nbfcs and fis

NBFCs AND FIs

XXXIV

Non-Banking Financial Companies (NBFCs)

NBFCs are a broad category of financial institutions other than commercial banks. NFBCs operate largely in vehicle financing, hire purchase, lease, personal loans, working capital loans, consumer loans, housing loans, loans against shares, investments, distribution of financial products, etc. The heterogeneous sector of NBFC is broadly catogorised as (i) NBFC-Deposit taking (NBFC-D) and (ii) NBFCs-Non-Deposit taking (NBFC-ND) (iii) Residuary non-banking finance companies (RNBCs) - deposit taking companies of different character. Among NBFCs-ND, companies with asset size of Rs. 1bn and more have been categorised as systemically important (NBFC-ND-SI). NBFC-D and NBFCs-ND-SI are further classified under three categories: Asset Finance Company (AFC), Investment Company (IC), and Loan Company (LC). New category that was recently added is Infrastructure Finance Company (IFC), as called Core Investment Company (CIC).

Over the years, NBFCs have become a crucial part of the Indian financial system and they form around 11% of the assets of the total financial system. NBFCs have emerged an important intermediary for financing and have provided strong competition to banks and financial institutions. Although banks have access to low-cost funds; however, NBFCs are reducing dependence on public deposits and RBI too is supportive of the move. The regulatory and supervisory framework for NBFCs has been continuously strengthened in order to ensure their strong and healthy functioning and limit excessive risk-taking practices and protect the interests of the deposit holders

Total number of NBFC declined marginally yet total assets and Net owned funds registered an increase

Size and Growth of NBFCs

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Num

bers

No of COs registered with RBI No of reporting companies

0

200

400

600

800

1,000

1,200

1,400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rs b

n

Total assets Net owned funds

Source:RBI and D&B Research

Over the years, NBFCs have become a crucial part of the Indian financial system. As of March 2011, the total number of NBFCs registered with RBI stands at 12,409, down from 12,630 in 2010. This reduction in numbers is largely due to closure and merger of weak companies and conversion of deposit-taking companies into non-deposit-taking companies. However, the size of total assets of NBFCs has grown more than 100% to Rs 1,169 bn as at end¬-2011. Net owned funds of NBFCs too have grown from Rs 49 bn in 2001 to 180 bn in 2011.

XXXV

Bank borrowing and debentures remains prominent source of funding

Funding source of NBFC sector

0

2,000

4,000

6,000

8,000

10,000

2005-06 2009-10 2010-11

Rs b

n

Owned Funds Public Deposit Bank Borrowings

Debentures Commercial papers Inter Corporate Borrowings

Others


Funding source of NBFCs comprise debentures, bank borrowings, public deposits, and commercial papers. The above chart indicates that bank borrowings constitute an important source of funds for NBFCs. Hence, NBFCs-ND-SI are significant from the systemic point of view as they also access public funds indirectly through commercial papers, debentures and inter-corporate deposits, apart from bank finance. Although NBFC-NDSI’s bank-driven liability profile causes indirect exposure to depositors and concentration of funding, a limit on bank’s lending to NBFC sector runs the risk of curtailing growth of the economy. Exposure of NBFCs to sensitive sectors as part of financial diversification too presents potential risks.

Ratio of Public deposit to owned funds increased marginally

Sources of Funds Application of Funds

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10

20

30

40

50

60

70

80

Owned Funds Public deposit Borrowings

Rs b

n

FY10 FY11

0

10

20

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50

60

70

80

90

Loans and advances

SLR Investments

Non SLR Investments

Rs b

n

FY10 FY11


XXXVI

During FY11, total assets/liabilities of NBFC-D expanded 11.90%. As of end-March 2011, more than two-thirds of the total assets of the NBFCs-D sector were held by asset finance companies. Component-wise, the advances accounted for a predominant share of the total assets, followed by investment. Hire purchase and loans and advances of NBFC-D increased 20.0% and 31.5% respectively during FY11 compared with FY10. Borrowings that are a major source of funding grew at 8.95% and public deposits that are subjected to credit rating continued to show an increasing trend with growth of 43.48%.Total Investments grew 14.08% mainly due to SLR investments, which grew at 40%.

The ratio of public deposit to owned funds improved marginally and stands at 23.69% versus 17.61% earlier.

Financial performance

NBFC D NDSI Rs 1000 mn & above RNBC

Rs In mn FY10 FY11 FY10 FY11 FY10 FY11

Total Income 136,150 151,960 609,320 716,960 19,460 11,590

Operating Profit(PBT) 25,770 42,630 17,323 21,578 5,460 1,530

Net Profit(PAT) 14,820 28,610 122,310 156,190 3,820 910

Total Assets 942,120 1,05,4310 5,888,060 7,303,660 179,200 114,660

Ratios in %

Income as % of total assets 14.50 14.40 10.30 9.80 10.86 10.11

NP as % of total assets 1.60 2.70 2.10 2.10 2.13 0.79

Cost to Income Ratio 81.10 72.00 71.57 69.90 71.94 86.80Source: RBI

Leverage ratio of NBFC NDSI increased for FY11

Sources of Funds Application of Funds

020406080

100120140160180200

Owned Funds Debentures Borrowings from Banks &

FI

Rs b

n

FY10 FY11

050

100150200250300350400450500

Loans & Advances

Investments Hire Purchase Assets

Rs b

n

FY10 FY11


The balance sheets of NBFC-NDSI as at end-FY11 stood at Rs 1,054bn as against Rs 942bn, indicating 10.64% growth. This rise is mainly due to a sharp increase in bank borrowings, debentures and commercial papers. Secured borrowing constitutes a major source of borrowings, which grew 55% during FY11. The leverage ratio of the entire NBFCs-ND-SI sector increased to 2.93% during FY11. On the deployment side, loans and advances continue to constitute the largest share followed by Investments and hire purchase. During FY11, loans and advances grew 31.50% whereas hire purchase assets grew 20%.

XXXVII

Financial performance demonstrated an upsurge

Financial performance

NBFC D NDSI 100 cr & above RNBC

Rs In mn FY10 FY11 FY10 FY11 FY10 FY11

Total Income 136 152 609 717, 19 11

Operating Profit(PBT) 25 42 17 21 5 1

Net Profit(PAT) 15 29 122 156 3 0.9

Total Assets 942 1,05,4 5,888 7,303 179 114

Ratios in %

Income as % of total assets 14.50 14.40 10.30 9.80 10.86 10.11

NP as % of total assets 1.60 2.70 2.10 2.10 2.13 0.79

Cost to Income Ratio 81.10 72.00 71.57 69.90 71.94 86.80Source:RBI and D&B Research

The financial performance of NBFC–D demonstrated an upsurge with TI growth of 11.61%, mainly coming from fund-based income, which grew at 12% and formed majority of the TI. In addition, expenditure declined marginally, resulting into almost double-digit growth in operating and net profit. Expenditure as a percentage to average total assets declined marginally during FY11 whereas income as a percentage to average total assets was more or less flat, resulting in an increase in net profit to total average assets (RoA) ratio of NBFCs-D.

NBFC NDSIs also performed well as reflected in TI growth of 17.67% and operating and net profit growth of 24.56% and 27.70% respectively. RoA for the same period remained constant.

The TI of RNBCs declined sharply by 40.44% exceeding the decline in total expenditure and leading to significant fall in operating and net profit by more than 70%.

Capital to risk weighted ratio remained strong

Capital Adequacy Ratio of NBFC D

2010-11

AFC LC Total

Less than 12% 1 1 2

A) Less than 9% 1 1 2

B) More than 9% and up to 12% 0 0 0

More than 12% and up to 15% 1 2 3



Above 30% 142 27 169

Total 168 36 204Source:RBI and D&B Research

XXXVIII

Capital Adequacy Ratio of NBFC-NDSIs

2010-11

AFC IFC IC LC Total

Less than 12% - - 4 2 6

More than 12% and up to 15% - - 3 1 4

More than 15% and up to 20% 7 1 3 22 33

More than 20% and up to 30% 4 1 9 19 33

Above 30% 4 1 127 66 198

Total 15 3 146 110 274Source:RBI and D&B Research

Capital Adequacy Ratio (CAR) of the NBFC sector is higher at 15% compared with 12% for banks. Over the years, the NBFC sector has undergone a fair degree of consolidation leading to the emergence of companies having larger asset size. Capital adequacy norms that were mandatory for NBFC Ds were made applicable to NBFC- NDSIs too in 2007, considering their growing importance in the segment and to ensure their sound development. As of end-March 2011, 199 out of 204 NDFC -Ds had CAR of more than 15% whereas in March 2010, 271 out of 275 NDFC Ds had CAR of 15%. In case of NBFC-NDSIs 264 companies out of 274 had CAR of more than 15%, indicating availability of capital for further expansion.

NPA ratio of NBFC D

2009 2010 2011

Gross NPA to Credit Exposure 2.0 1.3 0.7

Net NPA to Credit Exposure # # ##: Provision exceeds NPA.Source: RBI

NPA ratio of NBFC NDSIs

2009 2010 2011

Gross NPA to Gross Advances 2.9 2.8 1.8

Net NPA to Net Advances 1.0 1.2 0.7

Gross NPA to Total Assets 2.2 2.0 1.3

Net NPA to Total Assets 0.7 0.9 0.5Source: RBI

The period of classifying NPAs in case of the NBFC sector is higher at 180/360 days as against 90 days in case of banks. During FY11, gross NPA to credit exposure of NBFC-D declined from 1.3% in FY10 to 0.7%. At the same time, net NPA to credit exposure for the third consecutive year remained negative, with provisions exceeding assets. Further analysis suggests that asset quality of asset finance and loan companies improved significantly with reduction in gross NPA ratio. In case of NBFC NDSIs both gross and net NPA ratio declined to 1.8% and 0.7% as against earlier 2.8% and 1.2% respectively.

XXXIX

Financial Institutions (FIs)

As of March 2011 four financial institutions (FIs) operate under the directives of the Reserve bank of India (RBI). The table below shows the ownership and shareholding pattern of these institutions as on March 2011.In this section we have examined these FIs on various parameters that include income growth and composition, business growth, profit and operational efficiency, asset quality.

Ownership pattern of FIs (as on March 2011)

Ownership %

EXIM Bank Government of India 100

NABARD Government of India 99

Reserve Bank of India 1

NHB Reserve Bank of India 100

SIDBI Public Sector Banks 72.2

Insurance Companies 21.4

Financial Institutions 6.4

Financial assistance by FIs declined marginally

Sanction Disbursement

0

100

200

300

400

500

600

700

All India Term-lending

Institutions

Specialised Financial

Institutions

Investment Institutions

2010 2011

0

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400

500

600

All India Term-lending Institutions

Specialised Financial

Institutions

Investment Institutions

Rs in

bn

2010 2011


Sanction and disbursement made by FIs as at the end of FY11 stands at Rs 1015 bn and Rs 880 bn respectively. The financial assistance sanctioned and disbursed during FY11 declined marginally by 5% and 4% respectively led by more than 20% reduction in sanction and disbursement by Investment institutions consisting of LIC, GIC and erstwhile subsidiaries (NIA, UIIC and OIC).

XL

Overall Funds raised decline, major part of it utilized for fresh deployment

Sources of funds Deployment of funds

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200

400

600

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1,000

1,200

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1,600

1,800

Internal External Others

Rs b

bn

FY10 FY11

0200400600800

1,0001,2001,4001,6001,8002,000

Fresh Deployment

Repayment of past

borrowings

Other deployment

RS b

n

FY10 FY11


Total amount raised and utilised decined slightly during FY11. A majour part of the funds were raised through external sources followed by internal and other sources. While funding through internal sources increased , borrowing from external source decreased owing to uncertainity in global markets. A majority of funds raised were utilised for fresh deployment which led to growth of 2%. Other deployment also increased sharply, whereas repayment of past borrowings registered a decrease.A very small proprtion of funds were used for interest payments.

SIDBI utilised most of the umbrella limit of raising funds through money market

Funds raised through Money Market

Rs In Mn

NABARD SIDBI NHB EXIM Total

A)Total 71,030 81,370 26,210 15,380 193,980

Term Deposits 480 21,790 2490 710 25,480

Term Money 1100 - - - 1100

Inter-corporate Deposits - - - - -

Certificate of Deposits 1370 - - 40 1410

Commercial Papers 64,480 59,580 0 14,620 138,670

Short term loans from banks 3600 - 23,720 - 27,320

B)Umbrella Limit 126,750 56,100 32,770 44,080 0

Utilisation of limit 56.0 145.0 80.0 34.9 Source:RBI and D&B Research

FIs are authorised to raise money through money market within the stipulated umbrella limit which is currently at 150% of Net Owned Funds. During FY11 commercial papers proved to be a significant source accounting for 71.48% of total resouces raised through the money market. SIDBI had a highest share in total FIs borrowings standig at Rs 81 bn, however it as within the stipulated limit.

XLI

TI and Interest grew by 15%, but rise in operating cost brings down profits

Financial Performance of FIs

ParticularsRs in MN

% variationFY 10 FY 11

Income 156,240 179,650 15.00

Interest Income 151,470 174,850 15.40

Non Interest Income 4780 4800 0.50

Expenditure 104,920 133,370 27.10

Interest Expenditure 96,110 118,620 23.40

Operating Expenses 8800 14,750 67.60

which Wage Bill 4680 10,950 134.10

Provisions for taxation 15,590 12,550 -19.50

Profit (PBT) 43,320 38,080 -12.1

Profit (PAT) 27,730 25,540 -7.9

Financial Ratios *

Operating Profit 1.9 1.4

Net Profit 1.2 0.9

Income 6.7 6.7

Spread (NII) 2.4 2.1* as % of Total AssetsSource:RBI and D&B Research

Alhough Total Income(TI) of FIs grew 15% , finanacial performance weakened owing to a fall in operating and net profit. This was mainly due to rise in operating expenses by more than 50% contributed by a sharp rise in Wage Bill. However interest Income increased 15.40%.

Soundness IndicatorsRs In Mn

Standard Sub-Standard Doubtful Loss Net NPA

2010 2011 2010 2011 2010 2011 2010 2011 2010 2011

EXIM Bank 389,580 455,630 620 1970 3010 2460 500 360 780 930

NABARD 1204870 1394590 70 - 440 680 - 10 330 300

NHB 198,370 225,820 - - - - - - - -

SIDBI 378,920 459,220 750 1430 20 1360 - - 690 1320

All Fis 2171730 2535250 1440 3390 3470 4500 500 370 1800 2550Source:RBI and D&B Research

Net non performing assets of FIs during FY11 increased compare with FY10 mainly contributed by increase in NPA of SIDBI. Don the pecking order SIDBI’s NPAwas the highest followed by EXIM NABARD and NHB with no NPAs. Sub standard assets of EXIM Bank grew during FY11 but doubtful and loss assets recorded a fall. Although Sub standard assets of NABARD reduced completely, doubtful and loss assets recorded a rise. Both substandard and doubtful assets of SIDBI escalated during FY11.

Capital to Risk (weighted) Assets Ratio of Select FIs

2010 2011

EXIM Bank 18.5 17.2

NABARD 24.9 21.8

NHB 19.6 20.5

SIDBI 30.2 31.6Source:RBI and D&B Research

During FY11 Capital adequacy as measered by CRAR in case of all the FIs was above the minimum stipulated. CRAR of NHB and SIDBI increased whereas that of EXIM bank and NABARD declined.

nbfcs and fis

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