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PERFORMANCE OF NBFCS -AN INDIAN CONTEXT

Article  in  International Journal of Pure and Applied Mathematics · December 2020

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International Journal of Pure and Applied Mathematics
Volume 119 No. 18 2018, 3747-3757
ISSN: 1314-3395 (on-line version)
url: http://www.acadpubl.eu/hub/
Special Issue
http://www.acadpubl.eu/hub/

PERFORMANCE OF NBFCS – AN INDIAN CONTEXT

1
Dr.J.Shanmuganandavadivel,2 Dr.D.Sasikala Devi

1
Dean, School of Commerce, Sri Ramakrishna College of Arts and Science,Coimbatore,

Tamil Nadu,India

2
Associate Professor,Sri Ramakrishna College of Arts and Science,Coimbatore, Tamil Nadu,India

ABSTRACT

Non-banking Financial companies (NBFCs) form an integral part of the Indian Financial
system. It has been intermediating a growing share of the resource flows to the commercial
sector. NBFCs supplement the role of the banking sector in meeting the increasing financial
needs of the corporate sector. The Reserve Bank’s regulatory perimeter is applicable to
companies conducting non-banking financial activity. On the basis of their liability structures,
the type of activities they undertake and their systemic importance NBFCs are classified in to
twelve types. This paper aims to present a performance NBFCs in India. It includes assets
quality, profitability, exposure to sensitive sector and capital adequacy of NBFCs. The study
found that there has been some deterioration in asset quality of NBFCs in recent years, but it is
better than that of banks. NBFCs also reported better profitability and capital positions. The RBI
is constantly striving to bring necessary regulatory changes in the NBFC to ensure financial
stability in the long run.

Introduction

Non-banking Financial companies (NBFCs) form an integral part of the Indian Financial
system. It has been intermediating a growing share of the resource flows to the commercial

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International Journal of Pure and Applied Mathematics Special Issue

sector. NBFCs supplement the role of the banking sector in meeting the increasing financial
needs of the corporate sector. NBFCs are mostly private sector institutions that specialize in
meeting the credit needs and a variety of financial services which include financing of physical
assets, commercial vehicles and infrastructure loans. The Reserve Bank’s regulatory perimeter is
applicable to companies conducting non-banking financial activity, such as lending, investment
or deposit acceptance as their principal business. Certain categories of entities carrying out NBFI
activities are exempt from the Reserve Bank’s regulation as they are being regulated by other
regulators. They include housing finance companies (HFCs), mutual funds, insurance companies,
stock broking companies, merchant banking companies and venture capital funds (VCFs).
Against this background, this paper aims to present a performance NBFCs in India. It includes
assets quality, profitability, exposure to sensitive sector and capital adequacy of NBFCs

Structure of NBFC

Non Banking Financial Institutions

Non Banking Financial

Companies All India Financial Primary Dealers
Institutions

NBFCs-D NBFCs-ND Bank PDs Standalone PD

Systematically Other NBFCs -ND

Important NBFCs-ND

Source: https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92

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International Journal of Pure and Applied Mathematics Special Issue

CLASSIFICATION OF NBFCS BASED ON ACTIVITY

NBFCs are classified on the basis of their liability structures, the type of activities they
undertake and their systemic importance. In terms of liability structure, NBFCs are classified
into two categories – deposit-taking NBFCs or NBFCs-D, which accept and hold public deposits
and non-deposit taking NBFCs or NBFCs-ND, which do not accept public deposits. Among
NBFCs-ND, those with an asset size of `5 billion or more are classified as non-deposit taking
systemically important NBFCs (NBFCs-ND-SI). For the purpose of issuing certificates of
registration (CoRs), NBFCs were categorized as Type I and Type II companies in June 2016.
The applications for Type I NBFCs, which do not have / intend to accept public funds and do not
have / intend to have customer interface, are considered on a fast track basis. With addition of
new categories over time, there were 12 types of NBFCs viz.,

1) Asset Finance Company (AFC)

2) Loan Company (LC)

3) Investment Company (IC)

4) Core Investment Company (CIC)

5) Factoring – NBFC

6) Infrastructure Debt Fund Non-Banking Financial Company (IDF – NBFC)

7) Infrastructure Finance Company (IFC)

8) Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs)

9) Non-Operative Financial Holding Company (NOFHC)

10) Mortgage Guarantee Companies (MGC)

11) NBFC-Account Aggregator (AA)

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International Journal of Pure and Applied Mathematics Special Issue

12) NBFC-Peer to Peer Lending platform (NBFC-P2P).

Number of different types of NBFCs in India

Year NBFC-D NBFC-ND-SI NBFC-ND Total

2012-13 254 418 11553 12225
2013-14 241 465 11323 12029
2014-15 220 420 11202 11842
2015-16 202 209 11271 11682
2016-17 178 218 11126 11522
2017-18 156 249 10997 11402
Source: RBI

The above table exhibits the total number of NBFCs for the past five years. The total
number of NBFCs considerably decreased over a period of time. Whereas the NBFC-ND-SI was
increased till 2014 thereafter it was declined from 2015 to 2018.But the number of NBFC-ND-SI
has increased about 14% during the year 2017-18.

14000

12000

10000

8000
NBFC-D
Number

6000 NBFC-
ND-SI
4000 NBFC-
ND
2000

0
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

Year

Financial status of NBFCs

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International Journal of Pure and Applied Mathematics Special Issue

Aggregated balance sheet of the NBFC sector: y-o-y growth

(Percent)

2016-17 2017-18
1. Share capital 19.9 8.3
2. Reserves and surplus 16.9 19.9
3. Total borrowings 13.5 19.1
4. Current liabilities and provisions 26.7 15.4
Total Liabilities/Assets 15.2 18.6
1. Loans and advances 14.6 21.2
2. Investments 14.8 13.4
3. Others 20.8 5.5
Source: Financial Stability Report

There was deceleration in share capital growth of NBFCs in 2017-18 whereas borrowings
grew at 19.1 per cent, implying rising leverage in the NBFC sector. Loans and advances of the
NBFC sector increased by 21.2 per cent and investments increased by 13.4 per cent. Total
borrowings of the NBFC sector increased by 19.1 percent and current liabilities and provisions
decreased by 15.4 percent. And investments of NBFC sector declined by 13.4 percent.

Asset Quality and Capital Adequacy of NBFCs

Assets quality of NBFCs (Percent)

GNPA Ratio NNPA Ratio

2013-14 2.7 1.2
2014-15 2.9 1.6
2015-16 4.3 2.4
2016-17 6.1 4.1
2017-18 5.8 3.5
Source: Financial Stability Report

There has been a steady deterioration in asset quality of NBFCs till 2016-17.Gross non-
performing assets (GNPA)ratio for NBFCs increased up to 2016-17 .but it has been declined

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International Journal of Pure and Applied Mathematics Special Issue

during the year 2017-18 .The deterioration in asset quality is due to change in NPA recognition
norms and effects of demonetization . Notwithstanding this deterioration their asset quality
remained better than that of banks.

7
6.1
6 5.8

5
4.3
4.1
4 3.5
2.9
3 2.7
Percent

2.4 GNPA Ratio

2 1.6 NNPA Ratio
1.2
1

0
2013-14 2014-15 2015-16 2016-17 2017-18

Year

Profitability of NBFCs

Profitability of NBFCs (Percent)

Year ROA ROE

2013-14 2.2 9.1
2014-15 1.9 8.7
2015-16 2.1 9.7
2016-17 1.6 6.9
2017-18 1.9 8.4
Source: Financial Stability Report

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International Journal of Pure and Applied Mathematics Special Issue

Return on Assets (RoA) of NBFCs declined from 2013 onwards due to asset quality
deterioration in the financial system. But it was 1.9 per cent in 2017-18 as compared with 1.6 per
cent in 2016-17.However NBFCs have fairly higher ROA when compared to banks.

12

9.7
10 9.1
8.7 8.4
8
6.9
Percent

6
ROA

4 ROE

2.2 1.9 2.1 1.9

2 1.6

0
2013-14 2014-15 2015-16 2016-17 2017-18

Year

Capital Adequacy of NBFCs

Capital Adequacy of NBFCs (Percent)

Year CRAR
2013-14 27.5
2014-15 26.5
2015-16 23.9
2016-17 22.8
2017-18 22.9
Source: Financial Stability Report

The Capital to Risk-weighted Assets Ratio (CRAR) of NBFCs has declined over the
period of five years. But it was higher than the prescribed regulatory level of 15 percent. During
the year 2017-18 it has slowly increased from 22.8 percent to 22.9 percent.

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International Journal of Pure and Applied Mathematics Special Issue

CRAR
30
27.5 26.5
25
23.9 22.8 22.9
20
Percent

15

10 CRAR

0
2013-14 2014-15 2015-16 2016-17 2017-18

Year

Exposure to Sensitive Sector as a percent of total assets

Exposure to Sensitive Sector as a percent of total assets (Percent)

Year Capital Market Real Estate Exposure

exposure to total to total assets
assets
2015-16 8.5 4.8
2016-17 7.8 5.6
2017-18 7.5 7.5
Source: Financial Stability Report

The Reserve Bank of India defines the capital market, real estate and commodities as
sensitive sectors in view of the risks associated with fluctuations in prices of such assets. NBFCs
exposure to real estate increased till 2015-16 then there is a reduction during the during the
periods 2016-17 and 2017-18 due to economic recession in this field and changes in the real
estate policy whereas the NBFCs exposure to capital market has been increased during the last
three years.

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International Journal of Pure and Applied Mathematics Special Issue

16

14

12
4.8 7.5
5.6
10
Percent

8
Real Estate Exposure to total
6 assets

4 8.5 Capital Market exposure to total

7.8 7.5 assets
2

0
2015-16 2016-17 2017-18
Year

Conclusion

NBFCs have been playing a very important role in the Indian financial system. NBFCs are
emerging as better alternatives to the conventional banks for meeting the financial needs of
various sectors. NBFCs primarily lend to the industrial sector. While there has been some
deterioration in asset quality of NBFCs in recent years, it is better than that of banks. NBFCs
also reported better profitability and capital positions. The RBI is constantly striving to bring
necessary regulatory changes in the NBFC to ensure financial stability in the long run. These
initiatives have been motivated by the objectives of financial stability, financial inclusion and
harnessing of specialized domain expertise.

References:

Report on Trend and Progress of Banking in India for the year ended June 30, 2017
submitted to the Central Government in terms of Section 36(2) of the Banking Regulation
Act, 1949

Performance of Non-Government Non-Banking Financial and Investment Companies,

2016-17: Data Release, July 09, 2018

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International Journal of Pure and Applied Mathematics Special Issue

RBI-Financial Stability Report

non-banking-finance-companies-the-changing-landscape.pdf

economictimes.indiatimes.com/articleshow/57749011.cms?utm_source=contentofinterest
&utm_medium=text&utm_campaign=cppst

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