CHAPTER –

INDUSTRY PROFILE

Introduction to NBFC’s in India:

A Non-Banking Financial Company (NBFC) is a company registered under the Companies
Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit
business but does not include any institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods (other than securities) or providing
any services and sale/purchase/construction of immovable property. A non-banking
institution which is a company and has principal business of receiving deposits under any
scheme or arrangement in one lump sum or in instalments by way of contributions or in any
other manner, is also a non-banking financial company (Residuary non-banking company).
Non-Banking Financial Companies are financial companies which performs like banks but
they are not actual bank. These types of financial companies have to be registered under
Companies act,1956. These financial companies engage in the business of financial loans and
advances, acquisition of securities/bonds/debentures which are issued by Government or
local authority or the marketable securities of a like nature, leasing, hire-purchase, insurance
business, chit business but does not it does not include whose prime principal business is that
of agricultural activity, industrial activity, purchase or sale of any goods. A Non-Banking
Financial Companies have head business of accepting stores under any plan or course of
action in one singular amount or in portions by method for commitments or in some other
way, is additionally a non-banking budgetary organization.

NBFCs garnered the attention of the Reserve Bank of India (‘RBI’) when several
depositors lost their money, during the failure of several banks in the late 1950s and early
1960s. In order to prevent the large number of depositors, RBI initiated regulating them by
introducing Chapter IIIB in the Reserve Bank of India Act, 1934. In March 1996, there were
around 41,000 NBFCs in India and they were not recognised as a separate class. However,
due to the failure of some of the institutions the regulatory structure along with the reporting
and supervision was constricted by RBI. In the late 90s, sweeping changes were brought to
protect the interest of depositors and ensuring the desired functioning of NBFCs.
 The capital requirement was changed in the year 1999, NBFCs getting registered on
or after the issuance of notification dated April 21, 19991 were required to have the minimum
net owned funds of ` 200 lakhs in order to commence the business of an NBFC. Due to
snowballing trend in the sector and to ensure the growth of the sector in a healthy and
efficient manner various regulatory measures were taken for identifying the systemically
important companies and bringing them under the austere norms. The NBFC-ND with asset
size of ` 100 crores or more were considered to be systemically important companies. During
the FY 2011-12, two new categories of NBFCs were introduced viz., IDF and MFI.

DEFINITION (Reserve Bank of India)

Definition for Non-Banking Financial Company, it carries functions like bank but it is
not actual bank. Reserve bank of India has defined NBFC as below. RBI has defined it in
systematic way, it has explained each term in detailed i.e. what is financial institution? What
is non-banking?

An NBFC is a company registered under the Companies act, 1956 or Companies act,
2013 and is engaged in the Business of financial Institution.

Section 45I(f) of the Reserve Bank of India act, 1934 defines “Non-Banking Financial
Companies” as-

(i). A financial Institution which is a company;

(ii). A non-banking financial institution which is company and which has its principal
business the receiving of deposits, under any scheme or arrangement or in any order manner,
or in lending in any manner;

(iii) Such other non-banking financial institution or class of such institution, as the bank
may, with the previous approval of the central government and by notification in the Official
gazette, specify;

Section 45I(c) of the Reserve Bank of India act, 1934 defines the term “Financial Institution”
as-

Financial institution means any non-banking institution which carries on as it’s business or
part of its business any of the following activities, namely: -

(i). The financing, whether by way of making loans or advances or otherwise, of any
activities other than its own;
(ii). The acquisition of shares, stocks, bonds, debentures or securities issued by government
or local authority or other marketable securities of a like nature;

(iii). Letting or delivering of any goods to a hirer under hire-purchase agreement as defined in
clause (c) of section 2 of the hire purchase act, 1972;

(iv). The carrying on of any class of business;

(v). Managing, conducting or supervising, as foreman, agent or in any other capacity, of chits
or kooris as defined as any law which is for the time being in force in any state, or in any
business, which is similar thereto;

(vi). Collecting, for any purpose or under any scheme or arrangement by whatever name
called, monies in lump sum or otherwise, by way of subscription or by sale of units, or other
instruments or other any manner and awarding prizes or gifts, whether in cash or kind, or
disbursing monies in any other way, to persons from whom monies are collected or to any
other person, but does not include any other institution, which carries on as its personal
business: -

o Agricultural operations; or
o Industrial activity; or
o The purchase or sale of any goods (other than securities) or the providing of any
services; or
o The purchase, construction or sale of any immovable property, so however, that no
other portion of income of the institution is derived from the financing of the
purchases, constructions or sale of immovable property by other persons.

NBFCs v/s BANKS

NBFCs functions are very different from Banks. Following are some difference have
been mentioned:

 NBFCs cannot accept demand deposits.

 NBFCs do not form part of payment and settlement system and cannot issue
cheques drawn on itself.
 Deposits insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks:
  NBFCs do not have power under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Securities Interest Act, 2002.
 100% FDI in NBFCs is allowed under the automatic route in 18 specified
activities, subject to minimum capitalisation norms;
 74% FDI permitted in private sector banking, 49% under automatic route and
beyond 49% and up to 74% under approval route.

REQUIREMENT FOR REGISTRATION WITH RBI

Section 45-IA of the RBI Act, 1934 states that-

No Non-Banking Financial company shall commence or carry on the business of a Non-

Banking Financial Institution without –

 Obtaining Certificate of Registration; and

 Having Net Owned Fund of Rs. 2 crores (Prior to the issuance of notification dated
21st April, 1999 the requirement of having minimum Net owned fund was revised
from 25 lac to 2 crores)

However, as per revised regulatory framework if a NBFC having NOF less than Rs. 2 crores
then such companies need to increase the NOF in the following manner –

 Rs. 1 crore before 1st April, 2016; and

 Rs. 2 crores before 1st April, 2017.

An application for the registration needs to be submitted by the company in the prescribed
format along with the necessary documents for the RBIs consideration. RBI has specified
different indicative list of documentation/information to be submitted along with for the
application for NBFC-CIC (Core Investment Companies), NBFC-Factors, NBFC-MFI
(Micro Finance Company), and other NBFCs. However, in order to avert dual registration,
RBI has exempted certain class of companies from the requirement of registration with the
RBI.

CHARACTERSTICS:

NBFC is the financial institution which is working as shadow for Banks. Banks are mostly in
consumer banking while NBFCs are working in many segments like they are into consumer
banking, corporate banking, wholesale banking, mortgage loans, private banking, wealth
management, and investment banking.
 Incorporation of non-banking financial firm is essential as they are small players who
provide loans, chit funds etc, as 70% of population comes from the rural part of India. Many
companies have come forward ad registered themselves with RBI to attain the status of
NBFC. NBFCs are integral part of our Indian Economy and Financial Sector. Contribution
towards Indian economy from NBFC sector is increasing, recently it has been contributed
12.5% towards GDP of Indian economy. This recent success of NBFC can be attributed to its
lower cost, swiftness in providing strong risk management services and their reach in the
sector where public sector banks don’t.

NBFCs provide business loans at basic eligibility criteria. They study and do analysis
of the financial status of company and verify the credibility of the borrower company on the
basis of parameters. These parameters include CIBIL score, ITR, Business background,
assets quality, management of the company, liquidity and others.

Terms and conditions of the NBFCs are customer friendly because of which
companies do approach NBFCs for corporate loans rather than approach bank. Many NBFCs
provides unsecured business loans which do not require hypothecation of any collateral. For
small businesses, terms and conditions are very customer-friendly where it can avail them
loans easily.

Business loan interest rates of the NBFCs are very competitive in market. They
provide borrower moratorium period on the basis of terms and conditions of the lender. They
have zero prepayment charges and don’t have any hidden charges. They allow borrowers to
repay them as per their pocket i.e., lender offer multiple repayment tenor options that
borrower can choose from and can repay the loan.

FUNCTIONS OF NBFC’s:

(1) Receiving benefits:The primary function of nbfcs is receive deposits from the public in
various ways such as issue of debentures, savings certificates, subscription, unit certification,
etc. thus, the deposits of nbfcs are made up of money received from public by way of
deposit or loan or investment or any other form.
(2) Lending money: Another important function of nbfcs is lending money to public. Non-
banking financial companies provide financial assistance through.
(a) Hire purchase finance: Hire purchase finance is given by nbfcs to help small important
operators, professionals, and middle income group people to buy the equipment on the
basis on Hire purchase. After the last installment of Hire purchase paid by the buyer, the
ownership of the equipment passes to the buyer.
(b) Leasing Finance: In leasing finance, the borrower of the capital equipment is allowed
to use it, as a hire, against the payment of a monthly rent. The borrower need not
purchase the capital equipment but he buys the right to use it.
(c) Housing Finance: NBFC’s provide housing finance to the public, they finance for
construction of houses, development of plots, land, etc.
(d) Other types of finance provided by NBFCs include: Consumption finance, finance for
religious ceremonies, marriages, social activities, paying off old debts, etc. NBFCs provide
easy and timely finance and generally those customers which are not able to get finance
by banks approach these companies.
(e) Investment of surplus money: NBFCs invest their surplus money in various profitable
areas.Regulation of NBFC’s in India:
There are certain businesses that are involved in providing financial activities but do not need
to obtain a registration with RBI. These types of entities are regulated by other financial
sector regulators, and to avoid dual regulation, they are not required to obtain an NBFC
License from RBI. They are:
 Insurance Companies: These are regulated by the Insurance Regulatory and Development
Authority of India (IRDA),
 Housing Finance Companies: Being regulated by the National Housing Bank (NHB),
 Stock-Broking Companies: These are regulated by the Securities and Exchange Board of India
(SEBI),
 Merchant Banking Companies: Again, being regulated by SEBI,
 Mutual Funds: SEBI is the regulator,
 Venture Capital Companies: SEBI is the regulatory authority,
 Companies running Collective Investment Schemes: SEBI is the regulator,
 Chit Fund Companies: These are regulated under the Chit Fund Act and by the respective
State Governments,
 Nidhi Companies: Being regulated by the Ministry of Corporate Affairs (MCA).

TYPES OF NBFC’s:

TYPES OF NBFCS

NBFCS

LIABILITY SIZE ACTIVITY

LIABILITY
There are two types in classification of NBFCs by Liability.

 Deposit accepting NBFCs

 Non-Deposit accepting NBFCs

All Non-Banking Financial Companies don’t accept deposits. Only those NBFCs
which are holding a valid Certificate of Registration (CoR) with authorisation to
accept Public Deposits can accept/hold public deposit.
 Section 45-I(bb) of the Reserve Bank of India Act, 1934 defines the term deposits as-

Stores (Deposits) incorporates and will be deemed always to have included any
receipt of cash by way of deposit or credit or in any other structure, however does
exclude -

(i) Amounts raised by the way share capital;

(ii) Amounts contributed as capital by partners of the firm;
(iii) Amounts received from scheduled bank or co-operative bank or any
other banking company as defined in clause (c) of section 5 of the banking
regulation act, 1949;
(iv) Any amount received from, - a State financial corporation, any financial
institution specified in or under section 6 a of IDBI act, 1964, or any other
institution that may be specified by bank in this behalf;
(v) Money got in normal course of business, by method for – Security Deposits,
Dealership Deposits, sincere cash, and advance against request of
merchandise, properties or administrations.
(vi) Any sum got from an individual or a firm or a relationship of a people not
being a body corporate, enlisted under any institution identifying with cash
loaning which is for now in power in any state;

SIZE

NBFCs are categorised into two different categories viz. Deposit accepting and Non-
Deposit accepting. The non-depositing NBFCs further bifurcated into:

1. Systematically Important-
The term “Systematically important non-deposit taking non-banking financial
company” has been defined to means a Non-Banking Financial Company not
accepting/holding public deposits and having total assets of Rs. 500 crores and
above.
2. Non-systematically Important-
 The term “Non-systematically important non-deposit taking non-banking financial
company” has been defined to means a Non-Banking Financial Company not
accepting/holding public deposits and having total assets less than Rs. 500 crores.

ACTIVITY

 Underlying one or more assets as security for

ASSET FINANCING availing credit .
COMPANY  Principal Business, Financing for Physical Assets
like automobiles, tractors, and generator sets etc.
 E.g. Magma Fincorp ltd, Edelweiss Assets
Management

 Engaged in business of pooled capital of investors

in financial securities
INVESTMENT
 It can be corporation, partnership, business trust, or
COMPANY
LLP.
 E.g. Tata Investment Corporation Li

 Provide Finance by making Loans or advances.

 Offer different types of loans as per individual’s
preference.
LOAN COMPANY  Accepts deposits at higher interest rate and further
give loans on higher interest to retailers,
wholesalers, and self-employed persons.

 Non-Deposit taking NBFC.

 Deploys 75% of its total assets in infrastructural
INFRASTRUCTURE loans.
FINANCE COMPANY  Minimum Net Owned fund Rs.300 crores,
minimum credit rating of ‘A’ or equivalent, and
CAR should be 15 %. E.g. L&T, IDFC Ltd.

 Assets size 100 crores and Accept public deposits.

 Does not hold less than 90% of its total assets in
the form of investment in shares.
 CORE INVESTMENT
COMPANY

 Non-Deposit taking NBFC with minimum Net

Owned Funds of 5 crores.
MICRO FINANCE  Loans to be extended without collateral.
INSTITUTIONS  Indebtedness should not be exceed Rs.100,000.
 E.g. Unnati Micro Finance Private Limited.
.

 Principal business of financing of acquisition or

construction of houses.
HOUSING FINANCE
COMPANY  Regulated by National Housing Finance
 Net owned fund of Rs.10 Crores
 E.g. HDFC ltd, IndiaBulls Housing Finance ltd.

SOURCE OF FUNDING
  NBFCs do not depend on CASA (Current account Saving Account) deposits in order
to raise resources. NBFCs have to look for an alternative source of money supply,
which are higher than the traditional deposits taking by banks, where the interest rate
offered is between 4%-6%.
 Assets means investment in the operation of NBFCs and liabilities are defined as
amounts owed to parties that have supplied monies, the interest charged between both
transaction is called an arbitrage which is turned into Net Interest Margin.
 One of the primary source of NBFCs is lending Long term loans. NBFCs do take loan
from banks in lump-sum, as banks usually provide loans at lower rate which is
compiled to CASA deposit, which helps NBFCs because of the have high risk-return
profile.
 Funds can be obtained through distributing debentures of the company which have to
be repaid on the maturity of the debentures. It is long term borrowing which have to
be repaid on the maturity of the debenture with its interest.
 Short term loans offered by NBFCs can be issued by raising the funds through
commercial papers (CP) which are short term unsecured promissory notes issued by
companies with the tenor of 3 months to 12 months.

Table VI.7: Sources of Borrowings of NBFCs-ND-SI

(Amount in ₹ billion)

At end- March At end- March At end-Sept Share in per cent

Items
2017 2018 2018
Mar-17 Mar-18 Sep-18
1 2 3 4 5 6 7
1. Debentures 5,795 6,321 6,681 48.6 46.2 42.5
2. Bank
2,527 3,318 4,108 21.2 24.2 26.1
borrowings
3. Borrowings
263 221 277 2.2 1.6 1.8
from FIs
4. Inter-corporate
404 500 701 3.4 3.7 4.5
borrowings
5. Commercial
1,119 1,224 1,525 9.4 8.9 9.7
paper
6. Borrowings
193 175 1 1.6 1.3 0.01
from government
7. Subordinated
333 352 361 2.8 2.6 2.3
debts
8. Other
1,283 1,580 2,062 10.8 11.5 13.1
borrowings
9. Total
11,917 13,691 15,716 100 100 100
borrowings
Note: Data are provisional.
 Source: RBI Supervisory Returns.

Advantages of NBFC:
 Can provide loans and credit facilities
 Can trade in money market instruments
 Can do wealth management such as managing portfolios of stocks and shares
 Can underwrite stock and shares and other obligations
 NBFCs are the last resorts of borrowing; NBFCs are there where banks are not
there
 NBFCs are the largest propellants of ushering finance into the country
 Agility is very important for NBFCs as it sets the banks apart. Banks function
slower as compared to the NBFCs
 The use of modern methods by NBFCs has overcome key challenges that had
overwhelmed conventional lending. NBFCS have made great use of technological
advancements like the use of mobile phones and the internet which has helped in
making information easily accessible anytime anywhere. It has reduced the
demand and reliance on bank branches
 Technology is not only at the head of banking and financial services, but also an
increasingly digitized India has underpinned the rise of NBFCs. Digitalization has
given NBFCs the ability to present multiple choices and reach the larger audience
at quicker pace. This indirectly gives rise to larger NBFCs
 Combination of partnership and database helps in increasing penetration of
financial inclusion. To reach large numbers of customers successfully, and
minimize risks, NBFCs have forged partnerships including the government to use
their database and identify customer worthiness. Thus lending has been
productive

Disadvantages of NBFC:
 NBFCs cannot accept demand deposits as it falls within the realm of activity of
commercial banks
 An NBFC is not a part of the payment and settlement system and as such an
NBFC cannot issue cheques drawn on itself
 Deposit insurance facility is not available for NBFC depositors unlike in case of
banks
 All NBFCs cannot accept deposits; only some can. Only those NBFCs holding a
valid Certificate of Registration with authorisation to accept Public Deposits can
accept/hold public deposits
 The regulatory mechanism for NBFCs is stringent

CREDIT RATING (INTERNAL RATING)

A credit rating organisation is an organisation that rates accounts holders which are
going to pay back the amount of credit which have been availed to them on the basis of their
ability to pay back interests and principal amount on time and the probability of defaulting.
These companies also analyse the creditworthiness of debt and issuers and provide the credit
ratings to only organisations and not individuals consumers. The assessed entities may be
companies, special purpose entities, state governments, local government bodies, non-profit
organisations and even countries. There are specialized credit bureaus which have been set up
for the individual. These bureaus assign credit score to each of the individual on the basis of
their history of payment towards interest on loan and Principal amount.

Credit rating agencies, these are not too old agencies in the India. They came into
existence in the second half of the 1980’s. There are 6 Credit rating agencies which have
been recognized as the best Credit rating agencies in India namely; CARE, CRISIL, ICRA,
Brickworks rating, SMERA and IRRP. From above, I get to learn about three agencies
namely, CISIL, CARE, and ICRA. Rating provided by these agencies determine the nature
and integrals of the loan. Banks, NBFCs, or any Financial Institutions look for Credit rating
which have been assigned by the recognized Credit Rating Agency of the borrowing party. If
Credit rating is high of the borrower company then they can be given loan on lower rate of
interest. There is common parameter to rate companies called as CAMELS (Capital
Adequacy, Assets Quality, Management Quality, Earning, Liquidity, and Sensitivity) which
is used by the credit rating agency. This CAMELS have been explained as follows.

 Capital Adequacy
o Assess through Capital Trend Analysis.
o Compliance with regulations pertaining to risk based net worth requirement.
o Compliance with interest and dividend rules and practice.
o Other factors are involved in rating and assessing capital adequacy are its
growth plans, economic environment, ability to control risk, and Loan &
investments concentration.

 Assets Quality
o Covers an institutional loan’s quality, which reflects the earnings of the
company.
 o Analysing investment risk factors that company may face and comparing these
risks with company’s capital earnings, which shows the stability of the
company when faced with particular risks.
o Analysis of Company’s fair market value of investments when mirrored with
the company’s book value of investments.
o It reflected by the efficiency of a company’s investment policies and practices.

 Management Quality
o Management assessment determines whether company is able to properly
react to financial stress or not
o This parameter is reflected by the management’s capability to point out,
measure, look after and control risks of the company’s daily activities.
o Management of resources in systematic way which will reflect in efficiency.
o It covers management’s ability to ensure the safe operation of the company as
they comply with necessary and applicable internal and external regulations.

 Earnings
o Company’s ability to create appropriate returns to be able to expand, retain
competitiveness, and add capital is a key factor in rating its continued
viability.
o Determined by assessing the company’s growth, stability, valuation
allowances, net interest margin, net worth level and the quality of the
company’s existing assets.

 Liquidity
o Analyst look at interest rate risk sensitivity, availability of assets that can be
easily be converted into cash, dependence on short term volatile financial
resources and Assets Liability Management (ALM) technical competence.
  Sensitivity
o Covers how particular risk exposures can affect institutions.
o Analyst assess an institution’s sensitivity to market risk by monitoring the
management of credit concentration.
o How lending to specific industries affects company.
o Exposure to foreign exchange, commodities, equities, and derivatives are also
included in rating the sensitivity of a company to market risk.

Note- Parameters of above mentioned Credit Rating Agencies have been attached in
Annexures.

RISK ASSESSMENT MODEL (RAM)

During Summer internship in IDFC FIRST Bank, I got to learn about Risk
Assessment Model as I was working in Wholesale Banking department. This Risk
Assessment Model was an excel sheet in which I have to put financial data into that excel
sheet. There are different Risk Assessment Model for NBFC-MFI (Micro Finance Institution
and Other Non-Banking Finance Companies. CRISIL i.e. Credit Rating Service of India
Limited provides RAM to Financial Institution for internal credit rating. This internal credit is
used for making Credit Assessment Memo (CAM). While learning Risk Assessment Model,
there were many new concepts I got to learn which are very important factors of Credit
Analysis. Following are the Some important concepts which have to be taken into
consideration while Credit Assessment Model.

 Assets Classification
There are three types of assets classification which have been classified on some
criteria.
o Standard Assets -
When there is no default in repayment of principal or interest and does not
disclose any problem or carry more than normal risk attached to the business
then those assets are classified as standard assets.
 o Sub-standard assets -
Terms of the agreement regarding interest or principal amount have been
renegotiated, restructured or rescheduled after initiating of operating of
organisation till one year then the assets can be classified as non-performing
asset.

o Doubtful-assets -
Term loan, less assets, hire purchase asset or any other asset remaining sub-
standard of period exceeding 18 months or such shorter period*.

o Loss-assets –
Identified the company/external or internal auditor /RBI or an asset which is
adversely affected by a potential threat of non-recoverability due to either
erosion in the value of security or non-availability of security or due to any
fraudulent act or omission on the part of borrower.

* The period of 18 months shall be reduced to 16 months for the FY ended

March 31, 2016; 14 months for the FY ended March 31, 2017 and 12 months
for the FY ended March 31, 2018.

 Capital Risk Adequacy Ratio

The Capital Risk Adequacy Ratio is a measurement of Bank’s available capital
expressed as a percentage of a bank’s risk weighted credit exposures. It is also known as
Capital to Risk Weighted Assets Ratio (CRAR), is used to protect depositors and promote the
stability and efficiency of financial system. The Capital Adequacy Ratios ensure the
efficiency and stability of nation’s financial system by lowering the risk of banks becoming
insolvent. It has to be maintained minimum Capital Adequacy because it ensures that banks
have enough resources to absorbs a reasonable amount of losses before they become
insolvent and consequently lose the fund of depositors. Two types of capital are measured
that are Tier-1 capital, which can absorb losses without bank being cease the operation, and
Tier-2 Capital, which can absorbs the losses if the organisation is going to be winding-up.
Every NBFC’s shall maintain a minimum CAR of 15 percent. Capital Adequacy
Ratio formula as follows.

CAR= Tier-1 + Tier-2 (Capital) / Aggregate Risk Weighted Assets.

The total Tier-1 capital, at any point of time shall not be less than 8.5 percent by
March 31st, 2016 and 10 percent by March 31st , 2017.

* The total Tier II Capital for NBFC-MFIs, at any point of time, shall not exceed 100
percent of Tier I Capital.

** The Tier I capital of an IFC, at any point of time, shall not be less than 10%

 Tier-1 Capital
It includes shareholder’s equity and retained earnings which is disclosed in financial
statement of the organisation and it is primary indicator to measure a bank’s financial
health. It can be used when a bank must absorb losses without winding-up business
operations. It is the key funding source of the bank. It consists nearly all of the bank’s
accumulated funds and are generated specifically to support banks when losses are
covered so that regular business operations do not have to be shut down.
 Tier-2 Capital
It is the secondary part of bank own funds, in addition to tier 1 capital, that makes up
a bank’s required reserves. It is supplementary capital and it includes items which do
not disclosed in the financial statement of the company such as revaluation reserves,
undisclosed reserves, hybrid instruments, and subordinate debt. It is considered as less
secure than tier 1capital. It is also difficult to calculate accurate amount of Tier 2
Capital and it is very difficult to liquidate as it composes in difficult ways.

CREDIT CHECKS
 While learning in IDFC First Bank (NBFC Sector), I could learn the Credit Check. It
is term use to check company’s (Borrower) debt. That means, there are many organisations
who keeps the data of all company regarding their Loans have been taken from other
financial institutions and banks. Analyst do check whether directors of company, do they
have any credit due or any suit filed against them. Following are some aspects have been got
to know.

 CIBIL Check (Credit Information Report)

It has been recognised as the first Credit Information Company in India. It collects
and maintains records of individuals’ and companies’ loans and credit cards. These
records are submitted monthly to CIBIL by its members which are banks and other
financial institutions.
As analyst, it is very useful to get to know about companies’ all loans and
credits. It makes easy that payment history or credit-worthiness of company. Lenders
generally treat all borrowers equally. Each borrower, if approved by the lender’s
internal credit policy, would get charged the same rate of interest for particular loan
size and purpose. Before sanctioning the loan to any financial institution or any bank,
analyst firstly does credit checking through the CIBIL. It provides you the prompt
payment, as well as default payment and all facilities are mentioned in the report. The
Credit Information Report additionally has a list of enquiries made on your account
by various members banks/ financial institutions/ NBFCs for purpose of the
approving the Credit Facility.

 CRILC
Reserve bank of India has constituted a Central Repository of Information on Large
Credits (CRILC) to collect, store, and publish data on all borrowers’ credit exposures.
Banks/ Financial institutions are expected to report findings to CRILC. Banks have to
provide all information regarding their borrowers with an aggregate fund-based and
non-fund-based exposure of and over 5 crores. Banks also have to report the SMA
status of their borrowers to the CRILC. It has been built up for financial institutions to
notify the status of their stressed borrowers and submit the information to a central
database of the Reserve bank of India. CRILC reports have been useful to the lender,
 because it can be found out that from how many banks or financial institutions
borrower has borrowed money.

 MCA (Ministry of Corporate Affairs) Report

Ministry of Corporate Affairs provides the company’s master data. Lender has
to keep record of MCA report of borrower. It provides company’s CIN, Registration
number, Company Category and Sub-Category, and Class of Company that is whether
it is private or public company. It also provides how much authorised capital company
does hold and how much paid-up capital of company.
Lender can refer information regarding how much assets are there under
charge. It provides the data of all directors or signatories with their DIN/ PAN number
and provides information of directors who hold and directorship in any other
companies.

 CIBIL Suit-filed Database

India’s first credit information bureau has been established to cater to the credit
information requirement of the financial sector and serves as an effective mechanism
of cubing the growth of Non-Performing Assets (NPAs). The Reserve Bank of India
constituted a working group in December 2001 to examine the possibility of CIBIL
performing the role of collecting and disseminating information on suit-filed accounts
and list of defaulters, being reported to RBI by banks and notified Financial
Institutions.
It provides the data that if any director of borrower company has been there in suit
filed databased or not. There are two types of checking suit-filed accounts checking
1. Suit-filed accounts of Rs.1 crore and above
2. Suit filed accounts of (Wilful Defaulters) of Rs.25 lacs and above
Lender can refer this data and can take decision regarding loan should be sanctioned or
not

Growth of NBFC sector and the need for prudence

3. NBFCs have come a long way in terms of their scale and diversity of operations. They
now play a critical role in financial intermediation and promoting inclusive growth by
providing last-mile access of financial services to meet the diversified financial needs of
less-banked customers. Over the years, the segment has grown rapidly, with a few of the
large NBFCs becoming comparable in size to some of the private sector banks. The
sector has also seen advent of many non-traditional players leveraging technology to
adopt tech-based innovative business models.
4. 4. Between March 31, 2009 and March 31, 2019, the total assets2 of NBFCs grew at a
compounded annual growth rate (CAGR) of 18.6 per cent, while the balance sheets of
scheduled commercial banks (SCBs) grew at a CAGR of 10.7 per cent. Consequently, the
aggregate balance sheet size of NBFCs increased from 9.3 per cent to 18.6 per cent of
the aggregate balance sheet size of SCBs during the corresponding period. In absolute
terms, the asset size of NBFC sector (including HFCs), as on March 31, 2020, is Rs.51.47
lakh crore3 . As at end-March 2020, NBFCs have been the largest net borrowers of funds
from the financial system4 , of which, more than half of the funds were from SCBs,
followed by Asset Management Companies-Mutual Funds (AMC-MFs) and Insurance
Companies. As the financial intermediation has shifted, so has interconnectedness.
Many NBFCs now rely on banking system for funds and emergency liquidity needs.
Therefore, it is not enough to understand and confront the vulnerabilities of the banking
sector alone. The need of the hour is to understand vulnerabilities in the NBFC sector
and how shocks are transmitted to or from the sector.

40 25

35
20 20 20
30
35
Rs. lakh Crore

25 15
Per cent

20

32 11 10
15
26
10 22
5
5

0 0
FY 17 FY 18 FY 19 FY 20
Total Assets Y-o-Y(%) Growth-RHS

Source: Supervisory Returns, RBI

3. There is an increasingly complex web of inter-linkages of the sector with the banking sector,
capital market and other financial sector entities, on both sides of the balance sheet. As such NBFCs,
like other financial intermediaries, are increasingly exposed to counterparty, funding, market and
asset concentration risks, even before the COVID-19 pandemic impacted financial markets and our
lives.

The Pandemic Effect

6. In the aftermath of liquidity stress post IL&FS and DHFL events, the market funding
conditions turned difficult for NBFCs. While NBFCs with better governance standards and better
operating practices did well, others bore the brunt of the market forces. Smaller NBFCs and
Microfinance Institutions (MFIs), who were contributing significantly to the last mile credit delivery,
also got impacted as their funding sources got further squeezed. The Reserve Bank acted in a swift
and proactive manner to improve access to funding and liquidity by its monetary policy and liquidity
measures and resultantly, the cost of funds for NBFCs and HFCs has reduced substantially for all
rating categories (Chart-2).

Chart 2: Funding Cost

3-month Commercial Papers (CP) Weighted average yield
9

7
% yield

3
July October January April July October January April July October
2018 2018 2019 2019 2019 2019 2020 2020 2020 2020
HFC NBFC- Pvt.
Source: RBI Staff Calculations

7. It is important to recognize that challenges faced by some of the NBFCs were reflective of
inherent fragilities. As financial markets started differentiating between strong/well managed NBFCs
and those having perceptible weaknesses, market discipline started to play out - entities with asset-
liability mismatches or asset quality concerns faced constraints on market access. RBI, in response,
took several calibrated steps to channel credit flow into the NBFC sector and improve the sector’s
long-term resilience.

8. As the sector was slowly inching towards normalcy (as can be seen from Table-1 below), the
outbreak of COVID-19 and disruptions in economic activity due to lockdowns led to building up of
huge stress in the financial system. While the entire financial system was affected, the impact was
significantly greater on NBFCs due to their underlying business models, thereby straining their
profitability.

Table 1: Profitability of NBFC Sector (Deposit Taking and NDSI)

(Amount in Rs. Crore)
Profitability Parameters March 2017 March 2018 March 2019 March 2020
Net profit (Rs. Crore) 31,923 42,434 17,460 41,257
Annualised RoA (%) 1.5 1.6 0.6 1.2
Annualised RoE (%) 6.3 6.8 2.4 5.1
Data source- Supervisory Returns, RBI

The regulatory approach

9. The regulatory approach of the Reserve Bank has adapted to the increase in complexity of the
entities within the NBFC sector as well as the growing significance of NBFCs within the financial
sector. The core principles of NBFCs regulation, however, has remained intact, i.e., - a)
protection of depositors (in case of deposit-accepting companies) and customers; and, b)
preserving financial stability. The varying emphasis on these objectives at different points in
time has led RBI to deploy different policy tools as appropriate. We must recognise that NBFC
regulation has undergone certain fundamental changes in recent years.

10. Let me outline five of these most significant changes in brief -

(i). First and foremost, in line with RBI’s emphasis on ownership-neutral regulations, Government
owned NBFCs have been brought under the purview of prudential regulation since May 2018.
Considering that Government owned NBFCs account for more than one-third of the sector,
predominantly in infrastructure financing, this is a significant change.

(ii). Second, considering the recent turmoil some NBFCs had to face because of liquidity stress,
the criticality of sound liquidity risk management by NBFCs has been reinforced with the
introduction of the liquidity risk management framework for NBFCs with asset size above Rs.100
crore. All NBFCs, irrespective of size are encouraged to follow the framework. The guidelines
emphasize the ‘Principles of Sound Liquidity Risk Management and Supervision’ published by Basel
Committee on Banking Supervision. The framework expects the Boards of NBFCs to take an active
role in the management of liquidity risk and deploy internal monitoring tools suitable to their
business profile. More importantly, the regulations have devised a simplified and tailored Liquidity
Coverage Ratio (LCR) meant for large NBFCs. It would prepare large NBFCs to effectively meet cash
outflows even under severe liquidity stress scenarios over a 30-day horizon. No doubt, maintaining
adequate high-quality liquidity assets would have repercussion on the overall yields of NBFCs, but
the regulation is commensurate with the need to mitigate risks associated with maturity/liquidity
transformation the NBFCs engage in.

(iii). The third important development is in connection with FinTech based product delivery. It is
now well recognised that non-banking financial sector would be a fertile ground for technology-
based experimentation in financial products and services. Regulations have sought to create a
conducive environment in this regard. For example, the timely introduction of guidelines for P2P
lending platforms has ensured orderly growth of the segment anchored in high standards of
prudence. Those have made lending platforms a neutral meeting place for lenders and borrowers
and keeping them insulated from handling of funds involved in the underlying transactions.
Regulations have brought down risks while creating the right environment for legitimate expansion
of business opportunities. The ecosystem created under the Account Aggregator (AA) framework is
yet another example of proactive regulation in the technology-intense activities. The AA framework
has ushered in the required framework for safe, secure and consent-based sharing of information on
financial assets of a customer. The critical regulatory aspect to be noted here is that the Account
Aggregator does not store or view the data passing through it, thereby leaving no scope for any
perverse incentive to abuse/ misuse the financial data. Let me also emphasize that the RBI has been
flexible in according registered NBFCs to be completely app-based in financial intermediation.

(iv). The RBI revised the regulatory framework under the principles of proportionality for Core
Investment Companies (CICs) with transparency and disclosures being the focus of the revised
regulations. The learnings from failure of a large NBFC - a Core Investment Company prompted this
regulatory renovation. Large aggregate leverage at the group level aided by complex, multi-layered
ownership structures were found to be nurturing the seeds of financial instability and vulnerability.
Further, the aggregate risk view was missing at the holding company level. The revised regulatory
framework tries to plug regulatory gaps in critical areas in respect of CICs.

(v). Taking over the regulation of Housing Finance Companies (HFCs) is yet another significant
move. Changes in the regulatory framework of HFCs have been issued after wide public
consultations. The idea is to treat HFCs as a category of NBFC and bring about harmonisation of
regulations while allowing HFCs to maintain their unique characteristics and allow them to transition
to the revised regulations over a period of time, that is in a gradual manner, to make it least
disruptive for the rest of the financial sector.

11. With the growth in size and interconnectedness, NBFCs have increasingly become systemically
significant and the prudential regulations for NBFC sector have evolved to give greater focus to the
theme of financial stability. However, let’s not forget that regulation-light structure of NBFCs has
enabled the flexibility enjoyed by them. This flexibility is the primary advantage of NBFCs over
banks, enabling them to serve the last mile of financial intermediation. Therefore, it is imperative to
strike a balance between regulating the NBFCs more tightly and the need to provide them the
required flexibility.

CRISIS IN THE NBFC SECTOR

 INFRASTRUCTURE LEASING AND FINANCE COMPANY (ILFS)
It is investment company and it serves as the holding company of the
Infrastructure Leasing and Finance Company. Business operations of this company
have been working in many expertise sectors such as infrastructure, finance, and
social and environmental services.
The company has been working very well till September 2018, the IL&FS had
been defaulted due to it could not be met the debt obligations amounting to Rs.3,800
crores which resulted in the Credit squeezing of the company. The Government-
owned firms have 40% of IL&FS company which is the private entity and
Government had to ensure the solvency of IL&FS in order to maintain.
Due to this default, NBFC sector has been affected adversely and facing issues
of credit degrading, over-leveraging, and misadventures by some large entities.
Srinivas, of the officials said that,” imminent crisis has been brought in the NBFC
sector. This sector is facing issues of Credit degrading, over-leveraging, excessive
concentration, largest mismatch between assets and liabilities, which is correct and
perfect recipe for the disaster in this sector.” In May,2019, IL&FS faced the debt
obligation of Rs.94000 crores. This defaults have been significant impact on India’s
credit market. It’s borrowings from banks are around Rs.57000 crore which is made
up between 0.5% and 0.7% of banking loan. This defaults have created more trouble
for Indian lenders and already have created huge toxic loan pile.
As Government-owned firms have major stockholding in the IL&FS, IL&FS
group has been controlled by the government whose 358 subsidiaries owe more than
Rs.94000 crores to banks and other financial institutions. Government had appointed
six-members board under Uday Kotak.

 DEEWAN HOUSING FINANCE LIMITED

From September 2018, Housing Finance Companies has been facing a lot of financial
problem. This crisis started from the default of the Major player in the housing
finance company i.e. Infrastructure Leasing and Finance Services (IL&FS). IL&FS
could not pay-off its debt obligations which was nearly RS.94000 crores. It was due to
IL&FS could not pay-off its short term period debts obligations like Commercial
papers, Convertible debentures. This crisis affected another major player in Housing
Finance Companies i.e. Deewan Housing Finance Limited (DHFL). Due to this, share
of the DHFL which was trading at Rs.630 it drops directly 6825 BPS that is Rs.200.
Commercial Banks stopped lending loans to Non-Banking Financial
Companies and Housing Finance Companies due to this default in IL&FS. This also
brought liquidity crises around the all Housing Finance Companies.

Major reason for the Deewan Housing Finance crisis is that, promoters of the
company had sold shares of Rs.31000 crores illegally which has been claimed by the
Cobra-post. Losers in this entire DHFL crises were public sectors banks that are State
bank of India and Bank of Baroda.
DHFL, this housing finance company is the biggest player, as a responsible corporate
has met its all debt obligations to lenders and paid back to them in excess of Rs.17000
crores. It has strong corporate governance regime and it has been received as AAA
credit rating from lending credit agencies. All financials is checked by the global
auditors