Finance Industry Development Council · intermediation, helped commercial sector, albeit partially, to make up for historically low bank credit outstanding growth. Thus, problems

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FIDC

Non-Banking Finance Companies (NBFCs) -

Contribution to the Economy & Way Forward

Finance Industry Development Council

Presented by: Raman Aggarwal Chairman

28 September, 2017

FIDC

No. of Deposit Taking NBFCs = 179

No. of Non-Deposit Taking NBFCs

-Asset Size < Rs. 500 cr = 11,118

-Asset Size >= Rs. 500 cr (NBFC-ND-SI) = 220

________Total No. of NBFCs Registered with RBI = 11,517

________

NBFCs : Overview (As on March 31, 2017)*

* As per RBI’s Financial Stability Report dt. June 2017

FIDC

Growth in Aggregate Balance Sheet size (Y-O-Y) = 14.50% (15.50%)

Growth in Share Capital = 15.20% (4.80%)

Net Profit (%age to total income) = 14.00% (18.30%)

Growth in Loans and Advances for 2016-17 = 16.40% (16.60%)

Total Investments = 11.90% (10.80%)

Return on Assets (net Profit as %age of total assets) = 1.80% (2.10%)

Return on Equity (net profit as %age of equity) = 6.80% (7.90%)

Gross NPA (as %age of total advances) = 4.40% (4.60%)

Net NPA (as %age of total advances) = 2.30% (2.50%)

CRAR (minimum prescribed by RBI is 15%) = 22.00% (24.30%)

Growth in Total Borrowings for 2016-17 = 15.00% (15.30%)

Leverage Ratio = 2.80% (2.80%)

NBFCs have performed better than Public Sector Banks

As per RBI’s Financial Stability Report dt June 2017 Y-o-Y Growth

FY17 (FY16)



FIDC

** As per Economic Survey 2016-17, Volume II dated August 2017, Ministry of finance, Government of India

Distribution of Credit given by NBFCs

Industry - 42.20%Services - 30.80%Retail Sector - 21.50%Others - 5.50%


FIDC

NBFCs’ Assets

Loans & Advances - 70%Investments - 17%Others(*) - 13%

(*) Cash and Bank balances Other Current Assets Other Assets



FIDC

NBFCs’ Liabilities

Capital & Reserve - 26.10%Bank borrowings - 23.10%Debentures - 21.10%Commercial papers - 9.50%Others (*) - 20.20%

(*) All India FIs ECBs Public Deposits Pension Funds Current liabilities & provisions



FIDC

NBFCs’ Borrowings from Financial System

- Pension Funds are new investors- Bank Borrowings have declined from last year

SCBs - 41%AMC MFs - 35%Insurance Cos - 20%Pension Fund - 2%Others - 2%



FIDC

Network of the Indian Financial System

Bilateral exposure(both payables and receivables)

NBFCs are the 3rd Largest

Scheduled CommercialBanks - 51%AMCs MFs -13%NBFCs -12%All India FIs - 7%Insurance cos and HFCs - 8%UCBs & Pension fund - 1%Others - 8%



FIDC

Role of NBFCs

FIDCGreater Role of NBFCs in the Current Scenario

• The greater role of non-banking sector in resource mobilization, and hence credit

intermediation, helped commercial sector, albeit partially, to make up for

historically low bank credit outstanding growth. Thus, problems in the banking

sector are leading to greater reliance on non-banks for borrowers as well as

savers.

• Against asset quality concerns, credit intermediation by public sector banks has

retrenched and that by NBFCs and Mutual Fund Funds has increased

significantly.


FIDC

Ø Successful track record of more than 60 years

Ø Key aspects of financial activity are well regulated (almost at par with banks):§ Registration with the regulator§ Minimum size (Net owned Fund)§ Minimum Capital Adequacy Ratio § Prudential Norms on asset classification, income recognition and

provisioning § Know Your Customer (KYC) & Anti Money Laundering Guidelines§ Asset Liability Management Guidelines§ Credit Concentration Norms§ Maintenance of SLR§ Code of Fair Business Practices

Ø Promote Urban Financial Inclusion also (in addition to rural financial inclusion)Ø Use modern technology and have developed sound MIS Ø NPA levels have been lower than that for banksØ Small & Medium NBFCs are having a local/ regional presence (and the large

NBFCs through their branches or franchisees) are well versed with the local conditions/requirements

Why NBFCs

FIDC

ØPrevent concentration of credit risk in banks only and complement the banking services

ØProvide prompt & tailor made services with least hassles

ØProvide a personalized touch – Guidance in insurance matters and help in their hour of need at any time of the day

ØCater to a class of borrowers who :§ are “unbankable”§ Do not necessarily have high income§ are honest & sincere (gauged by the personal touch maintained with

them)

Why NBFCs ? – Contd..

FIDCExpert Committees /Task Force /Working Group on NBFCs

Ø 1971 - Bhabatosh Datta Study Group§ Reduced the number of entities to be regulated by inducing them to form corporate

bodies§ Regulatory authority should strengthen its inspection machinery § NBFCs usefully supplement the activities of banks in both deposit mobilization &

lending§ Capable of playing a dynamic role in the economy

Ø 1975 - James Raj Study Group§ Need for regulation and not prohibition of deposit acceptance by NBFCs

Ø 1987 - Chakaravarty Committee § Regulation for NBFCs should not curb their activities which genuinely help trade &

Industry§ System of licensing of NBFCs with a suitable cut-off point in regard to the level of

their business

Ø 1991 - Narasimham Committee§ Full regard to the important and growing role of Leasing & Hire Purchase

Institutions§ Need to have linkage by banks with NBFCs§ Prudential Norms and guidelines along with off-site supervision

FIDC

Ø 1992 - Shah Committee

§ Registration of NBFCs should be mandatory§ Entry level of Rs. 50 Lakhs NoF (Net Owned Funds)§ Regulation should be directed to the asset side of the balance sheet§ NBFCs cater to a section of borrowers left outside the purview of banks by the

monetary & credit policy§ NBFCs play a role in enlarging the degree of financialization of savings§ Growth of NBFCs & general economic growth are positively co-related

Ø 1996 - Khanna Committee

§ Under the RBI Act, RBI to be empowered to regulate NBFCs w.r.t entry point, compulsory registration, investment in approved securities and creation of reserve fund

§ Comprehensive supervisory framework by stratifying NBFCs based on size and off-site surveillance system

§ NBFCs play a significant role in economy, especially in - dispensation of credit to Road Transport & SSI sectors- mobilization of deposits

Expert Committees / Task Force / Working Group on NBFCs

FIDC

Ø 1998 - Vasudev Committee

§ Constituted after the infamous CRB debacle and the subsequent scams§ Formed the basis for prevailing NBFC Regulation§ NBFCs have greater reach & flexibility § Provide retail services to small & middle businesses and Road Transport

Operators§ Constitute an important link between banks and requirer of services§ Leasing & Hire Purchase Finance Companies perform a very important

intermediation role conducive to the country’s economic well being § Small NBFCs are more efficient in consumer finance

Ø 2003 - The Parliamentary Standing Committee on Finance –

§ NBFCs work like quasi banks§ Provide funds to the sectors where a credit gap exists§ NBFCs play a complementary & competitive role§ Easy access, absence of many formalities & easy money availability make NBFCs

attractive to public

Expert Committees /Task Force /Working Group on NBFCs

FIDC

Ø 2011 - The RBI Working Group on NBFCs (Usha Thorat Committee)

§ Over recent years NBFCs have assumed increasing significance and have added considerable depth to the financial sector.

§ It has become important to ensure that dynamism displayed by NBFCs in delivering innovation and last mile connectivity for meeting the credit needs of the productive sector s of the economy is not curbed.

Ø 2012 - Key Advisory Group on NBFCs (Ministry of Finance)

§ NBFCs have been playing a complimentary role to other FIs including banks in meeting the funding needs of the economy.

§ They help to fill the gaps in availability of financial services in regards to the product as well as customer and geographical segments.

§ They have been at the forefront of catering to the financial needs and creating livelihood sources of the un-bankable masses in rural and semi urban areas.

§ NBFCs have all the key characteristics to enable the government to achieve the mission of financial inclusion.

All of them have recognized and appreciated the Role of NBFCs

Expert Committees /Task Force /Working Group on NBFCs

FIDC

Ø Financial Inclusion is the process of ensuring access to appropriate

financial products and services needed by all sections of the society in

general and vulnerable groups such as weaker sections and low

income groups in particular at an affordable cost in a fair and

transparent manner by mainstream institutional players

Financial Inclusion – As Defined by RBI

FIDC

NBFCs

Reliability High- 20 Yrs of regulations almost at par with banks

Affordablitiy High- compared to MFIs & local money lenders

Accessibility High- As they cater to unbankable segment in rural & semi urban areas

Flexibility High- A balance between flexibility & low delinquencies maintained

NBFCs have all the key characteristics to achieve Financial Inclusion

How suitable are NBFCs for Promoting Financial Inclusion

FIDC

Examples of Innovation Shown by NBFCs

FIDC

Ø Used/ Second hand Vehicles’ / Equipment financing§ With the banks venturing into new asset backed retail financing§ A huge untapped market

Ø Reconditioned Vehicles’ / Equipment Financing§ Providing authenticated second hand vehicles to illiterate customers§ Backed with warranty

Ø Financing Vehicles Run on cleaner fuels like CNG/ LPG§ In compliance to the court orders§ Contributing to the cleaner environment§ Cashing on the incentives

Ø Three Wheeler Financing§ Only mode of public transport in small towns & villages§ No skills required§ Small ticket size

Ø Financing of Solar Lanterns§ Remote areas having no electricity § Funded by International Agencies including World Banks

Innovation in Products

FIDC

ØFinancing Tyres & Refrigeration Kits§ Providing additional finance for the customer in crisis

ØFinancing for Retro Fitting of CNG Kits in Vehicles§ Enables used vehicles to comply to the court orders and new

emition norms

ØGold Loans§ Fastest mode of secured lending§ Huge potential as gold is an integral part of Indian family§ Widespread in rural areas specially in South India

ØSmall Ticket Personal Loans§ No skills required§ Small ticket size

Innovation in Products – Contd..

FIDC

ØAccepting Repayment by Cash§ Borrowers do not have bank accounts

ØFlexibility in Repayment Schedule§ Not insisting on EMIs§ Borrowers repay part of their daily earnings on weekly/

fortnightly basis

ØGuiding & Helping in Asset Purchase§ Tie-ups with manufacturers and Sale-Purchase Agents§ Educate the customer on brand selection§ Providing prompt and door step after sale-service

ØTaking Care of Asset Insurance§ Tie-ups with Insurance Companies§ Handling of claims from intimation to getting the asset repaired

to issuance of claim cheques

Innovation in Operation

FIDC

ØThe Franchisee Model§ Bigger players appoint smaller one’s as their franchisee§ Leads to geographical spread of operations§ Sharing of Profit & Loss

ØBusiness Associates (BAs) Model§ Cost saving model§ Increase in geographical spread without opening

branch offices§ BAs are local entrepreneurs having grasp on the

prevailing local conditions and customers’ needs§ Stand Guarantee in every case sourced by them§ Fully responsible for recoveries§ Assets are physically verified§ Disbursement linked to their recoveries/ collections

Innovation in Business Model

FIDC

ØSrei - A leading NBFC has setup the First Construction Equipment Bank in India

ØSome Banks have outsourced their recovery operations to NBFCs

Ø “FIDC Handbook on Repossession” – A comprehensive handbook on Dos and Don’ts of Repossession of assets in case of default

Ø Issuance of Co-branded Credit Card§ A Large NBFC having a tie-up with a bank§ Exclusively meant for truck drivers§ Best suited to meet on route expenses

Examples of Innovation in Allied Activities

FIDC

Regulation of NBFCs

FIDC

The Reserve Bank of India Act, 1934

(As amended by Reserve Bank of India (Amendment) Act, 1997)

- Chapter IIIB : Provisions Relating to Non-Banking Institutions Receiving Deposits and Financial Institutions

- RBI is empowered to regulate

- Guidelines/Directions Issued By RBI which are dynamic

Legal Frame Work

FIDC

Sec. 45 I (c) and Sec. 45 I (f)

Define the activities covered under the definition of NBFCs

The List of activities include Financing, Acquisition of shares/ stock/ bonds/debentures or securities, hire purchase, collecting monies in lump-sump and otherwise

Does not include agricultural operations, industrial activities, sale purchase of

goods, purchase/construction/sale of immovable property

A company must have any of these activities singly or taken together as its Principal Business to be defined as a NBFC

Definition of NBFC

FIDC

RBI Press Release Dt. April 8, 1999

Ø If 50% or more of a company’s total assets (netted off by intangible assets) are financial assets

and

If 50% or more of a company’s gross income is from financial assets

then the Principal Business of the company is that of a NBFC

Note : Bank FD is not considered as a financial asset

Definition of Principle Business

FIDC

Classification

Liabilities Based - Deposit taking NBFC – D (Category-A) - Non- Deposit taking NBFC - ND (Category-B) - Subsidiary Company NBFC - ND (Category-C)

Activity Based - Asset Financing NBFC - AFC - Loans NBFC – LC - Investments NBFC - IC - Infrastructure Financing NBFC - IFC - Micro Financing NBFC - MFI - Factoring NBFC – FACTORS - Infrastructure Debt Fund IDF – NBFC - Core Investment CIC

Size Based - Assets of 500 Crores & Above NBFC - ND - SI(Systemically Imp.)

Classification of NBFCs

FIDC

The Key Issues

FIDC NBFCs not included in the official agenda on Financial Inclusion

Focus has been on “regulation” instead of “development” of NBFCs

Lack of level playing fields with banks & HFCs, specially in taxation matters

Fund raising is a big challenge, specially for small & medium NBFCs

Some of the State Govts treat NBFCs as money lenders under the State Money Lenders’ Act despite regulation by the RBI

Need to assign differential risk weights to assets based on their risk profile

Ø Need for Formalized arrangement for Regular interaction with RBI and the Ministry of Finance

Ø “Leasing” needs to be promoted as a tool for capital formation

Overview

FIDC

Bank Funding Lack of linkage by banks with NBFCs despite strong recommendations by

various Expert Groups Need for liberal Bank Funding at competitive rates “Wholesaler – Retailer” relationship between banks and NBFCs needed

Deposit acceptance is discouraged by RBI.

Securitization Guidelines issued by RBI have restricted securitization of receivables - it needs to be ‘Originator – friendly’

Priority Sector status accorded to bank lending to NBFCs for on-lending to priority sector has been withdrawn.

Urgent need for a refinancing window specially for small and medium NBFCs- MUDRA can play an important role

Funding of NBFCs

FIDC

Income Tax Act - Deduction allowed to banks, FIs & HFCs, for non-recognition of income on NPAs and provisions made against NPAs (u/s 36(i)(vii) of Income Tax Act) @ 7 to 10% – NBFCs allowed 5% only*

Income on NPAs is accounted on receipt basis u/s 43D of Income Tax Act by Banks and FIs - denied to NBFCs only

Exemption from TDS requirements on EMIs denied to NBFCs only TDS on lease rentals entails deduction of TDS from the principal component also GST rate on Lease Rentals of an asset give on lease = GST rate on the normal

sale of that asset – No incentive to Leasing GST on Sale of Repossessed Assets is unjustified Denial of depreciation benefits to the lessor in-spite of CBDT circular Low rate of depreciation (@15%) on Construction and Mining Equipment - need to

increase it to at least 30% (at par with CVs)

*Union Budget 2016-17

Imprudent Taxation of NBFCs

FIDC

Union Budget 2015-16 granted coverage under the SARFAESI Act, but with the following riders:

- Only NBFCs with asset base of 500 cr and above, have been given coverage

- Sections on Enforcement of Security Interest applicable only in cases where the ticket size of the loan is 1.0cr and above

NBFCs do not have access to Debt Recovery Tribunals

Indirect means - Criminal complaints for Cheque bouncing u/s 138 of The Negotiable Instruments Act : Time consuming and not very effective

Filing Application for appointing “Receiver” under the Arbitration Act – Sale of the asset cannot be done till the arbitration proceedings end

Recovery Avenues for NBFCs

FIDC

Recent Developments

FIDC

World Bank Group

(Through IFC)

Collaborates with FIDC to conduct Training

Programs for NBFCs on

- Commercial Credit Reporting

- Movable Asset Financing

FIDC

FIDCEngagement Letters Signed

FIDC

NABARDInitiates Refinancing of NBFCs

Ø NBFCs with Credit Rating AA- and above refinanced by NABARD

Ø NBFCs with lower Credit Rating to be refinanced by NAB SAMRUDDHI (Subsidiary of NABARD)

FIDC

FIDC

Hon’ble Prime Minister

Shri Narendra Modi

in his address to the nation on December 30th

2016 announced coverage of NBFCs under the

Credit Guarantee Scheme (CGTMSE) for MSME

Lending

FIDC

Following the PMs address, NBFCs are engaged in regular discussion for MSME Financing, with:

- Ministry of MSME

(through Secretary and Additional Secretary)

- SIDBI

- CGTMSE

- MUDRA

FIDC

FIDC FDI Norms have been further relaxed – entry level fixed at 2 cr and additional

capital requirements done away with

NBFCs with asset base of 500 cr & above given coverage under the SARFAESI Act

Demonetization had adversely impacted collections & disbursements in Q3 & Q4 of FY 2016-17

Insolvency and Bankruptcy Code, 2016 is a game changing law :- Recognizes business failures and provides an exit route- Acceptance of Insolvency application against the defaulting debtor by NCLT

stays all other legal proceedings under any other law

- Time bound resolution plan- If resolution is not feasible, liquidation in a time bound manner- Clearly lays down priority in which various creditors, claimants will be repaid - Creditors dues and Employee wages get higher priority over Govt dues

Impressive growth, better asset quality (low NPA levels), adequate CRAR have put NBFCs as a Bright Spot in the economy

Recent Developments

FIDC

Way Forward

FIDC Relaxation in norms likely to attract lot of FDI

RBI may create only 2 categories of NBFCs – CIC and Non CIC

Indian Finance Code (IFC) by FSLRC proposes “activity” & not ‘entity” based regulation

Huge potential for financing SMEs/MSMEs by NBFCs

Leasing as a tool for capital formation and lending to low capital SMEs needs to be promoted : World Bank has shown interest

New Players like P2P Lenders may change the rules of the game

Financial Technology (Fintech) shall play a transformational role

“Intangible” Asset based lending holds immense promise and potential

Future Scenario

FIDC

Ø Driving Financial Inclusion for more than 70 yrs

Ø Innovation and Flexibility

Ø Promoting & Encouraging Entrepreneurship

Ø Regulation history of 20 yrs

Ø Regulatory Framework “Harmonised” with Banks and other FIs

Ø Impressive & sustained Growth

Ø Better Asset Quality – Lower level of NPAs

Ø Likely to play a key role in MSME Financing

NBFCs Role in the PM’s Vision of New India

Page 48

FIDC

Thank You

Documents

Finance Industry Development Council · intermediation, helped commercial sector, albeit partially, to make up for historically low bank credit outstanding growth. Thus, problems