INDEX

SERIAL NO.

TOPIC

PAGE NO.

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INTRODUCTION:
We studied about banks, apart from banks the Indian Financial System has a large number of
privately owned, decentralized and small sized financial institutions known as Non-banking
financial companies. In recent times, the non-financial companies (NBFCs) have contributed

to the Indian economic growth by providing deposit facilities and specialized credit to certain
segments of the society such as unorganized sector and small borrowers. In the Indian
Financial System, the NBFCs play a very important role in converting services and provide
credit to the unorganized sector and small borrowers.
NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund
companies etc. NBFCs can be classified into deposit accepting companies and non-deposit
accepting companies. NBFCs are small in size and are owned privately. The NBFCs have
grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as
service oriented companies. Their main companies are banks and financial institutions.
According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of
India.
The NBFCs in advanced countries have grown significantly and are now coming up in a very
large way in developing countries like Brazil, India, and Malaysia etc. The non-banking
companies when compared with commercial and co-operative banks are a heterogeneous
(varied) group of finance companies. NBFCs are heterogeneous group of finance companies
means all NBFCs provide different types of financial services.
Non-Banking Financial Companies constitute an important segment of the financial system.
NBFCs are the intermediaries engaged in the business of accepting deposits and delivering
credit. They play very crucial role in channelizing the scare financial resources to capital
formation.
NBFCs supplement the role of the banking sector in meeting the increasing financial need of
the corporate sector, delivering credit to the unorganized sector and to small local borrowers.
NBFCs have more flexible structure than banks. As compared to banks, they can take quick
decisions, assume greater risks and tailor-make their services and charge according to the
needs of the clients. Their flexible structure helps in broadening the market by providing the
saver and investor a bundle of services on a competitive basis.
Non Banking Finance Companies (NBFCs) are a constituent of the institutional structure of
the organized financial system in India. The Financial System of any country consists of
financial Markets, financial intermediation and financial instruments or financial products.
All these Items facilitate transfer of funds and are not always mutually exclusive. Inter-

relationships Between these are parts of the system e.g. Financial Institutions operate in
financial markets and are, therefore, a part of such markets.
NBFCs at present providing financial services partly fee based and partly fund based. Their
fee based services include portfolio management, issue management, loan syndication,
merger and acquisition, credit rating etc. their asset based activities include venture capital
financing, housing finance, equipment leasing, hire purchase financing factoring etc. In short
they are now providing variety of services. NBFCs differ widely in their ownership: Some
are subsidiaries of large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd).
Many others are owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital
Market Ltd, Muthoot Bankers Muthoot Financial Services Ltd a key player in Kerala
financial services. Other financial institutions are IFCIs IFCI Financial Services Ltd or IFCI
Custodial Services Ltd (Devdas, 2005).
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public
savings for rendering other financial services including investment. All such Institutions are
financial intermediaries and when they lend, they are known as Non-Banking Financial
Intermediaries (NBFIs) or Investment Institutions.
The term Finance is often understood as being equivalent to money. However, final
exactly is not money; it is the source of providing funds for a particular activity. The word
system, in the term financial system, implies a set of complex and closely connected or interlinked Institutions, agents, practices, markets, transactions, claims, and liabilities in the
Economy. The financial system is concerned about money, credit and finance. The three
terms are intimately related yet are somewhat different from each other:

Money refers to the current medium of exchange or means of payment.

Credit or loans is a sum of money to be returned, normally with interest; it refers to a
debt
Finance is monetary resources comprising debt and ownership funds of the state.
HISTORICAL BACKGROUND.
The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by the Reserve
Bank Amendment Act, 1963 to include provisions relating to non-banking institutions
receiving deposits and financial institutions. It was observed that the existing legislative and

regulatory framework required further refinement and improvement because of the rising
number of defaulting NBFCs and the need for an efficient and quick system for Redressal of
grievances of individual depositors. Given the need for continued existence and growth of
NBFCs, the need to develop a framework of prudential legislations and a supervisory system
was felt especially
to encourage the growth of healthy NBFCs and weed out the inefficient ones. With a view to
review the existing framework and address these shortcomings, various committees were
formed and reports were submitted by them.

Some of the committees and its

recommendations are given hereunder:

1. James Raj Committee (1974):The James Raj Committee was constituted by the Reserve Bank of India in 1974. After
studying the various money circulation schemes which were floated in the country during that
time and taking into consideration the impact of such schemes on the economy, the Committee
after extensive research and analysis had suggested for a ban on Prize chit and other schemes
which were causing a great loss to the economy. Based on these suggestions, the Prize Chits
and Money Circulation Schemes (Banning) Act, 1978 was enacted
2. Dr.A.C.Shah Committee (1992):The Working Group on Financial Companies constituted in April 1992 i.e. the Shah
Committee set out the agenda for reforms in the NBFC sector. This committee made wide
ranging recommendations covering, inter-alia entry point norms, compulsory registration of
large sized NBFCs, prescription of prudential norms for NBFCs on the lines of banks,
stipulation of credit rating for acceptance of public deposits and more statutory powers to
Reserve Bank for better regulation of NBFCs.
3. Khan Committee (1995):This Group was set up with the objective of designing a comprehensive and effective
supervisory framework for the non-banking companies segment of the financial system. The
important recommendations of this committee are as follows:
i.

Introduction of a supervisory rating system for the registered NBFCs. The ratings
assigned to NBFCs would primarily be the tool for triggering on-site inspections at

ii.

various intervals.
Supervisory attention and focus

of the Reserve Bank to be directed in a

comprehensive manner only to those NBFCs having net owned funds of Rs.100 laths
iii.

and above.
Supervision over unregistered NBFCs to be exercised through the off-site surveillance
mechanism and their on-site inspection to be conducted selectively as deemed

iv.

necessary depending on circumstances.

Need to devise a suitable system for co-coordinating the on-site inspection

of the

NBFCs by the Reserve Bank in tandem with other regulatory authorities so that they
v.

were subjected to one-shot examination by different regulatory authorities.

Some of the non-banking non-financial companies like industrial/manufacturing units
were also undertaking financial activities including acceptance of deposits,
investment operations, leasing etc to a great extent. The committee stressed the need
for identifying an appropriate authority to regulate the activities of these companies,
including plantation and animal husbandry companies not falling under the regulatory
control of Either Department of Company Affairs or the Reserve Bank, as far as their

vi.

mobilization of public deposit was concerned.

Introduction of a system whereby the names of the NBFCs which had not complied
with the regulatory framework / directions of the Bank or had failed to submit the
prescribed returns consecutively for two years could be published in regional
newspapers.

4. Narasimhan Committee (1991):This committee was formed to examine all aspects relating to the structure, organization &
functioning of the financial system.
These were the committees which founded non- banking financial companies.

NON-BANKING FINANCIAL COMPANY (NBFC)

MEANING
Non-Banking Financial Companies (NBFCs) play a vital role in the context of Indian
Economy. They are indispensible part in the Indian financial system because they supplement

the activities of banks in terms of deposit mobilization and lending. They play a very
important role by providing finance to activities which are not served by the organized
banking sector. So, most the committees, appointed to investigate into the activities, have
recognized their role and have recognized the need for a well-established and healthy nonbanking financial sector.
Non-Banking Financial Company (NBFC) is a company registered under the Companies
Act, 1956 and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by Government or local authority or other
securities of like marketable nature, leasing, hire-purchase, insurance business, chit business
but does not include any institution whose principal business is that of agriculture
activity, industrial activity, sale/purchase/construction of immovable property.
Non-banking institution which is a company and which has its principal business of receiving
deposits under any scheme of arrangement or any other manner, or lending in any
manner is also a non- banking financial company.

DEFINITIONS OF NBFC.

Non-Banking Financial Company has been defined as:

(i)

A non-banking institution, which is a company and which has its principal business the
receiving of deposits under any scheme or lending in any manner.

(ii) Such other non-banking institutions, as the bank may with the previous approval of the
central government and by notification in the official gazette, specify.
NBFCS provide a range of services such as hire purchase finance, equipment lease finance,
loans, and investments. NBFCS have raised large amount of resources through deposits from
public, shareholders, directors, and other companies and borrowing by issue of nonconvertible debentures, and so on.
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public
savings for rendering other financial services including investment. All such Institutions are

financial intermediaries and when they lend, they are known as Non-Banking Financial
Intermediaries (NBFIs) or Investment Institutions:

UNIT TRUST OF INDIA.

LIFE INSURANCE CORPORATION (LIC).
GENERAL INSURANCE CORPORATION (GIC).

Regulation of NBFCs:In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing directions to the
maximum amount of deposits, the period of deposits and rate of interest they could offer on
the deposits accepted. Norms were laid down regarding maintenance of certain percentage of
liquid assets, creation of reserve funds, and transfer thereto every year a certain percentage of
profit, and so on. These directions and norms were revised and amended from time to time.
In 1997, the RBI Act was amended and the Reserve Bank was given comprehensive powers
to regulate NBFCs. The amended Act made it mandatory for every NBFC to obtain a
certificate of registration and have minimum net owned funds. Ceilings were prescribed for
acceptance of deposits, capital adequacy, credit rating and net-owned funds. T he Reserve
Bank also developed a comprehensive system to supervise NBFCs accepting/ holding public
deposits. Directions were also issued to the statutory auditors to report non-compliance with
the RBI Act and regulations to the RBI, Board of Directors and shareholders of the NBFCs.
Different types/categories of NBFCs registered with RBI.
NBFCs earlier were broadly classified into Deposit accepting NBFCs (NBFCs-D) and NonDeposit accepting NBFCs (NBFCs-ND-SI) . However, with the changing times there are
several categories of NBFCs created based on their activity with new categories being
introduced in 2011-12 and 2012 -13.
1. Types of NBFCs by regulatory intensity:Existing types of NBFCs by regulatory intensity, however after the implementation of
the revised regulatory framework the types will increase and will be as shown.

Based On
acceptance or
Non-acceptance
of deposits

Non Deposit
taking

Deposit Taking

NBFC - ND

NBFC - ND
(Customer
Interface &
Accepting Public
Funds)

NBFC - ND
(Accepting Public
Funds Only)

2. Based On Nature of Business.

NBFC - ND - SI

NBFC - ND
(Customer
Interface Only)

NBFC - ND
(Neither
Customer
Interface nor
Accepting Public
Funds)

Asset Fincance
Company

Loan Company

Investment
Company

Based ON
Nature of
Business

Infrastructure
Debt Funds
Micro Finance
Institutions
Core
Investment
Companies
Non Operating
Holding
Financial
Company
Factoring
Companies

Within this broad categorization the different types of NBFCs are as follows: Asset Finance Company(AFC): An AFC is a company which is a financial
institution carrying on as its principal business the financing of physical assets
supporting productive/economic activity, such as automobiles, tractors, lathe
machines, generator sets, earth moving and material handling equipments, moving on
own power and general purpose industrial machines. Principal business for this
purpose is defined as aggregate of financing real/physical assets supporting economic
activity and income arising there from is not less than 60% of its total assets and total
income respectively.

 Loan Company (LC): LC means any company which is a financial institution

carrying on as its principal business the providing of finance whether by making loans
or advances or otherwise for any activity other than its own but does not include an
Asset Finance Company.
Investment Company (IC): IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities.
Infrastructure Finance Company (IFC): IFC is a non-banking finance company a)
which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a
minimum Net Owned Funds of Rs. 300 crore, c) has a minimum credit rating of A
or equivalent d) and a CRAR of 15%.
Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the
business of acquisition of shares and securities which satisfies the following
conditions:i.

It holds not less than 90% of its Total Assets in the form of investment in
equity shares, preference shares, debt or loans in group companies.

ii.

Its investments in the equity shares (including instruments compulsorily

convertible into equity shares within a period not exceeding 10 years from the
date of issue) in group companies constitutes not less than 60% of its Total
Assets.

iii.

It 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.

iv.

It does not carry on any other financial activity referred to in Section 45I(c)
and 45I(f) of the RBI act, 1934 except investment in bank deposits, money
market instruments, government securities, loans to and investments in debt
issuances of group companies or guarantees issued on behalf of group
companies.

v.

Its asset size is Rs 100 crore or above.

vi.

It accepts public funds.

Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDFNBFC is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5 year maturity. Only Infrastructure Finance
Companies (IFC) can sponsor IDF-NBFCs.
Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC
having not less than 85%of its assets in the nature of qualifying assets which satisfy
the following criteria:
i.

loan disbursed by an NBFC-MFI to a borrower with a rural household annual

income not exceeding Rs. 60,000 or urban and semi-urban household income
not exceeding Rs. 1,20,000.

ii.

Loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in
subsequent cycles.

iii.

Total indebtedness of the borrower does not exceed Rs. 50,000.

iv.

Tenure of the loan not to be less than 24 months for loan amount in excess of
Rs. 15,000 with prepayment without penalty.

v.
vi.

Loan to be extended without collateral.

Aggregate amount of loans, given for income generation, is not less than 75
per cent of the total loans given by the MFIs.

vii.

Loan is repayable on weekly, fortnightly or monthly instalments at the choice

of the borrower.

Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in

the principal business of factoring. The financial assets in the factoring business
should constitute at least 75 percent of its total assets and its income derived from
factoring business should not be less than 75 percent of its gross income.

ROLE OF NON- BANKING FINANCIAL COMPANIES.

1. Promoters Utilization of Savings:- Non- Banking Financial Companies play an
important role in promoting the utilization of savings among public. NBFCs are able
to reach certain deposit segments such as unorganized sector and small borrowers
were commercial bank cannot reach. These companies encourage savings and
promote careful spending of money without much wastage. They offer attractive
schemes to suit needs of various sections of the society. They also attract idle money
by offering attractive rates of interest. Idle money means the money which public
keep aside, but which is not used. It is surplus money.
2. Provides easy, timely and unusual credit:- NBFCs provide easy and timely credit
to those who need it. The formalities and procedures in case of NBFCs are also very
less. NBFCs also provides unusual credit means the credit which is not usually
provided by banks such as credit for marriage expenses, religious functions, etc. The
NBFCs are open to all. Every one whether rich or poor can use them according to
their needs.
3. Financial Supermarket:- NBFCs play an important role of a financial supermarket.
NBFCs create a financial supermarket for customers by offering a variety of services.
Now, NBFCs are providing a variety of services such as mutual funds, counseling,
merchant banking, etc. apart from their traditional services. Most of the NBFCs
reduce their risks by expanding their range of products and activities.
4. Investing funds in productive purposes:- NBFCs invest the small savings in
productive purposes. Productive purposes mean they invest the savings of people in
businesses which have the ability to earn good amount of returns. For example In
case of leasing companies lease equipment to industrialists, the industrialists can carry
on their production with less capital and the leasing company can also earn good
amount of profit.
5. Provide Housing Finance:- NBFCs, mainly the Housing Finance companies provide
housing finance on easy term and conditions. They play an important role in fulfilling
the basic human need of housing finance. Housing Finance is generally needed by
middle class and lower middle class people.
6. Provide Investment Advice:- NBFCs, mainly investment companies provide advice
relating to wise investment of funds as well as how to spread the risk by investing in
different securities. They protect the small investors by investing their funds in
different securities. They provide valuable services to investors by choosing the right

kind of securities which will help them in gaining maximum rate of returns. Hence,
NBFCs plays an important role by providing sound and wise investment advice.
7. Increase the Standard of living:- NBFCs play an important role in increasing the
standard of living in India. People with lesser means are not able to take the benefit of
various goods which were once considered as luxury but now necessity, such as
consumer durables like Television, Refrigerators, Air Conditioners, Kitchen
equipments, etc. NBFCs increase the Standard of living by providing consumer
goods on easy instalment basis. NBFCs also facilitate the improvement in transport
facilities through hire- purchase finance, etc. Improved and increased transport
facilities help in movement of goods from one place to another and availability of
goods increase the standard of living of the society.
8. Accept Deposits in Various Forms:- NBFCs accept deposits forms convenient to
public. Generally, they receive deposits from public by way of depositor a loaner in
any form. In turn the NBFCs issue debentures, units certificates, savings certificates,
units, etc. to the public.
9. Promote Economic Growth:- NBFCs play a very important role in the economic
growth of the country. They increase the rate of growth of the financial market and
provide a wide variety of investors. They work on the principle of providing a good
rate of return on saving, while reducing the risk to the maximum possible extent.
Hence, they help in the survival of business in the economy by keeping the capital
market active and busy. They also encourage the growth of well- organized business
enterprises by investing their funds in efficient and financially sound business
enterprises only. One major benefit of NBFCs speculative business means investing
in risky activities. The investing companies are interested in price stability and hence
NBFCs, have a good influence on the stock- market. NBFCs play a very positive and
active role in the development of our country.

FUNCTIONS OF NON- BANKING FINANCIAL COMPANIES:

I.

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

II.

from public by way of deposit or loan or investment or any other form.

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:- NBFCs 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.

RESEARCH METHODOLOGY
Research Methodology refers to search of knowledge .one can also define research
methodology as a scientific and systematic search for required information on a specific
topic.
The word research methodology comes from the word advance learners dictionary
meaning of research as a careful investigation or inquiry especially through research
for new facts in my branch of knowledge for example some author have define
research methodology as systematized effort to gain new knowledge.

OBJECTIVES OF THE STUDY.

To Study the growth of Non-banking financial companies in India.
To Study the contribution of NBFCs in India.
To Study the Growth rate of NBFCs As Compare to Banking Financial Institutions.

Data and Methodology:

For the present study data are collected from various issues of RBI Bulletin regarding
Financial and Investment companies. This Report analyses the performance of non-Banking
financial companies during the year 2013-14. The study is based on the audited annual
accounts of 12,029 companies, which closed their accounts during the period April 2013 to
March 2014.
Interpretation:As of March 2014, there were 12,029 NBFCs registered with the Reserve Bank, of which 241
were deposit-accepting (NBFCs-D) and 11,788 were non deposit accepting (NBFCs-ND).

NBFCs-ND with assets of `1 billion and above had been classified as Systemically Important
Non-Deposit accepting NBFCs (NBFCs-ND-SI)25 since April 1, 2007 and prudential
regulations such as capital adequacy requirements and exposure norms along with reporting
requirements were made applicable to them. From the standpoint of financial stability, this
segment of NBFCs assumes importance given that it holds linkages with the rest of the
financial system.

Performance:Consolidated balance sheet of NBFCs

Item

2013

2014

1. Share Capital
2. Reserves & Surplus
3. Total Borrowings
4. Current Liabilities & Provisions
Total Liabilities/ Assets
1. Loans & Advances 7
2. Hire Purchase Assets
3. Investments
4. Other Assets
Memo Items

647
2,276
8,104
574
11,601
7,600
805
1,945
1,250

695
2,457
8,902
647
12,701
8,455
896
2,075
1,276

1. Capital Market Exposure (CME)

2. CME to Total Assets (per cent)
3. Leverage Ratio

885
7.6
3.0

1,029
8.1
3.0

Percentage
Variation
7.4
8.0
9.8
12.8
9.5
11.2
11.3
6.6
2.1
16.4

During 2013-14, the overall balance sheet of NBFCs expanded by 9.5 per cent (As Shown in
Balance sheet). Loans and advances (a major component on the assets side) increased by 11.2
per cent. Total borrowings, which constituted more than two-third of their liabilities,
increased by 9.8 per cent.

Financial performance of NBFCs

Items
1. Total Income
2. Total Expenditure

2013

2014
1,272
1,039

1,436
1,147

3. Net Profit
4. Total Assets

233
11,601

290
12,701

18.3
2.0

20.2
2.3

Financial Ratios (per cent)

5. Net Profit to Total Income
6. Net Profit to Total Assets

The financial performance of NBFCs improved during 2013-14 as their net profit to total
income increased from 18.3 per cent to 20.2 per cent. As a result, return on assets rose to 2.3
per cent as of March 2014 from 2.0 per cent a year ago.

The NBFC sector has been gaining systemic importance in the recent years
and the share of NBFC has steadily grown from 10.7% of banking assets in
2009 to 14.3% of banking assets in 2014.

Banking Assets
16
14
12
10

Banking Assets

8
6
4
2
0
2009

2014

Asset quality:The asset quality of the NBFCs sector has been deteriorating since the quarter ended March
2013 (Chart 2.34). The Reserve Bank issued separate guidelines for both banks and NBFCs
with an objective of mitigating the stress due to their NPAs. NBFCs were advised to identify
incipient stress in their accounts by creating a sub-asset category viz. Special Mention
Accounts (SMA), which was further divided into three sub-categories (viz., SMA-0, SMA-1
and SMA-2) based on the extent of principal or interest payment overdue as also the
weakness of their accounts. They were also directed to report relevant credit information to
the Central Repository of Information on Large Credits

Capital adequacy:As per the guidelines, NBFCs are required to maintain a minimum capital consisting of TierI26 and Tier-II capital, of not less than 15 per cent of their aggregate risk-weighted assets. As
of March 2014, by and large, the capital adequacy position of the NBFCs remained
comfortable and was well above prudential norms. Nevertheless, CRAR of the NBFCs
slipped from the peak of 29.0 per cent as of September 2013 to 27.2 per cent as of March
2014.

Profitability
RoA of NBFCs increased to 2.5 per cent in September 2014 after remaining at around 2.3 per
cent in previous three quarters.

Stress tests: Credit risk:System level

A stress test on credit risk for NBFC sector27 as a whole for the period ended September
2014 is carried out under three scenarios: (i) GNPA increased by 0.5 SD (ii) GNPA increased
by 1 SD and (iii) GNPA is increased by 3 SD. The results suggest that under first two
scenarios, CRAR of the NBFC sector is unaffected while in the third scenario, it declines to
23.0 per cent from its level of 23.6 per cent.
Individual NBFCs
A stress test on credit risk for individual NBFCs is also conducted for the same period under
the same three scenarios. The results indicate that under scenarios (i) and (ii) around 1.6 per
cent of the companies will not be able to comply with the minimum regulatory capital
requirements of 15 per cent, while 4.1 per cent of companies will not be able to comply with
the minimum regulatory CRAR norm under third scenario.

Increasing size and systemic importance:The NBFC sector has been gaining systemic importance in the recent years
and the share of NBFC has steadily grown from 10.7% of banking assets in
2009 to 14.3% of banking assets in 2014.

NBFC Assets/ Banking Aseets

16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2009

2010

2011

2012

2013

2014

Resource profile continues to be stable

Borrowings through capital market including NCDs, subordinated debt, preference shares,
perpetual debt continued to be the major source of funding for NBFCs as it accounted for
34% of total borrowings in FY14 followed by banks funding which accounted for 31% of
their total borrowings. Overall borrowing mix in FY14 has remained in-line with FY13.
Dependency on short term borrowings like commercial paper is less at around 7% which
helps them to manage their asset liability mismatches.
Revised guidelines on securitization and priority sector lending made NBFCs to re-look at
their business model. Direct loans given to NBFCs are now not classifying as priority sector
lending except for NBFC-MFIs. Lending via securitization route through direct assignment
without credit enhancement or through Pass through Certificates (PTCs) can be classified as
priority sector lending criteria.
Change in above guidelines has made NBFCs to explore channel business tie-ups and direct
assignment i.e. securitization without credit enhancement with banks to save their capital cost
and overcome fund raising constraints.

Recent Regulatory Changes:1. Loan against Shares

In the current year RBI issued guidelines on lending against shares, wherein RBI perceived
that the asset class posed a systemic risk wherein an event of default by borrower may lead to
offloading of shares by the lending NBFC in the market leading to very high volatility and
impacting NBFC ability to recover its loan. The regulation has prescribed the following
changes:
Lending restricted to 50% Loan To Value (LTV) of the security
Only A category as described by the Securities and Exchange Board of India (SEBI)
shares can be pledged as collateral to avail loan from NBFCs
Online reporting of pledge of equity shares by NBFCs to the stock exchanges

2. Lending Against Gold

In case of lending against gold, RBI harmonized the LTV ratio and valuation methodology as
different NBFCs were using different valuation methods and thereby leading to differences in
the loan amount by different players against the same collateral, both for banks as well as
NBFC. Additionally due the high risk perceived by the RBI in the segment RBI mandated
Gold loan Also, NBFCs lending against gold are required to maintain high Tier I CAR of
12%.
3. Restructuring of Advances
With regard to restructuring by NBFC, RBI has allowed only Infrastructure and Noninfrastructure project loans restructured to enjoy standard classification. In terms of
provisioning RBI has again harmonized regulation for banks and NBFCs.
4. Sharing of Special Mention Accounts (SMA) data
RBI has laid down framework for recognizing Special Mention Accounts (SMA) wherein
there are early warning signals at par with banks.Thus, NBFC need to classify early warning
accounts into
(i) SMA-0 (based on certain parameters,
(ii) SMA-1 (30-60 days overdue) and

(iii) SMA2 (60-180 overdue).

These SMA accounts need to be reported to Central Repository of Information on Large
Credits SMA-2 to trigger Joint lender forum and formulation of corrective action plan
together with banks, thus to help bank and NBFC to take corrective actions to address the
stress before it turns into NPA
5. Restriction on raising retail NCD by way of Private placement
Over the years, many NBFCs have been raising NCDs by way of private placement from
retail investors, the same posed a high risk as this effectively meant that these were in a way
retail deposits as there was no guideline to restrict the same.
Accordingly, RBI issued a circular to address this regulatory Gap which addresses the issue
a) By raising minimum investment to Rs.25 lakh in case of private placement
b) Restricting maximum investors at 49
Also now NBFC cant give loan against security of its own NCDs