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Investment & Finance Sector Analysis Report


[Key Points | Financial Year '13 | Prospects | Sector Do's and Dont's]

  • The major Non Banking Financial Companies (NBFCs) in India have their relative specializations, for e.g. HDFC (mortgage loans), IDFC (infrastructure loans), Mahindra Finance, Power Finance Corporation (power financer) & Shriram Transport Finance (auto loans). The trend of segmental monopoly is changing as banks are entering long-term finance and FIs also meeting the medium and short - term needs of the business masses

  • Today, NBFCs are present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans. NBFCs have emerged as key financial intermediaries particularly for small-scale and retail sectors. With easier sanction procedures, flexibility, low operating cost and focus on core business activity, NBFCs stand on a surer footing vis-a-vis banks. Therefore, the credit needs of customers are met adequately.

  • NBFCs' growth had been constrained due to lack of adequate capital. Going forward, we believe capital infusion and leverage thereupon would catapult NBFCs' growth in size and scale. A number of NBFCs have been issuing non-convertible debentures (NCDs) in order to increase their balance sheet liquidity. Also to address this purpose, especially in the infrastructure financing space, a new category of NBFCs was formed called Infrastructure financing companies (IFCs).

  • NBFCs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is also not applicable for them. While this is to their advantage, they do not have access to low-cost demand deposits. As a result their cost of funds is always high, resulting in thinner interest spread. However, the regulatory arbitrage may soon change between the two entities with the help of the Usha Thorat committee recommendations, which call for stricter regulations in the space.

     Key Points


    Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs.


    India is a growing economy, demand for long-term loans, especially infrastructure and personal finance is high

    Barriers to entry

    Licensing requirement, investment in technology, skills required for project finance, distribution reach, minimum capital requirements, etc

    Bargaining power of suppliers

    Providers of funds could be more demanding, base rate requirements are applicable. As quality of services provided with minimum time matters a lot.

    Bargaining power of customers

    High, as banks have also forayed into long-term finance and consumer finance.


    High. There are public sector, private sector and foreign banks along with non-banking finance companies competing in similar markets.


     Financial Year'13

  • FY13 has proved to be a challenging year on account of subdued economic activity, high interest rates, rising fuel and vehicle prices for the auto financiers. With slowdown in economic conditions, most of the auto space segments reported either a tepid credit growth or a decline in volumes. The cumulative production for the entire automobile sector was recorded at meager 1% for FY13 and the sales volume too witnessed a decline. Furthermore, the worrying part today for auto financiers is the new RBI guidelines that require NBFCs to move to the asset classification and provisioning norms as applicable to banks commencing form FY15.

  • Likewise, FY13 proved a challenging year for the infrastructure financiers too. As the domestic saving and investments plummeted, the private investment in infrastructure came to almost a standstill. Regulatory uncertainties, policy issues, execution challenges and eroding confidence impacted the business dynamics of the infrastructure finance companies. Power sector was the worst affected on account of significant unutilized capacity and fuel shortages. That said, with the much required headway made by CCI in fast-tracking key projects and administering clearances, the infrastructure sector has seen the light of the day.

  • For housing companies, the fiscal incentives provided in the 2013-14 Union Budget brought respite to the first time homebuyers who are now allowed an additional one-time benefit of interest deduction up to Rs 100,000 on a home loan. Regulatory forbearance, doing away with teaser products and creditworthiness of developers will go a long way in bringing stability in the housing sector. With mere 8% mortgage to GDP ratio of India, it leaves huge market potential for housing financiers to strengthen their footing in the financing market. Furthermore, with rising disposable incomes, increasing urbanization and improving demographics, worst is behind for the housing finance market in India.

  • Given the euphoric profit generation by gold-financiers in past couple of years, the RBI took a cautious stance. The new stringent RBI guidelines are expected to result in decline in profitability of gold loan companies. Fear of business concentration risks and business run-downs and the motive to safeguard the interest of the borrowers have prompted the regulator to turn extra-vigilant with respect to gold financing business.

  • The Reserve Bank of India is in the process to grant additional branch licenses to private sector banks and NBFCs that meet the central bank's eligibility criteria. These new licenses should be awarded shortly. Many NBFCs, microfinance companies and industrial houses have applied for the same.

  • FY13 also witnessed increased funding cost pressures and negative asset-liability match that dampened the earnings performance of NBFCs.


  • The RBI is looking at monitoring the NBFC sector to a greater extent now, especially on account of the sharp increase in finance to the space. This is primarily due to the higher possibility of risks getting transferred from the more leniently regulated NFC sector to the banking sector and concerns over protection of depositors' interests.

  • As at the end of March 2013, the total credit managed by NBFCs stood at Rs 3.25 trillion (Source: ICRA) reporting a sharp decline of 10% vis-a-vis previous year.

  • Asset quality trends began to deteriorate in FY13 after witnessing an impeccable improvement during 2009-12.

  • Cost of funds for NBFCs remained elevated for major part of FY13 given the higher proportion of bank funding in the overall borrowings. With higher base rates of banks, the funding costs are expected to remain high even in the coming periods. That said, few NBFCs managed to contain costs by raising funds through pass through certificates (PTC) routes by securitizing pools that qualify for priority sector lending at attractive rates.

  • The credit costs for NBFCs continued to rise in commensurate with the rise in delinquencies during FY13. Moreover, operating costs are also expected to remain elevated on account of rigorous recovery efforts and slower growth.

  • Therefore, unless the NBFCs increase their lending rates and improve operational efficiencies, the return ratios are expected to remain under pressure.

  • Currently, housing finance companies are in favor given the positive asset-liability position, limited asset quality risks and modest return ratios.

  • However, the other asset financier such as the infrastructure and automobile financiers, the scenario still stands grim. Subdued economic environment, higher loan-to-value (LTV) ratios and profitability pressures faced by the CV users have spurted asset quality risks for NBFCs. Moreover, higher interest rates, negative asset-liability position, declining collection efficiencies and increase in re-possession rates have marred the performance of these asset financiers.

  • We believe, going ahead, defying the macroeconomic headwinds, NBFCs with retail focused business models backed by penetration in hinterlands should show up robust performance.
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