There are 11,842 Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India out of which a lion's share of 98% are non-deposit accepting with the balance 2% being deposit accepting NBFCs. Since November 2014, 200 non-deposit accepting NBFCs having asset size of Rs 5 bn and above have been classified as systemically important. The major NBFCs in India have their relative specializations, for e.g. HDFC (mortgage loans), Mahindra Finance (agri loans), 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
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-à-vis banks.
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 advantageous to them, 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.
In November 2014, the Reserve Bank of India has tightened norms in asset classification and provisioning for NBFCs to bring them at par with banks. The time period after which an overdue asset would be classified as a Non Performing Asset has been reduced from six months to three months and would be applicable in a phase-wise manner until FY18. Similarly, the time period for classification of sub-standard and doubtful assets has also been reduced from 18 months to 12 months in a phase-wise manner until FY18. In other words, an asset would be classified as sub-standard if it remains NPA for a period of 12 months (18 months presently) and a doubtful asset beyond that. Additionally, the provisioning for standard assets has been raised from 0.25% to 0.4% of the outstanding by FY18. These developments are expected to increase the provisions of NBFCs, going ahead.
Key Points
Supply
Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs.
Demand
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.
Bargaining power of customers
High, as banks have also forayed into long-term finance and consumer finance.
Competition
High. There are public sector, private sector and foreign banks along with non-banking finance companies competing in similar markets.
FY15 continued to be a challenging year. Sluggish demand has led to lower investments in infrastructure and core industries – resulting in poor capacity utilization and slower earnings growth for companies. This has adversely impacted the credit offtake. However, in comparison to banks, the performance by NBFCs has been relatively better. The NBFC sector recorded a loan growth of 16.3% as compared to single-digit credit growth by banks in FY15. Strong growth in credit extended by infrastructure finance companies, microfinance companies and loan companies contributed to the sturdy growth in the loan portfolio of large NBFCs. This translated into overall balance sheet growth of 16.8% in FY15.
Backed by robust loan growth, the NBFC sector posted a healthy financial performance registering an income growth of 15.7% and an even better profit growth of 19%. However, the profitability of the sector has fallen slightly. The return on assets (RoA) of the sector declined to 2.2% in FY15 from 2.3% in FY14.
In line with the overall deterioration in the asset quality in the financial system, the NBFC sector has also seen a rise in bad loans. The gross NPA ratio for the sector has risen from 2.3% in FY11 to 4.1% in FY15.
The capital adequacy of the NBFC sector, by and large, remained stable at over 27% as of March 2015.
The credit penetration of NBFCs in India at 13% of GDP is still low compared to other emerging economies, according to a report by Boston Consulting Group (BCG). This in turn presents a big untapped opportunity.
NBFCs have been targeting the informal segment consisting of individuals that are either self-employed or employed in the informal sector. But this segment poses asset quality issues. Going ahead, NBFCs will have wider access to consumer data thanks to the new digital-age that will simplify their asset quality concerns as per the BCG report. Moreover, NBFCs can partner with payment banks and small financial banks and provide more financial offerings to customers thereby boosting their growth prospects.
The revival of economic growth in future backed by government focus on infrastructure development in the country is expected to provide huge scope to NBFCs engaged in infrastructure financing.
The conversion of ten micro finance institutions (MFIs) into small finance banks in the next one year is expected to provide space for growth to other NBFCs -MFIs.
As the large exposure regime for the banks will come into effect by 2018, NBFCs will have more room to operate in big corporates financing segment in the medium term.
With the development in the equity and corporate bond markets in future, Investment companies are likely to have better prospects in future.
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