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SECTOR- NBFC
GROUP – 2 (SECTION- “B”)

Akriti Singh
2022JULB02065

Aniketh Namen
2022JULB01195

Manneti Geethanjali Reddy

2022JULB01073

Nayanthara Balagopal
2022JULB07058

NBFC REPORT Nitya Arawindan

2022JULB01045

Sheetal Singh Parmar

2022JULB01142

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TABLE OF CONTENTS

1. Overview of the NBFC sector ................................................................................................3

1.1 Introduction
1.2 NBFCs - growth and evolution

2. Various categories of NBFC ...................................................................................................4

1.1 Investment & Credit Companies
1.2 Infrastructure Finance Companies
1.3 Systematically Important Core Investment Companies
1.4 Mortgage Company in Types of NBFCs

3. NBFCs funding model ............................................................................................................5

1.1 RBI Regulations for funding in NBFCs
1.2 Fund sources for NBFCs
1.3 Permitted business activities for NBFCs

4. Overview of the Market for NBFCs ........................................................................................6

1.1 Market for NBFCs
1.2 Market size of NBFCs in India

5. Understanding of customers for NBFC ...................................................................................7

1.1 Strong understanding of customer segments
1.2 Reasons: Why Customers prefer NBFCs over BANKs

6. Top players in the NBFC market ............................................................................................8

7. Government and RBI measures for NBFCs .............................................................................9

1.1 Developmental activities by Government for NBFCs
1.2 Regulation of NBFCs by RBI

8. Impact of the Covid-19 Pandemic on NBFCs ........................................................................10

1.1 Overall impact of Covid-19 on NBFCs
1.2 Government relief for NBFCs

9. Conclusion ..........................................................................................................................11
1.1 Recommendations

10. References ……….................................................................................................................12

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1. Overview of the NBFC sector
1.1 Introduction

The Indian economy has witnessed high growth rates in the last few years. Financing requirements have
also risen commensurately and will continue to increase to support and sustain the tremendous
economic growth.

NBFCs have been playing a complementary role to other financial institutions, including banks, in
meeting the economy's funding needs. They help fill the gaps in the availability of financial services that
otherwise occur in bank-dominated financial systems. The gaps are about the product as well as
customer and geographical segments.

NBFCs over the years have played a very vital role in the economy. They have been at the forefront of
catering to the financial needs and creating livelihood sources for the so-called unbankable masses in
the rural and semi-urban areas. They have created a medium of reach and communication through
strong linkage at the grassroots level and are very effectively serving this segment. Thus, NBFCs have all
the key characteristics to enable the government and regulator to achieve the mission of financial
inclusion in the given time.

1.2 NBFCs – Growth and Evolution

The NBFC sector has grown considerably in the last few years despite the slowdown in the economy. As
of March 2013, it accounted for 12.5% of the country’s Gross Domestic Product (GDP) – a measure of
the size of the economy. This is up from 8.4% in March 2006. However, this only counts NBFCs with
more than Rs 100 crore assets.

In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between
2006 and 2013. On average, it grew 22% every year. Even when the country’s GDP growth slowed to
6.3% in 2011-12 from 10.5% in 2010-11, the NBFC sector clocked a growth of 25.7%. This shows it is
contributing more to the economy every year.

RBI’s financial stability report says NBFC loans expanded 16.6% in the year, twice as fast as the 8.8%
credit growth across the banking sector.
Non-banking financial companies (NBFCs) improved their performance on most metrics in the last fiscal
year, as the banking industry struggled under the weight of a growing pile of bad loans.
According to the financial stability report (FSR) released by the Reserve Bank of India (RBI) on Tuesday,
NBFC loans expanded 16.6% in the year, twice as fast as the 8.8% credit growth across the banking
sector on an aggregate level.

The aggregate balance sheet of the NBFC sector expanded 15.5% in fiscal 2016 compared with 15.7%
the previous year, the report said, NBFCs also performed better in terms of asset

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2. Various categories of NBFC
1.1 Investment & Credit Companies

ICC-NBFC is any financial institution carrying on as its principal business – asset finance, the provision
of finance whether by making loans or advances or otherwise, for any activity other than its own, and the
acquisition of securities. And is not included in any other types of NBFC as defined by RBI in any of its
Directives.
(a) Asset Finance Company: An AFC is a financial institution that finances various assets for
individuals and businesses supporting productive/economic activity, as its principal business.
(b) Investment Company: The financial institution whose principal business is the acquisition of
securities. That is, it takes money from the public which is invested in various securities and financial
products.
(c) Loan Company: NBFC – LC is a financial institution that offers a loan for various purposes except
for AFC. The loan is offered not for assets but for other purposes such as working capital finance etc. But
includes the Housing Finance Firms.

1.2 Infrastructure Finance Companies

It is an NBFC that –
(a) Deploys 3/4th of its total assets in infrastructure loans
(b) Has a minimum Net Owned Fund of Rs? 300 crores
(c) Has been ranked at least “A” in its credit rating or similar
(d) CRAR of at least 15%

1.3 Systematically Important Core Investment Companies

An NBFC that:
(a) Holds at least 90% of its total assets by investing in shares, stocks, debt, or loan group companies.
(b) Out of 90%, 60% should be invested in equity shares or those which compulsorily convert later in
equity shares, within a period not exceeding 10 years from the date of issue.
(c) Does not trade in its investments in shares, debt, or loans in group companies except through block
sale for the purpose of dilution or disinvestment.
(d) It is not involved in any activity referred to in section 45(c) or 45(f) of the RBI act 1934.

1.4 Mortgage Company in Types of NBFC

NBFC-MGCs are FI for which:

At least 90% of the business turnover is of mortgage guarantee,

Or
At least 90% of the gross income is from the mortgage guarantee business,
Or

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NOF is Rs. 100 crores.

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3. NBFCs funding model
1.1 RBI Regulations for funding in NBFCs

NBFCs (Non-Banking Financial Companies) as the name suggests, are not banking companies. They do
not rely on CASA (Current Account Savings Account) deposits for raising funds. As CASA deposits are only
meant for banks, wherein the banks are provided with licenses by the RBI to accept monies from the
public. NBFCs do not have those luxuries, which means, the NBFCs need to look for alternate sources of
the money supply, which are higher than the deposits taken by banks, where the interest rate offered is
between 4%-6%.

1.2 Fund sources for NBFCs

After the liberalization of the Indian economy in 1991, there has been witnessed significant interest
from foreign investors in the Indian NBFC sectors.
Foreign investment in the NBFC sector is permitted under the automatic route as per the FDI
policy

(a) The automatic route is one where no approval from Foreign Investment Promotion Board (FIPB) or
RBI approval is needed before making the proposed investment. Up to 100%, foreign investment is
permitted without the approval of FIPB under the automatic
(b) All foreign transactions are required to route only through entities licensed by the RBI as per the
regulations framed under FEMA.
(c) A Foreign investment that is allowed under automatic route only in the non-banking financial service
activities are as follows:
(d) Merchant Banking, Underwriting, Portfolio Management Services, Stock Broking, Asset Management,
Venture Capital, Custodian Services, Factoring
(e) Leasing & Finance, Housing Finance, Credit Card Business, Micro Credit, Rural Credit, Non-fund based
activities, Investment Advisory Services, Financial Consultancy, Forex Broking, Credit Rating Agencies,
Money Changing Business, etc.
(f) FDI in such NBFCs is allowed without any minimum capitalization norms after 2016.

1.3 Permitted business activities for NBFCs

A Non-Banking Financial Company (NBFC) is a company that carries on the business of loans and
advances, acquisition of shares, bonds, stock, insurance business, or hire-purchase, but does not include
any institution whose principal business objective is agriculture or agriculture-allied activity, purchase or
sale of any goods (other than securities) ordinary business activity or providing any services and
sale/purchase/construction of the immovable property.

The financial institutions capable of raising money supply at a low rate like banks and end up raising
funds at a higher interest rate. This causes NBFCs to seek for alternative strategies for raising funds to
generate a higher return.

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4. Overview of the Market for NBFCs
1.1 Market for NBFCs
Non-Banking Financial Companies in India have rapidly contributed to the economy over the past few
years.
Due to heavy debts in the public sector banks, their lending capacity is declining especially in rural areas.
With this, NBFCs are increasing their presence. The main reasons for the success of NBFCs are such as
lower cost, wider reach, and strong risk management capabilities with a better understanding of
customer segments. The credit demand of our country can be fulfilled with the help of NBFCs as
traditional banks are not able to serve all.
In India, ensuring financial access to fuel growth and entrepreneurship is not an easy task however with
the help of government initiatives such as the launch of government-backed schemes; there has been a
substantial increase in the number of bank accounts all over the country.
It will provide an opportunity for NBFC market share in India to ensure sustainable growth over a
period of time.

1.2 Market size of NBFCs in India

Progress of NBFC:

NBFCs are emerging as the preferred option for fulfilling the credit needs covering various
sectors. The market share of NBFC had increased from 22.68% in March 2018 to 44.92% in
March 2020. Further, by the fiscal year, 2021-22 around 42% of Non-Banking Financial
Companies are anticipating more than 15 percent growth in their asset under management.

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5. Understanding of customers for NBFCs
1.1 Strong understanding of customer segments

The ability of NBFCs to produce innovative products in consonance with the needs of their clients is well
recognized. This, in addition to the proximity to the clients, makes the NBFCs distinct from their banking
sector counterparts. In a short period of time, NBFCs have become market leaders in most of the retail
finance segments like commercial vehicles, car financing, and personal loans. In the last decade or so,
the Indian retail finance markets have seen several new products being developed and introduced by
NBFCs.

1.2 Reasons: Why Customers prefer NBFCs over BANKs

7. Instant Approval
1. Better lending models 8. Shorter Loan Processing Time
2. Automated risk assessment 9. Competitive Interest Rates
3. Better data utilization 10. Lenient Eligibility Criteria
4. Unique offerings 11. Minimum Documentation
5. Loan Offered to More Borrowers

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6. End-to-End Online Application Process

6. Top players in the NBFC market

Bajaj Finance Ltd-

It is the largest NBFC in India based on turnover, registered with RBI. It is a subsidiary of Bajaj FinServ
Ltd and is engaged in the business of lending. Its revenue is nearly 22,413 Cr, its profit is 4937 Cr, and it
has a market capitalization of 2,49,069 cr.

Shriram Transport Finance Company Ltd-

It is a flagship company of the Shriram Group. It has a diversified group of interests like commercial
vehicle finance, consumer finance, general and life insurance, stockbroking, chit funds, and distribution
of financial products and units of mutual funds.

Aditya Birla Capital Ltd-

It IS the holding company for the financial services businesses of the Aditya Birla Group. It has a
nationwide reach with more than branches and more than 200000 agents. It is the third largest NBFC in
the list of top NBFC companies in India. It has a revenue of about Rs. 16131 cr.

L&T Finance Holdings Ltd-

It is a subsidiary of Larsen & Toubro Ltd. The company is registered under RBI as a systematically
important non-deposit-accepting core investing company. It has a revenue of nearly Rs 13873 Cr.

Mahindra & Mahindra Financials-

It is one of the best on the list of top finance companies. The product portfolio consists of vehicle
finance. The company also undertakes mutual fund distribution, fixed deposits, and personal loans. It
has a revenue of Rs. 11307 Cr.

Edelweiss Financial Services Ltd-

It is one of India’s leading financial services conglomerates. The company experiences across India’s
multiple consuming facts, from small companies to large businesses as well as average Indian urban and
rural households, it has a revenue of Rs. 10650 Cr.

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7. Government and RBI measures for NBFC
1.1 Developmental activities by Government for NBFCs

The Department of Non-Banking Supervision (DNBS) is entrusted with the responsibility of regulation
and supervision of Non-Banking Financial Companies (NBFCs) under the regulatory - provisions
contained under Chapter III B and C and Chapter V of the Reserve Bank of India Act, 1934.

Developmental activities of the Department

1. Co-ordination with State Governments to pass State Legislation to curb unauthorized and fraudulent
activities
2. Conducting public awareness programs, depositors' education, conducting two workshops/seminars
or trade and industry organizations
3. Promoting Self-Regulatory Organization (SRO) for NBFC-MFI
4. Conducting training programs for personnel of NBFCs, State Governments, State Police, and auditors
of NBFCs
5. Interacting with co-regulators viz., SEBI, IRDA, and Government of India and State Governments for
greater coordination on related issues.

1.2 Regulation for NBFCs by RBI

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8. Impact of the Covid-19 Pandemic on NBFCs
1.1 Overall impact of Covid-19 on NBFCs

On 25 March 2020, India went into a nationwide, comprehensive lockdown, and economic activities
came to an abrupt halt. Because of the measures adopted to prevent the spread of COVID-19 (e.g.,
social distancing, widespread mobility restrictions, and temporary closures of all kinds of businesses),
there were large-scale disruptions in supply chains and a massive reduction in both aggregate supply
and demand. The strict lockdown until late June 2020 imposed enormous hardship on all economic
agents.

Most NBFCs had to shut down their branch networks, resulting in stalled operations. For consumer
lending-focused NBFCs (such as those in the business of lending for housing, cars, and consumer
durables) the underlying businesses were temporarily shut and hence there was no opportunity to lend.

1.2 Government relief for NBFCs

NBFCs are already facing liquidity shortages amid dwindling cash flows. This is despite the policy
announcements by the RBI to inject liquidity into the banking system even with the explicit objective of
lending to NBFCs.
However, given the heightened risk aversion in the banking system, this long-term repo
operations scheme has so far not been very effective in providing much-needed liquidity to NBFCs.
In fact, the spreads during the COVID-19 pandemic have been higher than the borrowing costs faced by
NBFCs in the post-IL&FS default period in FY2019. Mutual funds have also been reducing their exposure
to NBFCs.
The Atmanirbhar Bharat (Self-Reliant India) fiscal relief package announced by the Finance
Minister in May 2020 to alleviate the adverse impact of the COVID-19 crisis included two liquidities
7 schemes worth ₹750 billion for NBFCs:

(a) A ₹300 billion liquidity scheme to invest in investment-grade debt papers

(ii) A ₹450 billion partial credit guarantee scheme. This policy initiative eased the liquidity position of
NBFCs.

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9. Conclusion
NBFCs have turned out to be engines of growth and are an integral part of the Indian financial system,
enhancing competition and diversification in the financial sector, spreading risks specifically at times of
financial distress, and have been increasingly recognized as complementary to the banking system at
competitive prices. The competitive environment is augmented by lending practices and the quality of
services compared to banks. NBFCs frame a well-thought customer-oriented product planning and
pricing strategy with a commitment to add value to customers. This approach enables NBFCs to
legitimize their presence amidst a volatile, and competitive environment.

As IFCI is a Systemically Important Non-Banking Financial Company (NBFC-ND-SI), it is

essential that rigorous standards of appraisal and diligence are followed and due
consideration is given to its own financial/commercial interest during the process of appraisal
and extension of credit facilities.

1.1 Recommendations
The credit appraisal mechanism should be strengthened.

• The Company should strictly comply with the RBI guidelines applicable to
Systemically Important Non-Deposit taking Non-Banking Financial Companies.

• The Company should strictly adhere to its General Lending Policy and should not
take recourse to deviations as a matter of routine.

• The Company should assess the financial position of the borrower company along
with that of the pledgor Company/buyback entity while sanctioning financial
assistance.

• The action for recovery needs to be initiated immediately on default by enforcing the
available security.

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10. References

SOURCE:1
Study on NBFC by Rajeswari Sengupta, Lei Lei Song, and Harsh Vardhan, ADB SOUTH ASIA WORKING
PAPER SERIES.

SOURCE:2
Et BFSI article on the opportunities & challenges for NBFCs catering to New to Credit Customers

SOURCE:3
Enter slice article on Market Size of NBFC (Non-Banking Financial Companies) in India

SOURCE:4
https://www.rba.gov.au/publications/bulletin/2021/dec/the-indian-banking-system.html

SOURCE:5
https://poonawallafincorp.com/blogs/why-choose-nbfc-over-banks-for-business-loan-in-
india.php#:~:text=Higher%20interest%20rates%20result%20in,a%20loan%20from%20an%20NBFC

SOURCE:6
CRISIL Research, NBFC Report – 2020

SOURCE:7
https://www.moneytap.com/blog/nbfcs-vs-traditional-banks/

SOURCE:8 https://cag.gov.in/cag_old/sites/default/files/audit_report_files/Chapter_8_
%E2%80%93_Conclusion_and_recommendations_of_Report_No.16_of_2017_Performance_audit_Unio
n_Government_Credit_Risk_Management_in_IFCI_Limited_Reports_of_Ministry_of_Finance.pdf

SOURCE: 9
https://economictimes.indiatimes.com/industry/banking/finance/banking/nbfcs-seek-continued-
liquidity-support-in-upcoming-budget/articleshow/80369343.cms

SOURCE:10
https://www.rbi.org.in/Scripts/NBFCCitiChart.aspx

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