product segments make higher margins. Higher exposure to mid corporate
or big ticket size loans generates relatively lower yield as compared to retail and small ticket size focussed players. Higher
focus on small ticket size and niche customers helps Shriram City Union generate higher margins in the range of 12-12.5%,
followed by MAS Financial Services and Bajaj Finance. Edelweiss Finance makes lowest margins among the peers due to its
high exposure to big ticket mid-corporate loans.
Company wise Gross NPA ratio (%)
Bajaj Finance, Edelweiss Financial Services and Shriram City Union Finance are well provisioned as compared to other
players. These players have provided for more than 50% of their gross NPAs.
Company wise Net NPA ratio (%)

Return on assets are mainly the function of net interest margins, opex and credit cost. MAS Financial services has return on
assets (RoA) at (3.1%) in fiscal 2019 among peers followed by Capri global (6.5%) and Bajaj Finance (3.0%).
Company wise return on assets (%)
All the diversified NBFCs are well capitalized to support growth in near term, except HDB Finance and Capital First and they
will require capital raising in near term to continue their strong growth.
Company wise tier 1 ratio (%)

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1.0 Microsite - special report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.0 Overall NBFC: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

3.0 Housing finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

4.0 Housing finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

5.0 Housing finance: Borrowing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

6.0 Housing finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

7.0 Low cost housing finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

8.0 Low cost housing finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

9.0 Low cost housing finance: Borrowing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

10.0 Low cost housing finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

11.0 Infrastructure financing: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

12.0 Infrastructure financing: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

13.0 Infrastructure financing: Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

14.0 Infrastructure financing: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

15.0 Wholesale Finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

16.0 Wholesale Finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

17.0 Wholesale Finance: Lending to Real Estate Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

18.0 Wholesale Finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

19.0 MSME finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

21.0 Loan against property (LAP): LAP: Competitive scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

22.0 Loan against property (LAP): LAP: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

24.0 Loan against property (LAP): LAP: Key industry trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

26.0 MSME finance: Non-LAP MSME secured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

27.0 MSME finance: Key trends in MSME secured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

28.0 MSME finance: MSME unsecured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

29.0 Auto Finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

30.0 Auto Finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

31.0 Competitive Dynamics: Captive and Non Captive NBFCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

32.0 Competitive Dynamics: Large, Medium and Small NBFCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

33.0 Used car Finance: Used car finance-Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

34.0 Used car Finance: Used car finance-Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

35.0 Used CV Finance: Used CV finance-Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

36.0 Used CV Finance: Used CV finance-Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

37.0 Tractor Finance: Tractor finance-Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

38.0 Tractor Finance: Tractor finance-Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

39.0 Construction equipment finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

40.0 Construction equipment finance: Industry Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

41.0 Construction equipment finance: Borrowing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

42.0 Construction equipment finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

43.0 Gold Finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

44.0 Gold Finance: Competitive Positioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

45.0 Gold Finance: Region wise industry dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

46.0 Gold Finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

47.0 Consumer durable finance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

48.0 Consumer durable finance: Key growth drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

49.0 Consumer durable finance: Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

50.0 Consumer durable finance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

51.0 Educational loans: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

52.0 Educational loans: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

53.0 Microfinance: Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

54.0 Microfinance: Changing Industry Landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

56.0 Microfinance: Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

57.0 Fintech: Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

58.0 Fintech: Fintech adoption in Indias leading market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201

60.0 An Overview on NBFCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

61.0 Infrastructure finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

62.0 Housing finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

63.0 Low cost housing finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

64.0 Auto finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

65.0 Wholesale finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

66.0 Microfinance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

67.0 Gold Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261