Icra NBFC Report Feb '04

Industry Comment Non-Banking Financial Company
ICRA
ICRA Sector Analysis

NBFC
The Indian Non Banking Financial Company
ICR
February 2004
Industry Comment
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Contacts:
Vineet Nigam Manager
Rajeev Thakur Research Head
Amul Gogna Executive Director &
Chief of Information and Grading Service
Date February 2004
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TABLE OF CONTENTS
Environment Analysis: Porter's Model................................................................................4
Structure of the Industry....................................................................................................5
Key Issues Facing the Players ............................................................................................6
High Degree of Competition ............................................................................................6
Slowdown in Growth .......................................................................................................8
Policy Reforms ................................................................................................................9
Competition from SCBs ................................................................................................. 11
Depositor Protection ...................................................................................................... 13
Trends in Production, Consumption, Price, Capacity Utilisation ....................................... 14
Business Profile ............................................................................................................ 14
Type-wise Profile of the NBFC Sector ............................................................................ 14
Region -Wise Profile....................................................................................................... 14
Asset Profile (excl. RNBCs) ........................................................................................... 15
Public Deposits (PDs) Profile ......................................................................................... 15
Region -Wise Profile of PDs ............................................................................................ 15
Maturity Pattern of PDs (excl. RNBCs) ......................................................................... 15
Interest Rate Pattern of PDs (excl. RNBCs)................................................................... 16
Borrowing Profile (excl. RNBCs).................................................................................... 16
Industry Concentration by Assets (excl. RNBCs) ........................................................... 16
Industry Concentration by Deposits (excl. RNBCs)........................................................ 17
Industry Concentration by NOF (excl. RNBCs) ............................................................. 17
DEMAND SUPPLY POSITION ........................................................................................ 17
Liabilities Profile........................................................................................................... 17
Lending Profile ............................................................................................................. 19
REVIEW OF PERFORMANCE ........................................................................................ 19
NEW PROJECTS ............................................................................................................. 21
OUTLOOK ....................................................................................................................... 21
ENVIRONMENT ANALYSIS : PORTER'S MODEL
Threat of Substitutes:
Medium to High
As a financial intermediary, NBFCs
face competition from scheduled
commercial banks (SCBs) and capital
markets. Non-Banking Financial
Companies (NBFCs) offer a wide
variety of financial services and play an
important role in providing credit. As
compared with many SCBs, they have
an ability to take quicker decisions, but
face the disadvantage of higher cost of
funds.
Bargaining Power of Inter-Firm Rivalry: Medium Bargaining Power of

Suppliers: Medium Buyers: Medium
Although the number of players is
Reduced dependence on deposits high, firms have different clientele The major portion of the
and increased borrowings from based on their borrowing costs, and assets of NBFCs continue to
banks/financial institutions. size of business be in Hire Purchase
Better rated NBFCs face little (HP)/Equipment Leasing (EL).
constraint in borrowings. Asset quality deteriorated in
the late-1990s, before
recovering in recent years.
Barriers to entry: Medium

Certificate of registration (CoR)
from RBI necessary
Minimum net owned funds (NOF)
for registration Rs. 20 million for
new NBFCs seeking grant of CoR on
or after April 21, 1999.
Stringent regulatory supervision by
the RBI.
STRUCTURE OF THE INDUSTRY

In terms of the Section 45I(f) (read with Section 45I(c)) of the Reserve Bank of India (RBI)
Act, 1934, as amended in 1997, the principal business of NBFCs is that of receiving
deposits, or that of a financial institution (FI), such as, lending, investment in securities,
hire purchase (HP) finance or equipment leasing (EL). As shown in table below, NBFCs in
India are a combination of heterogeneous entities.
Types of NBFCs
Entity Principal Business
Equipment leasing company Equipment leasing or financing of such activity.
(ELC)
Hire purchase finance company Hire purchase transactions or financing of such transactions.
(HPC)
Investment company (IC) Acquisition of securities; includes primary dealers which, inter alia,
deal in underwriting and market-making for government securities.
Loan company (LC) Providing finance by making loans or advances, or otherwise for any
activity other than its own; excludes EL/HP/Housing Finance
Companies (HFCs).
Residuary non-banking company Receiving deposits under any scheme or arrangement, by whatever
(RNBC) name called, in one lump-sum or in installments by way of
contributions or subscriptions or by sale of units or certificates or
other instruments, or in any manner. These companies do not belong
to any of the categories as stated above.
In terms of relative importance of various activities financed by NBFCs, loans and

intercorporate deposits (ICDs) is the largest activity, accounting for 34.4% of their total
assets at end-March 2002 (the latest period for which detailed financial data is available
for the entire NBFC sector), followed by HP (33.1%), investments (10.9%), EL (7.8%), and
bills (1.7%). The latest period for which detailed financial data is available for the entire
NBFC sector is for FY2002. However, ICRA has analysed a sample of 17 NBFCs
(hereinafter referred to as sample companies), each with an asset base exceeding Rs. 2,000
million. These include large NBFCs such as Sundaram Finance, Tata Finance, Ashok
Leyland Finance, Cholamandalam, SREI, etc. Wherever relevant, an analysis of their
results for FY2003 has been carried out. These 17 companies comprise 8 companies with
an asset base of Rs. 2-5 billion, 4 with an asset base of Rs. 5-10 billion, 2 with an asset base
of Rs. 10-20 billion, and 3 with an asset base exceeding Rs. 20 billion.
In terms of public deposit (PD) taking activities, Residuary Non-Banking Companies

(RNBCs)1, which have certain similarities with banks in terms of their asset composition,
held 68.5% of the PDs of NBFCs at end-March 2002, followed by HPCs (19.7%), and
LCs/ICs (5.5%). For the NBFC sector as a whole, the PDs of NBFCs (with PDs of Rs. 200
million and above) accounted for 1.1% of broad liquidity (L 3) in India at end-June 2003,
which comprised the monetary and liquid liabilities of the banking sector, post office bank,
FIs, and NBFCs. However, the share of NBFCs has declined from 1.35% at end-March
2001.
1 RNBCs are a class of NBFCs which cannot be classified as any of the following NBFCs-EL, HP, loan and
investments, nidhi, chit fund-but tap PDs by offering various schemes, similar to recurring deposit schemes of
banks.
PDs of NBFCs and their share of L3

As of end Mar. June Sep. Dec. Mar. June Sep. Dec. Mar. June
2001 2001 200 1 2001 2002 2002 2002 2002 2003 2003
Deposits-Rs. 175.32 179.10 179.90 176.23 194.25 197.64 186.62 192.64 195.73 195.73
billion
Share of L3 1.36% 1.31% 1.29% 1.23% 1.31% 1.24% 1.15% 1.15% 1.13% 1.08%
Although significantly smaller than scheduled commercial banks (SCBs), NBFCs are
regarded as one of the major institutional purveyors of credit in India. Traditionally, both
banks and NBFCs have predominantly extended short-term credit. NBFCs have displayed
flexibility in meeting the credit needs of specific sectors like EL, HP, housing finance and
consumer finance, where gaps between the demand and supply of funds have been high
and where SCBs were earlier not easily accessible to borrowers. NBFCs in India offer a
wide variety of financial services and play an important role in providing credit to the
unorganised sector and to small borrowers at the local level. As compared with many
SCBs, they have an ability to take quicker decisions, assume greater risks, and customise
their services and charges more according to the needs of the clients. This enables them to
build up a clientele that ranges from small borrowers to established corporates. By
employing innovative marketing strategies and devising tailor-made products, NBFCs
have also been able to build up a clientele base among the depositors, mop up public
savings and command large resources. Consequently, the share of non-bank deposits in
household sector savings in financial assets, increased from 3.1% in FY1981 to 10.6% in
FY1996. In 1998, the definition of PDs was for the first time contemplated as distinct from
regulated deposits and as such, the figures thereafter are not comparable with those
before. Nevertheless, at end-March 2002, non-bank deposits accounted for 2.9% of the
financial assets of the household sector in India.
While NBFCs have often been leaders in financial innovations, there have been instances
of unsustainability, often on account of high rates of interest on their PDs and periodic
bankruptcies. The rising importance of this segment has thus resulted in increased
regulatory attention and focused supervisory scrutiny in the interests of financial stability
and depositor protection.
KEY ISSUES FACING THE PLAYERS
High Degree of Competition

The NBFC sector is characterised by the large number of NBFCs, as well as the
heterogeneous nature of these entities. Of 910 NBFCs at end-March 2002, there were 463
HPCs, accounting for 50.9% of NBFCs, followed by ILCs (231), ELCs (56), RNBCs (5), and
others (155). The five RNBCs accounted for 31.7% of the outstanding assets of Rs. 582.90
billion of the NBFCs at end-March 2002. Further, as the table below shows, RNBCs had a
market share of 68.5% of the PDs held by NBFCs at end-March 2002. The market share of
RNBCs in total PDs has increased in line with long-term trends. Among other types of
NBFCs, ELCs have witnessed a decline in number of companies and PDs. However, ILCs
have witnessed an increase in both number of companies and PDs held by them.
Market Share In dicators of NBFCs

Share of total NBFCs Share of PDs
March 31 2000 2001 2002 2000 2001 2002

EL 5.6 5.9 6.2 5.3 8.0 3.5
HP 46.3 47.9 50.9 21.1 20.2 19.7
IL 18.7 17.3 25.4 13.0 4.3 5.5
RNBCs 0.9 0.7 0.5 56.9 64.3 68.5
Other NBFCs 28.6 28.1 17.0 3.7 3.1 2.8
Total 100 100 100 100 100 100
As of end-December 2003, the RBI had granted permission to only 641 NBFCs for
accepting PDs, as compared with 710 at end-June 2003, and 784 at end-June 2002. The
number of PD-accepting companies has came down because of conversion to non -PD-
accepting activities. All NBFCs holding PDs whose CoRs have been either rejected or
cancelled have to continue repaying the deposits on due dates and dispose off their
financial assets within three years from the date of application/cancellation of the
certificate or convert themselves into non-banking non -financial companies. In recent
years, there has been a fall in the number of operating NBFCs reflecting mergers, closures
and cancellation of licenses. The number of NBFCs declined from 1,536 at end-March 1999
to 905 at end-March 2002.
The NBFC sector is characterised by a large number of companies with a small asset base,
and a few companies with large asset sizes. At end-March 2002, just 5 RNBCs accounted
for 31.7% of the total assets, and 68.5% of PDs of all NBFCs. Excluding RNBCs, at end-
March 2002, just 4.8% of the total number of NBFCs held 88.8% of the total assets of
NBFCs. By comparison, an estimated 95.2% of the total number of NBFCs held just 11.2%
of the assets of the NBFCs. An estimated 85% of NBFCs control only 3.8% of the total
assets. Further, there has been increased concentration in the sector with the smaller
players being weeded out. In recent years, while larger NBFCs have witnessed growth in
assets, the smaller size NBFCs are reporting declining market shares. While smaller
NBFCs often specialise in addressing local credit needs, their large number continues to
pose a regulatory challenge for the RBI.
Size-wise Distribution of Assets of NBFCs (excluding RNBCs)

(ercentages)
Share of total NBFCs Share of Assets Growth in Assets
(excl.. RNBCs) (excl. RNBCs)
March 31 2000 2001 2002 2000 2001 2002 2000 2001 2002
Less than Rs. 2.5 million 8.2 6.4 5.6 0.0 0.0 0.0 -73.9 -10.9 -28.6
Rs. 2.5-5 million 9.5 9.3 9.7 0.1 0.1 0.1 -26.0 -3.7 -5.7
Rs. 5-20 million 39.9 39.9 42.3 1.1 1.1 1.0 41.3 -3.1 -1.2
Rs. 20-100 million 26.7 28.7 27.3 2.9 3.2 2.7 18.8 4.5 -9.8
Rs. 100-500 million 9.0 9.1 8.2 4.8 5.3 4.0 12.9 3.1 -19.5
Rs. 500-1,000 million 1.6 1.5 2.1 2.8 2.7 3.4 -34.8 -8.6 31.6
Rs. 1,000-5,000 million 2.8 2.9 2.5 19.6 18.9 15.0 -3.7 -8.9 -16.4
Above Rs. 5,000 million 2.2 2.1 2.2 68.8 68.7 73.8 19.2 -6.1 13.8
Total 100.0 100.0 100.0 100.0 100.0 100.0 11.2 - 5.9 5.8
Reflecting the increased market share of larger NBFCs, while there were only 25 NBFCs
(excluding RNBCs) with a PD base exceeding Rs. 500 million, these 25 NBFCs accounted
for 59.4% of the PDs of all NBFCs (excl. RNBCs). By comparison, there has been a
significant reduction in smaller NBFCs—both in terms of number of entities and quantum

of PDs. While the number of NBFCs (excl. RNBCs) with PDs of less than Rs. 500 million
declined from 968 at end-March 2000 to 880 at end-March 2002, their share of PDs
declined from 47.1% to 40.6%.
Size-wise Distribution of PDs of NBFCs (excluding RNBCs)

(ercentages)
Share of total NBFCs Share of PDs Growth in PDs
(excl. RNBCs) (excl. RNBCs)
March 31 2000 2001 2002 2000 2001 2002 2000 2001 2002
Less than Rs. 2.5 million 20.6 23.1 23.6 4.7 12.5 18.9 -39.3 104.4 38.8
Rs. 2.5-5 million 36.1 35.5 33.1 2.3 2.9 2.2 68.1 -3.2 -31.9
Rs. 5-20 million 31.5 31.3 32.9 4.4 10.7 6.1 -66.0 90.7 -47.8
Rs. 20-100 million 4.3 3.5 3.3 2.4 1.5 1.3 -23.6 -53.5 -14.9
Rs. 100-500 million 4.6 3.8 4.2 33.3 12.0 12.1 31.6 -72.0 -7.6
Rs. 500-1,000 million 0.9 1.2 1.2 10.5 14.3 14.3 -31.0 5.3 -8.4
Rs. 1,000-5,000 million 1.9 1.4 1.5 42.4 35.6 45.2 -17.6 -34.9 16.6
Above Rs. 5,000 million 0.0 0.1 0.0 0.0 10.5 0.0 NA NA NA
Total 100.0 100.0 100.0 100.0 100.0 100.0 - 14.8 - 22.5 - 8.2
With a view to reinforcing financial stability, the RBI's supervisory framework lays special
emphasis on the sufficiency of NOF of NBFCs to restrict excessive leveraging. While the
larger NBFCs have witnessed some improvements in NOFs, and NOFs as percent of PDs,
the financial position of the smaller NBFCs has deteriorated. Excluding RNBCs, just 25
out of 905 NBFCs accounted for 94.6% of the NOFs of all NBFCs. By comparison, the NOF
position of smaller NBFCs has deteriorated—NBFCs with NOFs of less than Rs. 2.5
million had a cumulative negative NOF of Rs. 13.51 billion at end-March 2002, as
compared with negative NOF of Rs. 2.15 billion at end-March 2000. A major concern
continues to be that the NOF was negative for a large number of the reporting NBFCs
(excluding RNBCs) holding 18.9% of PDs as at end-March 2002.
Size-wise Distribution of NOFs of NBFCs (excluding RNBCs)

(Percentages, except as specified)
Share of total NBFCs Share of NOFs PDs as multiple of NOF
(excl. RNBCs) (excl. RNBCs)
March 31 2000 2001 2002 2000 2001 2002 2000 2001 2002
Less than Rs. 2.5 million 20.6 23.1 23.6 -3.2 -16.8 -31.6 -1.83 -0.94 -0.83
Rs. 2.5-5 million 36.1 35.5 33.1 1.7 2.3 2.4 1.67 1.62 1.24
Rs. 5-20 million 31.5 31.3 32.9 7.5 9.7 11.2 0.72 1.39 0.76
Rs. 20-100 million 4.3 3.5 3.3 4.4 4.4 4.8 0.69 0.42 0.39
Rs. 100-500 million 4.6 3.8 4.2 15.9 15.1 18.7 2.62 1.00 0.90
Rs. 500-1,000 million 0.9 1.2 1.2 9.4 15.7 18.7 1.40 1.15 1.06
Rs. 1,000-5,000 million 1.9 1.4 1.5 64.2 59.8 75.9 0.83 0.75 0.83
Above Rs. 5,000 million 0.0 0.1 0.0 0.0 9.8 0.0 NA 1.36 NA
Total 100.0 100.0 100.0 100.0 100.0 100.0 1.25 1.26 1.39
Slowdown in Growth
Although NBFCs in India have existed for a long time, they shot into prominence from the
late-1980s. This rapid expansion was driven by the scope created by the process of financial
liberalisation in fresh avenues of operations in areas, such as, HP, EL, housing, and
investment. The rapid growth of the NBFCs sector can also be attributed to other factors.
NBFCs were historically subjected to a relatively lower degree of regulation vis-à-vis

banks. Secondly, the higher rates of return on deposits offered by NBFCs enabled them to
attract a large base of small savers. Added to these was the fact that the operations of
NBFCs were characterised by several distinctive features viz., no entry barriers, limited
fixed assets and no holding of inventories-all of which led to a proliferation of NBFCs.
During 1991-98, the total assets of NBFCs increased at a Compounded Annual Growth
Rate (CAGR) of 36.7%. The deposits of NBFCs as a proportion of bank deposits increased
sharply from 0.8% during FY1986-90 to 9.5% in FY1997. Customer orientation,
concentration in the main financial centres and the attractive rates of return offered by
them were some of the reasons for their rapid growth. However, since 1997, a combination
of economic slowdown, loss of investor confidence, and tightening of regulations, has
resulted in the weeding out of many NBFCs with insufficient capital base. The number of
NBFCs has declined from 1,547 at end-March 1999 to 910 at end-March 2002. Till 1997,
although NBFCs were regulated by the RBI, the focus was mainly on the liability side. In
1997, the RBI was conferred with extensive powers for regulation and supervision of
NBFCs (discussed below). Because of regulation and weeding out of many NBFCs, the total
PDs of NBFCs have declined from Rs. 238.20 billion at end-March 1998 to Rs. 188.22
billion at end-March 2002. The total PDs of 17 sample companies declined 13.6% during
FY2003 to Rs. 17.95 billion.
Among NBFCs, because of the unfavourable operating environment for the EL and HP
business during the last few years, the business volumes of companies in these businesses
has also declined. While the PDs of EL companies declined from Rs. 19.62 billion at end-
March 1998 to Rs. 6.68 billion at end-March 2002, the PDs of HP companies also declined
from Rs. 39.38 billion to Rs. 37.09 billion.
In terms of distribution of assets, there has been a significant shift in asset deployment
away from the traditional business of EL/HP towards loans, ICDs and investments. While
the share of EL/HP in total assets declined from 42.9% at end-March 2000 to 41% at end-
March 2002, the share of loans, ICDs, and investments increased from 70.4% to 78.4%.
Policy Reforms
The NBFCs are governed by the RBI. The NBFCs are governed by various norms and
guidelines announced by the RBI. Till 1997, although NBFCs were regulated by the RBI,
the focus was mainly on the liability side. The regulatory framework for NBFCs had been
in existence since 1963 under the provisions of Chapter III B of the RBI Act and the
Directions issued thereunder. However, the powers vested with the RBI were very limited
in that it could regulate only the (a) limits upto which, (b) manner in which, and (c)
conditions subject to which the deposits could be accepted by NBFCs depending upon the
classification based on their principal business.
As these powers were not adequate from the point of view of regulation of NBFCs, it was
necessary to strengthen the legislative framework relating to regulatory powers of the RBI.
This view was also supported by various Working Groups, which examined the function
and working of the NBFC sector. Several measures were initiated by the RBI in the light of
the recommendations of the various Working Groups. In July 1996, the RBI introduced
liberalisation/rationalisation measures for NBFCs which were registered, rated and were
complying with the prudential norms. Under these measures, the eligible companies were
given freedom to determine their own rate of interest on deposits, accept
unrestricted/increased amount of deposits and maintain lower level of liquid assets. At the
same time, having regard to the recommendations of the Shah Working Group and the
observations made by the Joint Parliamentary Committee in 1992, the RBI prepared and
forwarded to the Government of India (GoI) a comprehensive draft legislation in 1994,

which was promulgated as an Ordinance by the GoI in January 1997 and subsequently
replaced by an Act in March 1997. Accordingly, the Reserve Bank of India (Amendment)
Act enacted in 1997 conferred extensive powers on the RBI for regulation and supervision
of NBFCs. Among the various measures introduced have been:
q Compulsory registration of NBFCs engaged in financial intermediation and
prescription of minimum level of net owned funds (NOF)—compulsory for NBFCs to
apply to the RBI for a certificate of registration (CoR). The minimum NOF for
registration was stipulated at Rs. 2.5 million for the then existing NBFCs and Rs. 20
million for new NBFCs seeking grant of CoR on or after April 21, 1999. The three-year
period provided in the RBI (Amendment) Act, 1997 for the NBFCs to attain the
minimum NOF necessary for registration expired on January 9, 2000. The further
three-year period granted by the RBI, at its discretion, also came to a close on January
9, 2003;
q Maintenance of certain percentage of liquid assets—NBFCs have to invest in
unencumbered approved securities, valued at a price not exceeding current market
price, an amount which, at the close of business on any day, shall be between 5-25% of
the PDs outstanding at the close of business on the last working day of the second
preceding quarter;
q Creation of reserve fund and transfer thereto every year not less than 20% of net
profits to reserve fund;
q Ceiling on quantum of PDs—(a) Loan and investment companies (1.5 times NOF if the
company has NOF of Rs. 2.5 million, minimum investment grade (MIG) credit rating,
complies with all the prudential norms and has capital adequacy ratio or CAR of 15%);
(b) EL/HP companies: if company has NOF of Rs. 2.5 million and complies with all the
prudential norms—4 times NOF with MIG credit rating and CAR of 12%; 1.5 times
NOF without MIG credit rating but CAR of 15% and above;
q CAR—12% for ELCs/HPCs with MIG credit rating; 12% for RNBCs; 15% for
ELCs/HPCs without MIG credit rating; 15% for ILCs;
q Non-performing assets (NPAs) recognition norms—Loans and Advances: Upto 6
months and 30 days past due period (past due period done away with effect from March
31, 2003); EL/HP: 12 months;
q Credit exposure norms;
q Ceiling on interest rate on PDs—11% per annum on domestic deposits, no
gifts/incentives on PDs: interest rate on non-resident external (NRE) capped at 25
basis points above the LIBOR/SWAP rates for US dollar of the corresponding maturity
on fresh repatriable NRE deposits;
q Restriction on PDs—For accepting PDs, an NBFC must have at least a MIG credit
rating; failing which it must be engaged in EL/HP, or be a RNBC. NBFCs/RNBCs
cannot accept demand deposits; Maturity periods for PDs is 12-60 months for NBFCs;
12-84 months for RNBCs.
The RBI has been continually strengthening the supervisory framework for NBFCs to
ensure sound and healthy functioning, and avoid excessive risk taking. The degree of
supervision is based on the following three criteria, viz., a) size of the NBFC, b) the type of
activity performed, and c) the acceptance (or otherwise) of PDs. The RBI's supervisory
framework rests on a four-pronged strategy encompassing the following, viz., a) on-site
inspection, based on Capital, Assets, Management, Earnings, Liquidity, and Systems and
Procedures (CAMELS), b) off-site monitoring, c) market intelligence, and d) exception
reports of statutory auditors of NBFCs.
Competition from SCBs

With SCBs also offering the same spectrum of services as NBFCs, apart from other
uniquely banking services, the distinction between SCBs and NBFCs is narrowing. On the
liabilities side, after an increase in business till the mid-1990s, NBFCs now face increased
competition from SCBs. Banks and PD-accepting NBFCs compete for deposits. Besides,
banks and NBFCs are also competing sources of funds in certain sections of the credit
markets. Even though SCBs offer much lower interest rates on deposits, their deposits
have increased at a much faster rate in recent years, as compared with NBFCs.
Indicators of Competition between SCBs and NBFCs

At March 31 1998 1999 2000 2001 2002 2003
Assets—Rs. billion
SCBs 79,572 95,037 11,100 12,952 15,364 16,989
NBFCs 455 470 513 539 583 NA
NBFCs as % of assets of SCBs 5.7 5.0 4.6 4.2 3.8 NA
Deposits—Rs. billion
SCBs 6,441 7,708 9,003 10,552 12,059 13,559
NBFCs 238 204 193 181 188 196
NBFCs as % of deposits of SCBs 3.7 2.7 2.1 1.7 1.6 1.4
Because NBFCs cannot accept PDs of less than 1-year maturity, bank deposits score higher
than NBFCs on the liquidity account, and continue to retain their dominance in the
portfolio of household financial savings. Nearly 53.4% of outstanding deposits of SCBs at
end-March 2003 were for a maturity of less than 1 year, as compared with 54.5% at end-
March 2002. By comparison, only 25% of the outstanding PDs of the NBFCs (excl. RNBCs)
at end-March 2002 were for maturity of less than 1-year. The interest rate offered by
NBFCs is much higher than by SCBs. Overall the cost of funds is higher for NBFCs than
for SCBs. While the NBFCs reported financial expenditure of 8.3% of total assets, SCBs
reported a decline in interest expenditure, as percent of assets—from 5.7% during FY2002
to 5.5% during FY2003.
After the securities scam of 1992, bank deposit mobilisation increased, as a greater part of
the household sector savings started to move from the stock markets to the banking sector.
By contrast, the disturbing developments in the NBFC sector during the mid-1990s,
tightening of supervision, and closures have resulted in NBFCs commanding a lower share
of both deposits and financial assets of the household sector. Public/regulated NBFC
deposits, as a percent of gross domestic product (GDP) declined from 1.2% during FY1999
to 0.7% during FY2003. Over the same period, bank deposits outstanding, as percent of
GDP, increased from 40.5% to 50.1%. The pattern of household financial savings also
indicates a continued preference of households for relatively safer instruments (bank
deposits, insurance, provident and pension funds, and small savings).
Composition of Financial assets of the household sector

FY Currency Bank Non-
Non- Life Provident/
Provident/ Claims on Shares & Others
Deposits Banking Insurance Pension Govt. Debentures
Deposits funds
1992 12.0 26.2 3.3 10.3 18.4 7.1 10.0 12.7
1993 8.2 36.7 7.5 8.9 18.4 4.8 10.2 5.2
1994 12.2 33.1 10.6 8.7 16.7 6.3 9.2 3.2
1995 10.9 38.4 7.9 7.8 14.7 9.1 9.3 1.9
1996 13.3 32.1 10.6 11.2 18.0 7.7 7.1 0.0
1997 8.6 32.1 16.4 10.2 19.2 7.4 4.2 1.9
1998 7.4 43.1 3.9 11.3 18.8 12.9 2.6 -0.1
1999 10.5 38.3 3.8 11.3 22.4 13.6 2.5 -2.4
2000 8.7 34.7 3.7 12.0 22.6 12.1 6.4 -0.1
2001 6.9 36.9 4.8 13.3 21.3 15.2 2.8 -1.1
2002 9.7 37.8 2.9 14.2 18.0 17.1 3.0 -2.8
Notwithstanding the increased competition between banks and NBFCs, and the dominance
of SCBs, there are areas of operational convergence due to their engagement in similar
types of activities in the broad product space of deposit mobilisation and lending. A critical
issue for regulation and supervision is the desirable degree of regulatory convergence
between banks and NBFCs. It is in this context that the RBI's regulatory framework for
NBFCs, largely follows the regulations for banks but also differs in a number of cases.
Key Regulatory Norms for Banks and NBFCs

Particulars Bank NBFC
Minimum capital/ Net Minimum capital requirements of Rs. Net owned fund of not less than Rs. 20
Owned Fund 2,000 million, to be raised to Rs. 3,000 million is a pre-requisite for grant of CoR for
million within three years of operation, in commencing the business of a non-banking
case of new banks. Promoters’ minimum financial institution.
contribution is 49% of the paid-up capital.
Statutory Liquidity Maintain in India, in either, (i) cash, (ii) To maintain in India in unencumbered
Requirement gold (at up to current market price), (iii) approved securities, valued at current
unencumbered approved securities valued market price, an amount at the close of
at a price specified by the RBI, or (iv) net business on any day which shall not be less
balances in current accounts with than 15% of the PDs outstanding as at the
nationalised banks in India, at close of last working day of the second preceding
business on any day, an amount not less quarter.
than 25% of total of demand and time
liabilities in India on fortnightly basis, or
such other percentage not exceeding 40%,
as the RBI, by way of notice, specifies from
time to time.
Cash Reserve Ratio Applicable. No such requirement.
Reserve Fund Applicable. Transfer out of the profit of Same as in the case of banks.
each year before dividend is declared, to
such reserve fund a sum, not less than 20%
of such profit.
Prior approval of RBI Necessary. Applicable in case of No such requirement.
for appointment of the amendment to the terms and conditions of
managing directors. the appointment of managing directors,
etc.
Control over Prior approval of the RBI for appointment, No such requirement for NBFCs. These
appointment of auditors re-appointment or removal of the auditor companies have freedom to appoint their
required. auditors as per the Companies Act, 1956.
Deposit directions Acceptance of deposits from the public, Detailed directions on acceptance of PDs
repayable on demand, allowed. Interest relating to, inter alia, minimum eligibility
rate payable on saving accounts prescribed criteria, quantum, minimum and maximum
by the Reserve Bank. period, rate of interest, and advertisement.
Contd…
Particulars Bank NBFC

Deposit insurance Deposits insured by the Deposit Insurance PDs are uninsured and no official agency
and Credit Guarantee Corporation of India guarantees the payment of principal or the
up to Rs.0.1 million for each depositor in interest on such PDs.
respect of his/her deposit in an insured
bank in the same capacity and in the same
right.
Refinance facility The RBI may grant refinance, No such provision in the RBI Act, 1934.
rediscounting facilities and demand loans.
Powers of The RBI has powers to sanction schemes of No such provision.
amalgamation, and amalgamation, reconstruction, and
scheme of arrangement arrangement approved by the requisite
majority of shareholders of the bank.
Winding up proceedings Special provisions for winding up of a Winding up, subject to the general provisions
banking company under certain contained in the Companies Act, 1956.
circumstances.
However, there are differences in regulation of SCBs and NBFCs reflecting their unique
characteristics and the fundamental differences in their operations. As compared with
SCBs, the regulations are relatively more stringent in case of PD-accepting NBFCs in
order to protect depositors’ interest. Since NBFCs are not directly part of the process of
credit creation, reserve requirements apply exclusively to banks. Finally, as NBFCs have
sometimes promised unsustainable returns to investors, there is a ceiling on rates offered
on NBFC deposits to avoid such past experiences.
In response to the increased competition from SCBs, one NBFC—Kotak Mahindra—has

recently converted into a SCB. Conversion of NBFC into SCBs has many positive aspects.
At present, statutory constraints on raising cheap retail deposits (maturity should not be
less than 1 year) have meant that NBFCs have found it difficult to protect interest
margins, putting pressure on profitability. With conversion into a bank, NBFCs could have
access to short-term retail deposits, which would significantly reduce their funding costs. A
universal bank would also be expected to provide the full range of banking products to its
customers, from small loans for retail individuals to project financing for big corporates
and multinationals.
Depositor Protection
Unlike deposits with SCBs (insured upto Rs. 0.1 million), deposits placed with NBFCs are
not insured, and there is no guarantee of repayment of principal and/or payment of
interest. In recent years, the RBI has initiated several measures for the benefit of
depositors, especially given the large number and varying size of various NBFCs. These
measures include:
q Upgrading legal recourse, by pursuing the enactment of legislation for protection of
interest of depositors in financial establishments;
q Greater transparency, through an extensive publicity campaign using the print and
electronic media to educate the depositors;
q Enhancing the effectiveness of supervision, by conducting training programmes for
personnel/executives of NBFCs in order to familiarise them with the objectives, genesis
and focus of the RBI's regulations; seminars for the civil and police personnel of the
State Governments; and training programmes/seminars for auditors to familiarise
them with the directions and regulations of the RBI as applicable to the NBFCs as also
the directions applicable to statutory auditors of the NBFCs;
q Reinforcing inter -regulator co-ordination by holding meetings with other regulators
like the Registrars of Companies, Department of Company Affairs of the Central
Government as well as the civil and police officials of the State Governments.
TRENDS IN PRO DUCTION, CONSUMPTION, PRICE, CAPACITY

UTILISATION
Since the NBFCs are not categorised under manufacturing sector, these trends are not
available. However, financial indicators relevant for a financial intermediary are presented
below:
Business Profile
(Rs. million, except number of reporting companies)
At end-
end- March 1998 1999 2000 2001 2002
Number of reporting Companies 1,429 1,547 1,005 981 910
Total Assets 455,081 470,485 513,243 538,780 582,900
PDs 238,205 204,289 193,417 180,840 188,220
Net Owned Funds 84,645 91,183 62,229 49,430 43,830
Of which RNBCs
Number of reporting Companies 9 11 9 7 5
Total Assets 107,183 110,805 113,173 162,440 184,580
PDs 102,487 106,443 110,038 116,250 128,890
Net Owned Funds -1,085 -6,664 -4,428 -1,790 1,110
Of which other NBFCs
Number of reporting Companies 1,420 1,536 996 974 905
Total Assets 347,897 359,680 400,070 376,340 398,320
PDs 135,717 97,847 83,380 64,590 59,330
Net Owned Funds 85,730 97,847 66,657 51,220 42,720
Type- wise Profile of the NBF C Sector

Number of companies
At end-March 2000 2001 2002
Equipment Leasing (ELC) 56 58 56
Hire Purchase (HPC) 465 470 463
Investments and Loans (ILC) 188 170 231
RNBCs 9 7 5
Others 287 276 155
Total 1,005 981 910
Region - Wise Profile

(Number of companies)
As at end-
end- March 2000 2001 2002
Others RNBCs Total Others RNBCs Total Others RNBCs Total
North 251 251 253 253 271 271
North -East 3 1 4 0 3 3
East 26 6 32 21 3 24 18 3 21
Central 122 2 124 123 3 126 92 2 94
West 86 86 81 81 70 70
South 508 508 496 1 497 451 451
Total 996 9 1,005 974 7 981 905 5 910
Mumbai 68 68 62 62 52 52
Chennai 340 340 349 349 317 317
Kolkata 23 5 28 20 3 23 18 3 21
Delhi 90 90 114 114 111 111
Asset Profile (excl. RNBCs)

(Rs. million, except percentages)
As at end-
end- March 2000 2001 2002
Amount % of total Amount % of total Amount % of total
Loans & ICD 105,614 26.4 102,710 27.3 137,100 34.4
Investments 55,787 13.9 43,440 11.5 43,340 10.9
HP 120,168 30.0 128,870 34.2 132,020 33.1
Equipment & Leasing 51,467 12.9 46,810 12.4 31,120 7.8
Bills 12,801 3.2 7,880 2.1 6,730 1.7
Others 54,234 13.6 46,630 12.4 48,020 12.1
Total 400,070 100 376,340 100 398,330 100
Public Deposits (PDs) Profile

At end-March 2000 % 2001 % 2002 %
ELC 10,212 5.3 14,500 8.0 6,680 3.5
HPC 40,835 21.1 36,590 20.2 37,090 19.7
ILC 25,175 13.0 7,850 4.3 10,290 5.5
RNBCs 110,038 56.9 116,250 64.3 128,890 68.5
Others 7,158 3.7 5,640 3.1 5,280 2.8
Total 193,417 100 180,830 100 188,230 100
Region - Wise Profile of PDs

(Rs. million)
As at end-
end- March 2000 2001 2002
Others RNBCs Total Others RNBCs Total Others RNBCs Total
North 5,290 0 5,290 5,750 0 5,750 5,540 0 5,540
North -East 15 56 70 0 0 0 40 0 40
East 20,664 75,066 95,731 2,900 76,420 79,320 2,390 78,120 80,510
Central 1,318 34,916 36,234 1,250 39,800 41,050 1,300 50,770 52,070
West 24,412 24,412 20,410 20,410 14,670 14,670
South 31,681 31,681 34,280 40 34,320 35,380 35,380
Total 83,380 110,038 193,418 64,590 116,260 180,850 59,320 128,890 188,210
Mumbai 23,812 0 23,812 20,110 0 20,110 14,450 0 14,450
Chennai 25,776 0 25,776 29,180 0 29,180 31,830 0 31,830
Kolkata 20,619 74,467 95,085 2,870 76,420 79,290 2,390 78,120 80,510
Delhi 4,527 0 4,527 4,920 0 4,920 4,600 0 4,600
Maturity Pattern of PDs (excl. RNBCs)

At end-
end- March 2000 2001 2002
Amount % Amount % Amount %
Less than 1 year 13,235 15.9 17,210 26.6 14,830 25.0
1-2 years 16,159 19.4 17,410 27.0 14,190 23.9
2-3 years 24,625 29.5 20,380 31.5 21,980 37.0
3-5 years 12,185 14.6 8,420 13.0 7,790 13.1
More than 5 years 17,176 20.6 1,180 1.8 540 0.9
Total 83,380 100 64,600 100 59,330 100
Interest Rate Pattern of PDs (excl. RNBCs)

At end-
end- March 2000 2001 2002
Upto 10% 524 0.5 230 0.3 1,180 1.8
10-12% 875 0.9 5,885 7.1 14,040 21.7
12-14% 23,367 23.9 37,021 44.4 27,590 42.7
14-16% 36,627 37.4 28,808 34.6 15,330 23.7
More than 16% 36,454 37.3 11,436 13.7 6,460 10.0
Total 97,847 100 83,380 100 64,600 100
Borrowing Profile (excl. RNBCs)

At end-
end- March 200 0 2001 2002
Central/State Governments 26,036 11.6 30,410 13.5 33,530 14.0
Foreign 6,013 2.7 6,700 3.0 6,700 2.8
Inter-corporate borrowings 18,427 8.2 28,660 12.7 19,960 8.3
Issue of secured or convertible 33,488 14.9 37,580 16.7 41,800 17.4
debentures
Banks 56,328 25.1 65,450 29.0 79,180 33.0
FIs 13,845 6.2 16,940 7.5 15,460 6.4
CP 5,544 2.5 6,270 2.8 7,810 3.3
Others 64,802 28.9 33,580 14.9 35,550 14.8
Total 224,484 100 225,590 100 239,990 100
Industry Concentration by Assets (excl. RNBCs)
At end-
end- March 2000 2001 2002
No of Amount No of Amount No of Amount
companies (Rs. million) companies (Rs. million) companies (Rs. million)
Less than Rs. 2.5 million 82 79 62 70 51 50
Rs. 2.5-5 million 95 364 91 350 88 330
Rs. 5-20 million 397 4,343 389 4,210 383 4,160
Rs. 20-100 million 266 11,420 280 11,930 247 10,760
Rs. 100-500 million 90 19,211 89 19,810 74 15,940
Rs. 500-1,000 million 16 11,144 15 10,190 19 13,410
Rs. 1,000-5,000 million 28 78,252 28 71,300 23 59,620
Above Rs. 5,000 million 22 275,257 20 258,480 20 294,060
Total 996 400,070 974 376,340 905 398,330
Industry Concentration by Deposits (excl. RNBCs)
At end-
end- March 2000 2001 2002
companies (Rs. million) companies (Rs. million)
million) companies (Rs. million)
Less than Rs. 2.5 million 205 3,948 225 8,070 214 11,200
Rs. 2.5-5 million 360 1,942 346 1,880 300 1,280
Rs. 5-20 million 314 3,629 305 6,920 298 3,610
Rs. 20-100 million 43 2,021 34 940 30 800
Rs. 100-500 million 46 27,732 37 7,770 38 7,180
Rs. 500-1,000 million 9 8,776 12 9,240 11 8,460
Rs. 1,000-5,000 million 19 35,332 14 22,990 14 26,800
Above Rs. 5,000 million 1 6,790
Total 996 83,380 974 64,600 905 59,330
Industry Concentration by NOF (excl. RNBCs)
At end-
end- March 2000 2001 2002
companies (Rs. million) companies (Rs. million) companies (Rs. million)
Less than Rs. 2.5 million 205 -2,152 225 -8,590 214 -13,510
Rs. 2.5-5 million 360 1,162 346 1,160 300 1,030
Rs. 5-20 million 314 5,020 305 4,980 298 4,770
Rs. 20-100 million 43 2,941 34 2,240 30 2,040
Rs. 100-500 million 46 10,602 37 7,750 38 7,980
Rs. 500-1,000 million 9 6,284 12 8,040 11 7,980
Rs. 1,000-5,000 million 19 42,800 14 30,630 14 32,430
Above Rs. 5,000 million 1 5,010
Total 996 66,657 974 51,220 905 42,720
DEMAND SUPPLY POSITION
Liabilities Profile
In recent years, the operations of NBFCs have witnessed significant changes especially on
the liability side. Although the definition of PDs of NBFCs has been revised and no strict
comparison is possible between deposits of NBFCs before and after 1998, there are clear
indications of a sharp decline in the relative importance of NBFC deposits, as compared
with bank deposits. There have also been considerable changes in the share of different
types of NBFCs in total PDs held by them. While the shares of RNBCs and HPCs increased
significantly, those of ILCs declined. RNBCs were the only category of NBFCs whose PD
increased in absolute terms between 1998 and 2002. In future, with reduced ceiling on
interest rates on PDs, the importance of PDs in their sources of funds is expected to decline
considerably. The share of PDs in total loans for the 17 sample companies has declined
from 38.6% during FY1999 to 19.2% during FY2002, and to 17% during FY2003.
Share of PDs in total liabilities of NBFCs

March 2000 March 2001 March 2002
RNBCs Others Total RNBCs Others Total RNBCs Others Total
97.2% 20.8% 37.7% 71.6% 17.2% 33.6% 69.8% 14.9% 32.3%
As the share of PDs has declined, other sources of funds, especially borrowing from banks,
market borrowings, borrowings from the Government and inter -corporate borrowings have
emerged as major sources of funding for NBFCs. Borrowings from banks have increased
significantly in recent years—from Rs. 60.38 billion (26.7% of borrowings) at end-March
1999 to Rs. 79.18 billion (33% of borrowings) at end-March 2002. However, there has been
a decline in inter-corporate borrowing, which has been compensated by an increase in other
sources, such as securitised commercial paper (CP). Capital markets could also have an
increasingly important role in an environment of declining PDs. Borrowings from banks
have been facilitated by various RBI guidelines. During FY2003, the RBI directed that all
new loans granted by banks to NBFCs for the purpose of on -lending to SSI sectors would
be reckoned for priority sector lending. Lending by SCBs to NBFCs for on-lending to
agriculture is also included in priority sector lending. Earlier, banks were precluded from
financing investments of NBFCs in other companies and ICDs/loans in other companies.
The position has been reviewed and banks have been advised that Special Purpose
Vehicles (SPVs) which comply with the certain conditions would not be treated as
investment companies and therefore would not be considered as NBFCs.
Sources of Borrowings of NBFCs (excluding RNBCs)

(Percent of borrowings)
As at end-
end- March 1998 1999 2000 2001 2002
Central/State Governments 10.7 12.1 11.6 13.5 14.0
Foreign 1.7 2.8 2.7 3.0 2.8
Inter-corporate borrowings 11.2 13.6 8.2 12.7 8.3
Issue of secured or convertible debentures 12.0 17.7 14.9 16.7 17.4
Banks 33.6 26.7 25.1 29.0 33.0
FIs 12.4 6.8 6.2 7.5 6.4
CP 0.7 2.1 2.5 2.8 3.3
Others 17.7 18.3 28.9 14.9 14.8
Total 100 100 100 100 100
As a result of changes in the financing pattern of NBFCs, their dependence on higher cost
of funds has increased. High cost of funds could induce NBFCs into excessive risk-taking
and may, thereby, result in adverse selection. While NBFCs may not have much control
over the cost of funds, they can improve their profitability by operating more efficiently.
The operating cost of NBFCs as a group have increased in the recent years. In fact, their
operating cost are higher than that of even co-operative banks.
The deposit maturity structure and interest rate structure of NBFCs has continued to
soften over the past few years, reflecting the declining interest rate environment and
reduction in ceiling for deposit rates. The ceiling on annual interest rates on PDs payable
by NBFCs reduced from 16% to 14% effective April 1, 2001; to 12.5% effective November 1,
2001; and to 11% effective March 4, 2003. The reduction in ceiling on interest rates was in
consonance with easy liquidity conditions emanating from strong capital flows on the
supply side and poor credit off-take on the demand side. The share of PDs with annual
interest rate of 12% and above has declined from 98.6% at end-March 1999 to 76.4% at
end-March 2001, and to 59.4% at end-March 2002. While there has been a gradual
repayment of the high-cost PDs accepted by NBFCs, the overhang of deposits, contracted at
14% and above, remains substantial at 20.1% of total PDs. This high interest rate, by and
large, also reflects the risk premium NBFCs typically pay vis-à-vis bank deposits. At the
same time, higher deposit rates further affect their commercial viability in a scenario of
falling interest rates.
PD Maturity and Interest Rate Structure of NBFCs (excluding RNBCs)

(Percent of PDs)
As at end-
end- March 1998 1999 2000 2001 2002
Maturity Structure
Less than 1 year 19.8 17.3 15.9 26.6 25.0
1-2 years 29.8 29.7 19.4 27.0 23.9
2-3 years 27.5 29.6 29.5 31.5 37.0
3-5 years 21.2 21.7 14.6 13.0 13.1
More than 5 years 1.6 1.7 20.6 1.8 0.9
Total 100 100 100 100 100
Interest Rate Structure (% per annum)
Upto 10% 1.1 0.5 0.3 1.8 6.0
10-12% 1.3 0.9 7.1 21.7 34.6
12-14% 9.6 23.9 44.4 42.7 39.2
14-16% 48.9 37.4 34.6 23.7 14.0
More than 16% 39.2 37.3 13.7 10.0 6.1
Total
Total 100 100 100 100 100
Lending Profile
The major portion of the assets of NBFCs (excluding RNBCs) continue to be in the form of
their specialised areas of HP and EL. However, the share of HP/EL in total assets has
declined from 42.9% at end-March 2000 to 41% at end-March 2002. There has a shift in
asset deployment towards loans and ICDs reflecting the slowdown in economic activity and
changes in taxation.
Information regarding the extent of NPAs in the NBFC sector is not available on a
consistent basis. However, according to the limited information available, the asset quality
of NBFCs deteriorated in the late-1990s, before recovering in recent years.
NPAs as percent of credit exposure of NBFCs

March March March March March September
September
1998 1999 2000 2001 2002 2002
Gross NPAs 11.4 10.2 9.9 11.5 10.6 9.7
Net NPAs 6.7 7.0 9.5 5.6 3.9 4.3
REVIEW OF PERFORMANCE
The profitability analysis of the NBFCs (excl. RNBCs) indicates that this segment recorded
losses during FY2001 and FY2002, as the decline in financial expenditure was less than
the decline in both fund-based and fee-based income. The decline in fund income was
particularly steep in recent years—with decline of 4.7% during FY2002, and 16.7% during
FY2001. The Net operating income (NOI)—comprising income minus interest
expenditure—of NBFCs has declined in recent years because of the significant decline in
fund-based income caused by lower interest rates, and lower HP/EL business. However,
interest expenditure has declined at a lower rate, mainly bec ause of the longer maturity
period of PDs. The share of outstanding PDs exceeding 2 years increased from 46.3% at
end-March 2001 to 51.1% at end-March 2002. As percent of average assets, while fund-
based income declined from 16.58% during FY2000 to 13.52% during FY2001, and to
12.92% during FY2002, interest costs have tended to be sticky. Interest expenditure as
percent of average assets declined from 9.71% during FY2000 to 8.76% during FY2001, and
to 8.51% during FY2002. Total expenditure fell less sharply as operating expenditure and
tax provisions have tended to be sticky. Because of lower NOI, the profitability position has
showed signs of deterioration in recent years. However, net losses declined from Rs. 3.25
billion during FY2001 to Rs. 2.12 billion during FY2002, because of a limited decline in
operating expenditure. The losses during FY2001 and FY2002 were contributed to a large
extent by the huge losses suffered by Apple Finance and Tata Finance. Operating costs of
NBFCs continue to be higher than those of SCBs.
Trends in Financial Performance of NBFCs (excl. RNBCs)

Rs. million % of average assets
FY 2000 2001 2002 2000 2001 2002
Fund based Income 62,990 52,470 50,050 16.58% 13.52% 12.92%
Non-fund based income 4,710 3,720 3,520 1.24% 0.96% 0.91%
Total Income 67,700 56,190 53,570 17.82% 14.47% 13.83%
Financial Expenditure 36,870 34,000 32,970 9.71% 8.76% 8.51%
Operating & Other Expenditure 26,760 23,410 20,240 7.04% 6.03% 5.23%
Total Expenditure 63,630 57,410 53,210 16.75% 14.79% 13.74%
Operating Profit 4,070 -1,220 360 1.07% -0.31% 0.09%
Tax Provisions 2,700 2,030 2,480 0.71% 0.52% 0.64%
Net Profit 1,370 -3,250 -2,120 0.36% -0.84% -0.55%
Assets 400,070 376,340 398,320
An analysis of the financial performance of the 17 sample companies indicates an improved

financial performance during FY2003. Net operating income (NOI) as percent of average
assets increased because of significant decline in interest costs. As a result, the 17
companies reported a combined net profit of Rs. 2,264 million during FY2003, as compared
with a net loss of Rs. 671 million during FY2002.
Trends in Financial Performance of sample companies

Rs. million % of average assets
FY 2001 2002 2003 2001 2002 2003
Total Income 27,658 26,152 27,301 18.60% 16.47% 16.14%
Financial Expenditure 13,432 13,582 13,160 9.03% 8.56% 7.78%
Operating & Other Expenditure 15,572 12,892 10,849 10.47% 8.12% 6.41%
Total Expenditure 29,005 26,474 24,009 19.51% 16.68% 14.19%
Operating Profit -1,347 -322 3,292 -0.91% -0.20% 1.95%
Provisions 554 349 1,028 0.37% 0.22% 0.61%
Net Profit -1,901 -671 2,264 -1.28% -0.42% 1.34%
Assets 153,227 164,259 174,020
The balance sheets of the NBFCs have been strengthening in recent years in response to
prudential norms. In terms of CAR, only 43 NBFCs (incl. RNBCs) reported a CAR of less
than 12% at end-March 2002, as compared with 61 at end-March 2001, and 88 at end-
March 1999. Further, NPAs in gross and net terms, as a percentage of credit exposure,
have also been declining.
CAR of reporting NBFCs

NBFC Category CAR Range (%)
Less than 10-
10- 12 12-
12- 15 15-
15- 20 20-
20- 30 Above 30 Total
10
March 2000
ELCs 7 0 1 3 12 23 46
HPCs 11 0 3 31 52 253 350
ILCs 12 1 3 8 16 159 199
RNBCs 2 0 0 0 1 1 4
Total 32 1 7 42 81 436 599
March 2001
ELCs 9 1 1 4 8 30 53
HPCs 22 1 5 29 58 313 428
ILCs 23 2 2 5 15 180 227
RNBCs 2 1 0 0 1 2 6
Total 56 5 8 38 82 525 714
March 2002
ELCs 10 0 1 4 9 32 56
HPCs 17 0 8 32 54 334 445
ILCs 15 0 1 9 11 121 157
RNBCs 1 0 0 1 1 2 5
Total 43 0 10 46 75 489 663
NEW PROJECTS
Not Applicable
OUTLOOK
Until the early 1990s, NBFCs grew rapidly, but there was no regulation of their asset side.
However, the financial sector reforms of the late-1990s have brought their asset side also
under the regulation of the RBI. The aggregate assets of the NBFC sector increased at a 3-
year CAGR of 7.4% to Rs. 582.90 billion at end-March 2002. Because of the change in tax
environment, while the traditional business of EL/HP is expected to grow at a slower pace
in the future; loans, investments and ICDs are expected to increase at a faster rate in the
future. The EL/HP industry has been adversely impacted by the service tax imposed in the
Union Budget 2001-02.
Growth Rate in NBFC's (excl. RNBC) assets—by type of activity and size of NBFC
Type of Activity By size of assets
Growth 3- year Growth 3- year
(FY2002) CAGR (FY2002) CAGR
Loans & ICD 33.5% 85.2% Less than Rs. 2.5 million -28.6% -45.1%
Investments -0.2% -0.1% Rs. 2.5-5 million -5.7% -12.4%
HP 2.4% 0.2% Rs. 5-20 million -1.2% 10.6%
Equipment & Leasing -33.5% -0.6% Rs. 20-100 million -9.8% 3.8%
Bills -14.6% -15.0% Rs. 100-500 million -19.5% -2.1%
Others 3.0% -26.4% Rs. 500-1,000 million 31.6% -7.8%
Rs. 1,000-5,000 million -16.4% -9.8%
Above Rs. 5,000 million 13.8% 8.4%
Total 5.8% 3.5% 5.8% 3.5%
The business of asset reconstruction is also likely to emerge in the NBFC sector following
the passage of the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (SARFAESI). Many NBFCs have sought to minimise the
impact of declining lending rates by focusing on higher-yielding segments such as light
commercial vehicles (LCVs) and two-wheeler financing.
Reflecting the weeding out of many smaller NBFCs, the financially sound larger NBFCs
are expected to register higher growth in business. Although the NBFC sector (including
RNBCs) reported an asset growth of 8.2% during FY2002, the asset growth was higher for
NBFCs with asset base exceeding Rs. 5 billion. During FY2003, the asset base of the 17
companies in the ICRA sample increased 5.9% to Rs. 174 billion. Following a 5.4% decline
in income during FY2002, the income of the 17 companies also increased 4.4% during
FY2003 to Rs. 27.30 billion.
In response to the increased competition from SCBs, one NBFC—Kotak Mahindra—has

recently converted into a SCB. Conversion of NBFC into SCBs has many positive aspects.
At present, statutory constraints on raising cheap retail deposits (maturity should not be
less than 1 year) have meant that NBFCs have found it difficult to protect interest
margins, putting pressure on profitability. With conversion into a bank, NBFCs could have
access to short-term retail deposits, which would significantly reduce their funding costs. A
universal bank would also be expected to provide the full range of banking products to its
customers, from small loans for retail individuals to project financing for big corporates
and multinationals.
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Email : icrainfo@icraindia.com
Website : www.icraindia.com

Icra NBFC Report Feb '04

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Industry Comment Non-Banking Financial Company

ICRA Sector Analysis

Copyright, ICRA Limited, 26 Kasturba Gandhi Marg, New Delhi – 110001

ENVIRONMENT ANALYSIS : PORTER'S MODEL

Bargaining Power of Inter-Firm Rivalry: Medium Bargaining Power of

Barriers to entry: Medium

STRUCTURE OF THE INDUSTRY

In terms of relative importance of various activities financed by NBFCs, loans and

In terms of public deposit (PD) taking activities, Residuary Non-Banking Companies

PDs of NBFCs and their share of L3

KEY ISSUES FACING THE PLAYERS

High Degree of Competition

Market Share In dicators of NBFCs

March 31 2000 2001 2002 2000 2001 2002

Size-wise Distribution of Assets of NBFCs (excluding RNBCs)

significant reduction in smaller NBFCs—both in terms of number of entities and quantum

Size-wise Distribution of PDs of NBFCs (excluding RNBCs)

Size-wise Distribution of NOFs of NBFCs (excluding RNBCs)

NBFCs were historically subjected to a relatively lower degree of regulation vis-à-vis

forwarded to the Government of India (GoI) a comprehensive draft legislation in 1994,

Competition from SCBs

Indicators of Competition between SCBs and NBFCs

Composition of Financial assets of the household sector

Key Regulatory Norms for Banks and NBFCs

Particulars Bank NBFC

In response to the increased competition from SCBs, one NBFC—Kotak Mahindra—has

TRENDS IN PRO DUCTION, CONSUMPTION, PRICE, CAPACITY

Type- wise Profile of the NBF C Sector

Region - Wise Profile

Asset Profile (excl. RNBCs)

Public Deposits (PDs) Profile

Region - Wise Profile of PDs

Maturity Pattern of PDs (excl. RNBCs)

Interest Rate Pattern of PDs (excl. RNBCs)

Borrowing Profile (excl. RNBCs)

Industry Concentration by Assets (excl. RNBCs)

Industry Concentration by Deposits (excl. RNBCs)

Industry Concentration by NOF (excl. RNBCs)

DEMAND SUPPLY POSITION

Share of PDs in total liabilities of NBFCs

Sources of Borrowings of NBFCs (excluding RNBCs)

PD Maturity and Interest Rate Structure of NBFCs (excluding RNBCs)

NPAs as percent of credit exposure of NBFCs

Trends in Financial Performance of NBFCs (excl. RNBCs)

An analysis of the financial performance of the 17 sample companies indicates an improved

Trends in Financial Performance of sample companies

CAR of reporting NBFCs

In response to the increased competition from SCBs, one NBFC—Kotak Mahindra—has

CORPORATE & REGISTERED OFFICE

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