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“STUDY AND GROWTH OF NON BANKING FINANCIAL COMPANY”

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE DEGREE OF

BACHELOR IN COMMERCE (FINANCIAL MARKETS)

UNDER THE FACULTY OF COMMERCE

BY

MR. ARJUN DEEPAK SINGH

UNDER THE GUIDANCE OF

MS. HARSHA HARDASANI

SMT. M.M.K COLLEGE OF COMMERCE & ECONOMICS

ADV, NARI GURSAHANI RD, T.P.S III, BANDRA(W) MUMBAI, MAHARASHTRA 400050

MARCH-2024
 “STUDY AND GROWTH OF NON BANKING FINANCIAL COMPANY”

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE DEGREE OF

BACHELOR IN COMMERCE (FINANCIAL MARKETS)

UNDER THE FACULTY OF COMMERCE

BY

MR. ARJUN DEEPAK SINGH

UNDER THE GUIDANCE OF

MS. HARSHA HARDASANI

SMT. M.M.K COLLEGE OF COMMERCE & ECONOMICS

ADV, NARI GURSAHANI RD, T.P.S III, BANDRA(W) MUMBAI, MAHARASHTRA 400050

MARCH-2024
 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Prof. CA. Kishore. S. Peshori for providing the necessary facilities
required for completion of this project

I take this opportunity to thank our Coordinator Harsha Hardasani for her moral support and guidance

I would also like to express my sincere gratitude towards my project guide ___________________ whose
guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and magazines
related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion of the project especially my Parents and Peers who supported me throughout my project
 SMT. M.M.K COLLEGE OF COMMERCE & ECONOMICS
ADV, NARI GURSAHANI RD, T.P.S III, BANDRA(W) MUMBAI, MAHARASHTRA 400050

CERTIFICATE

This is to certify that Mr Arjun Deepak Singh has worked and duly completed his Project Work for the
degree of Bachelor in Commerce (Financial Markets) Under Faculty of Commerce in the subject of
Financial Market and her project is entitled “ STUDY AND GROWTH OF NON BANKING
FINANCIAL COMPANY’’ under my supervision.

I further certify that the entire work has been done by the learner under my guidance and
that no part of it has been submitted previously for any Degree or Diploma of any
University.

It is his own work and facts reported by his personal findings and investigations.

Seal of the college

Name and Signature of Guiding Teacher

External Examiner Signature

Date of submission:
 Declaration by learner

I the undersigned Mr. Arjun Deepak Singh here by, declare that the work embodied in this project
work titled “STUDY AND GROWTH OF NON BANKING FINANCIAL COMPANY” forms my
own contribution to the research work carried out under the guidance of Ms Harsha Hardasani is a
result of my own research work and has not been previously submitted to any other University for any
other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly indicated as such
and included in the bibliography.

I. here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.

Name and Signature of the learner

Certified by

Name and signature of the Guiding Teacher

 EXECUTIVE SUMMARY

We studied about banks, apart from banks the Indian financial system has large number
of privately owns, decentralized and small sized financial institutions known as Non-
banking financial companies (NBFC’s). In recent times, the non-banking financial
companies have contributed to the Indian economic growth by providing deposits
facilities and specialized credit to certain segment of the society such as unauthorized
sector and small borrowers. In the financial system, the NBFC’s plays very important
role in converting services and provide to credit unorganized sector and small borrowers.

NBFC’s provide financial services like hire-purchase, leasing, loans, investments, chit
funds companies etc. NBFC’s can be classified into deposit accepting companies and
non-deposits accepting companies. NBFC’s are small in size and are owned privately.
The NBFC’s have grown rapidly since 1990’s.

They offer attractive rate of return. They are fund based as well as serviced oriented
companies. Their main companies are banks and financial institutions. According to
Reserve Bank of India Act 1934, it is compulsory to register the NBFC’s with the
Reserve Bank of India. This research work also focuses on the non-banking financial
services after COVID-19 pandemic.
 TABLE OF CONTENTS

Chapter No. Topics Page No.

1 Introduction

2 Research Methodology

3 Literature Review

4 Data Analysis, Interpretation and

Presentation

5 Conclusion and Suggestions

 CHAPTER 1

INTRODUCTION OF STUDY AND GROWTH ON NON-BANKING

FINANCIAL COMPANIES (NBFC’S)

Non-Banking Financial Companies (‘NBFCs’) are financial institutions which are not
banks, but they accept deposits and carryout functions similar to the banks. NBFCs
started meanly in India within the 1960s as an alternate for savers and investors whose
financial needs weren't sufficiently met prevailing by the banking industry. In a broader
sense, NBFC means a corporation whose principal business is financing, in whatever
form, but not qualified enough to be called a bank as defined in Banking Regulation Act,
1949. NBFCs offer a spread of services. The service mixture of NBFCs has all
dimensions-width, depth and consistency-the three essential characteristics of any
product mix. Width refers to variety, depth refers to home in each variety and consistency
refers to overall synergy of the service mix. With their diversified structure and methods
of business NBFCs are serving the economy during a sort of ways.

Growth and diversification of non-banking financial companies are integral parts of the
event process of the financial market of the economy. NBFCs and unincorporated bodies
are competing and complementing the services of economic banks since yester-years
everywhere the planet

The NBFCs at first operated on a limited scale without making much impact on the
financial Industry. They accepted fixed deposits from investors and figured out leasing
deals for giant industrial organizations. In the first stages of development, the businesses
Act regulated financing. However, the unique and sophisticated nature of operations and
with financial companies acting as financial intermediaries, there was an Involve in
separate regulatory mechanism.

Hence, Chapter III B was included within the Federal Reserve Bank of India Act, 1934,
which assigned the Bank with limited authorities to manage deposit-taking companies.
Since then the RBI has initiated measures to handle the NBFC sector.
The RBI accepted and applied that hire purchase and leasing companies could accept
deposits to the extent of their net owned funds, as per the key recommendations of James

S. Raj Study Group formed in 1975. The businesses were also required to take care of
quick assets within the sort of unencumbered approved government securities. Between
the 1980s and 1990s, NBFCs, with their customer-friendly reputation, began to draw in
an enormous number of investors. the amount of NBFCs rose smoothly from a mere 7000
in 1981 to around 30000 in 1992, which made the RBI feel the necessity to manage the
industry. In 1992, the RBI formed a Committee headed by the previous Chairman of
Bank of Baroda, Mr. A. C. Shah, to recommend measures for effective regulation of the
industry. The Shah Committee's recommendations also included most things from
compulsory registration to the prudential norms.

In January 1997 there have been huge changes within the RBI Act, 1934, especially the
Chapters III-B, III-C, and V of the Act seeking to place in situ an entire regulatory and
supervisory structure, which might protect and save the interests and also make sure
about the smooth functioning of Non-banking financial institutions .

In March 1996, there have been around 41,000 NBFCs in India and that they weren't
recognized as a separate class. However, thanks to the failure of a number of the
institutions the regulatory structure alongside the reporting and supervision was
constricted by RBI. Within the late 90s, sweeping changes were delivered to protect the
interest of depositors and ensuring the specified functioning of NBFCs.

After the amendment of the Act in 1997, the NBFCs have boosted significantly in terms
of operations, range of instruments and market products, technological advancement,
among others. In the last 20 years, the NBFCs have obtain prominence and added depth
to the financial sector. In August 2016, the union cabinet gave the go-ahead for foreign
direct investment (FDI) under the automated route in regulated NBFC

The capital specification was changed within the year 1999, NBFCs getting registered on
or after the issuance of notification dated April 21, 19991 were required to possess the
minimum net owned funds of ` 200 lakhs so as to commence the business of an NBFC.
Thanks to snow balling trend within the sector and to make sure that the expansion of the
world during a healthy and efficient manner various regulatory measures were taken for
recognizing the systemically important companies and getting them under the austere
norms. The NBFC-ND with asset size of ` 100 crores or greater were accepted to be
systemically important companies. During the FY 2011-12, two new class of NBFCs
were introduced videlicet, IDF and MFI.

Between 1980’s and 1990’s, NBFCs gained good ground and began to draw in an
enormous number of investors due to their customer friendly reputation. Since the times
of Liberalization, Privatization and Globalization (LPG, started in 1991), there has been a
mushrooming growth of NBFCs; the amount of NBFCs grew from a mere 7000 in 1981
to around 30000 in 1992.This is often when the RBI felt that it had been becoming
increasingly onerous for it to manage the industry. In 1992, the RBI created a Committee
lead by A. C. Shah, former Chairman of the Bank of Baroda, to recommend measures for
the effective regulation of the industry. The Shah Committee gave its recommendations,
which ranged from compulsory registration to prudential norms.

January 1997 witnessed drastic changes within the RBI Act, 1934, especially the
Chapters III-B, III-C, and V of the Act with the elemental objective of sticking place an
entire regulatory and supervisory structure, aimed toward protecting the interests of
depositors also as ensuring the robust functioning of NBFCs.

In the period following the modification of the Act in 1997, the NBFCs have evolved
substantially in terms of operations, sort of market products and instruments,
technological sophistication etc. In the past twenty years, the NBFCs have acquire much
seriousness by adding depth to the general financial sector. In light of the growing sense
of NBFCs as a key player in broadening the financial base of India, it generates
paramount academic and research interests to develop deep into its onset, growth and
performance. In August 2016, the union cabinet has given nod for foreign direct
investment (FDI) under the mechanized way to regulated NBFCs.

NBFCs are performing a significant role within the process of intermediation, especially
in areas where well- established financial entities aren't easily accessible to borrowers.
They need inspired small savers to take a position money in them, then they were tough
enough to lend to the borrowers.
In terms of Section 45-IA of the RBI Act, 1934, no NBFC can start or keep it up business
of a non-banking financial organization without

(a) Obtain a certificate of acceptance from the Bank and without having a Net Owned
Funds of ₹ 25 lakhs (₹ Two crore since April 1999). although, in terms of the powers
given to the Bank, to preclude dual regulation, certain categories of NBFCs which are
regulated by other regulators are omitted from the need of registration with RBI viz. risk
capital Fund/Merchant Banking companies/Stock broking companies registered with
SEBI, insurance firm holding a legalized Certificate of Registration provided by
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY, Nidhi companies as informed
under Section 620A of the businesses Act, 1956, Chit companies as defined in section
(b) of Section 2 of the Chit Funds Act, 1982, Housing Finance Companies handled by
National Housing Bank, stock market or a Mutual Benefit company.

1.1 DEFINATION OF NBFC ACCORDING TO RESERVE BACK

OF INDIA

Definition for Non-Banking Financial Company, it carries functions like bank but it's not
actual bank. Federal Reserve Bank of India has defined NBFC as below. RBI has defined
it in systematic way, it's explained each term in detailed i.e. what's financial institution?
What is non-banking?

An NBFC may be a company registered under the businesses act, 1956 or Companies act,
2013 and is engaged within the Business of monetary Institution.

Section 45I (f) of the Reserve Bank of India act, 1934 describes “Non-Banking Financial
Companies” as-

1. A financial Institution which is a company;

2. A non-banking financial institution which is company and which has its principal
business the receiving of deposits, under any programme or arrangement or in any
order manner, or in lending in any manner;
3. Such other non-banking financial institution or category of such institution, as the
bank may, with the previous acceptance of the central government and by
notification in the Official gazette, specifically;

Section 45I(c) of the Reserve Bank of India act, 1934 clarifies the term “Financial
Institution” as

1. The financing, whether by way of making loans or advances or otherwise, of

any activities other than its own;
2. The possession of shares, stocks, bonds, debentures or securities issued by
government or local authority or other marketable securities of a-like nature;
3. Letting or delivering of any goods to a hirer under hire-purchase agreement
as defined in clause (c) of section 2 of the hire purchase act, 1972;
4. The carrying on of any class of business;
5. Managing, conducting or supervising, as foreman, agent or in any other capacity,
of chits or kooris as defined as any law which is for the time being in force in any
state, or in any business, which is alike thereto;
6. Collecting, for any purpose or under any scheme or arrangement by whatever
name called, monies in lump sum or otherwise, by way of subscription or by sale
of units, or other instruments or other any manner and awarding prizes or gifts,
whether in cash or kind, or disbursing monies in any other way, to persons from
whom monies are collected or to any other person, but does not include any
other institution, which carries on as its personal business:-
• Agricultural operations; or
• Industrial activity; or
• The purchase or sale of any goods (other than securities) or the providing of any
services; or
• The purchase, construction or sale of any stable or rooted property, so however,
that no other part of income of the institution is derived from the financing of
the purchases, constructions or sale of immovable property by other persons.
1.2 CHARACTERISTICS OF NBFC’S

NBFC is that the financial organization which is functioning as shadow for Banks. Banks
are mostly in consumer banking while NBFCs are working in many segments like they're
into consumer banking, corporate banking, wholesale banking, mortgage loans, private
banking, wealth management, and investment banking.

Incorporation of non-banking financial firm is important as they're small players who

provide loans, chit funds etc., as 70% of population comes from the agricultural a part of
India. Many companies have come to the fore ad registered themselves with RBI to
achieve the status of NBFC. NBFCs are integral a part of our Indian Economy and
Financial Sector. Contribution towards Indian economy from NBFC sector is increasing,
recently it's been contributed 12.5% towards GDP of Indian economy. This recent
success of NBFC are often attributed to its lower cost, swiftness in providing strong risk
management services and their reach within the sector where public sector banks don’t.

NBFCs provide business loans at basic eligibility criteria. They study and do analysis of
the financial status of company and verify the credibility of the borrower company on the
idea of parameters. These parameters include CIBIL score, ITR, Business background,
assets quality, management of the corporate, liquidity et al. . . .

Terms and conditions of the NBFCs are customer friendly due to which companies do
approach NBFCs for corporate loans instead of approach bank. Many NBFCs provides
unsecured business loans which don't require hypothecation of any collateral. For little
businesses, terms and conditions are very customer-friendly where it can avail those
loans easily.

Commercial loan interest rates of the NBFCs are very competitive in market. They
supply borrower moratorium period on the idea of terms and conditions of the lender.
They need zero prepayment charges and don’t have any hidden charges. They permit

borrowers to repay them as per their pocket i.e. lender offer multiple repayment tenor
options that borrower can choose between and may repay the loan.
1.3 DIFFERENCE BETWEEN BANKS AND NBFC’S

BASIC BANK NBFC’S

MEANING Banks are government NBFC is a company which
authorized financial gives services which are
intermediary which aims to similar to banking services
supply banking services to to people without holding a

customers. bank license.

REGESTERED UNDER Banks are registered under NBFC is registered under
company’s act 1956.
Banking regulation act,
1949
DEPOSIT Banks can accept and lend NBFC’S cannot lend and
deposits. accept deposits.
INVESTMENT In banks a foreign In NBFC, Foreign
investment is restricted up investment is permitted up

to a certain fixed limit. to 100 percent.

PAYMENT SYSTEM Payment and settlement is In NBFC, the payment
the key activity of banks. system is not a part of the

activity.
DEMAND DRAFT Bank can issue self- NBFC cannot issue self-
demand draft on itself. demand draft their own.
CHEQUE DRAWN Banks can draw a self- NBFC cannot draw self-
cheque by their own. cheque their own.
CREDIT CREDITORS Banks can create credit NBFC cannot do it.
through various financial

activities.
TRANSACTION Bank provides a range of NBFC does not provide
SERVICE transaction services. transaction services.
1.4 THE DIFFERENT TYPESOF NBFC ARE AS FOLLOW:

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.

Investment Company (IC): IC means any company which is a financial institution carrying on
as its principal business the acquisition of securities,

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.

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

Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of

acquisition of shares and securities.

Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): IDF-NBFC 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.
Non-Banking Financial Company - 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:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not
exceeding Rs 1,00,000 or urban and semi-urban household income not exceeding Rs 1,60,000;
Loan amount does not exceed Rs 50,000 in the first cycle and Rs 1, 00,000 in subsequent cycles;
Total indebtedness of the borrower does not exceed Rs 1, 00,000;
tenure of the loan not to be less than 24 months for loan amount in excess of Rs 15,000 with
prepayment without penalty;
Loan to be extended without collateral;
Aggregate amount of loans, given for income generation, is not less than 50 per cent of the total
loans given by the MFIs;
Loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower

Non-Banking Financial Company – 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 50 percent of its total assets and its income derived from
factoring business should not be less than 50 percent of its gross income

Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at least
90% of the business turnover is mortgage guarantee business or at least 90% of the gross income
is from mortgage guarantee business and net owned fund is Rs 100 crore.

NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through

which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned
Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all
other financial services companies regulated by RBI or other financial sector regulators, to the
extent permissible under the applicable regulatory prescriptions
 1.5 NON BANKING FINANCIAL COMPANY QUALITATIVE FACTORS

a) Overview and Operating environment

Non-Banking Finance Companies (NBFCs) play an important role in the Indian financial market.
While the Reserve Bank of India (RBI) regulates both NBFCs and banks, there are some significant
differences in the regulatory treatment, with NBFCs being given greater flexibility in governance
structure and operational matters, and being allowed to lend independent of priority-sector targets and
of statutory reserve requirements. However, at the same time, there are regulatory restrictions on the
bouquet of services that NBFCs can offer and on their funding options. Normally NBFCs lend for
vehicle loans, personal loans, loan against property/shares, corporate loan, etc.

The operating environment has a significant bearing on an NBFC’s credit rating as it can impact its
growth prospects and asset quality quite considerably. In assessing the operating environment, also
looked at is the overall economic conditions, prospects of the industry related to the asset class being
financed, and the regulatory environment. For instance, in the case of a commercial vehicle (CV)
financing NBFC, the level of economic activity and freight rates are very important, just as the outlook
on real estate is important for a home finance company, from the perspective of both asset creation and
asset quality.

For an NBFC, regulatory changes can significantly impact (either positively or negatively) credit
losses. For instance, the establishment of the credit information bureau has helped lenders take
informed credit decisions, while The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI) has helped them recover real estate backed
loans more efficiently; at the same time, recoveries from unsecured asset classes and vehicle loans have
been hit with the regulator taking a strict view of the recovery procedure followed by some financiers.

Intensity of competition has a significant bearing on the credit profile of an NBFC, given that the
prevailing or anticipated competitive intensity would influence the company’s growth prospects,
earnings and management strategy. Our evaluation focuses on the current level of competition as well
as the attractiveness of the segment for potential competition by assessing several factors including
growth potential, entry barriers and risk-adjusted returns.
b) Promoters
Ownership structure could have a key influence on an NBFC’s credit profile in that a strong promoter
and strategic fit with the parent can benefit an NBFC’s earning, liquidity and capitalisation, and hence
its credit profile. In assessing an NBFC’s ownership structure, the parameters examined include,
among others: the credit profile of the promoter, shareholding pattern of the NBFC, operational
synergies of the NBFC with its promoter, level of involvement of promoter in the NBFC and level of
commitment, and track record of the promoter in providing fund support.

c) Management quality
Quality of management, systems and policies, shareholder expectations and the strategy followed to
manage these expectations, and accounting quality are the foundation stones on which an NBFC’s
credit risk profile is built. The importance of these factors is even higher for a new NBFC, one with a
shorter track record, or one with a changing business profile. The composition of the board, frequency
of change of CEO and the organisational structure of the company are critically examined. The
company's strategic objectives and initiatives in the context of resources available, its ability to identify
opportunities and track record in managing stress situations are taken as positives. The extent of
digitisation of the operations and adequacy of the information systems used by the management are
evaluated. The evaluation focuses on the adoption of modern practices and systems, capabilities of
senior management, personnel policies and extent of delegation of powers.

d) Risk Management
A careful evaluation of the risk management policies of the NBFC is done as that provides important
guidance for assessing the impact of stress events on the liquidity, profitability, and capitalisation of
the company concerned. Also compared is the underwriting policies of the NBFC concerned with the
best practices in the industry to make an assessment of the company’s risk profile. The process of risk
profiling also involves evaluating the NBFC’s business sourcing practices (in-house vs. outsourced),
besides its recovery and monitoring systems.

e) Compliance with statutory requirements

The track record of the company in complying with regulatory requirements of RBI are
examined.
f) Accounting Quality

Consistent and fair accounting policies are a prerequisite for financial evaluation and peer group
comparisons. By virtue of being incorporated under the Companies Act, 1956, NBFCs are required to
follow the Accounting Standards prescribed by the Institute of Chartered Accountants of India. Further,
the RBI has also issued prudential norms for NBFCs specifying the accounting methods to be used for
income recognition, provisioning for bad and doubtful advances, and valuation of investments. In
evaluating an NBFC’s accounting quality, the review is made with regard to the company’s accounting
policies, notes to the accounts, and auditors’ comments in detail. Deviations from the Generally
Accepted Accounting Practices are noted and the financial statements of the NBFC adjusted to reflect
the impact of such deviations.

g) Size and Market Presence

For an NBFC, its franchise strength determines its capacity to grow while maintaining reasonable risk-
adjusted returns, and to maintain resilience of earnings, thereby facilitating predictability of its future
financial performance. It may be noted that an NBFC with a significant market share and a niche player
can both have a defensible franchise (The bigger company on the strength of its standing in the overall
market and the smaller one on account of its unique offering or its strong relationship with the key
participants in the credit chain of the target segment), which could in turn benefit their credit profile.
As for size, typically it is
seen in relation to an NBFC’s loan mix and has a bearing on the company’s competitive position,
diversity, credit risk concentration, stability of earnings, and financial flexibility.

1.6 NON BANKING FINANCIAL QUANTITATIVE FACTORS

a) Asset Quality
Asset quality plays an important role in indicating the future financial performance of an
NBFC. Asset quality holds the potential to affect earnings (higher NPAs could dilute the
yields and necessitate higher credit provisions) and capital (lower earnings could slow down
the internal capital generation or in extreme situations (loss) could weaken the capital).The
evaluation of asset quality begins with the examination of the NBFC’s credit risk
management framework. Assessment is also made of credit risk concentration, trend in
viability of customers, trend in delinquencies, Gross NPA percentage, Net NPA percentage,
and Net NPAs in relation to Net Worth. The NBFC's experience of loan losses and write
off/provisions are studied carefully. The percentage of assets classified into standard,
substandard, doubtful or loss and the track record of recoveries of the NBFC is examined closely. The
portfolio diversification and exposure to troubled industries/areas is evaluated to arrive at the level of
weak assets. In assessing diversification, the common factors include loan mix, portfolio granularity,
geographical diversification and borrower profile.Restructured assets in NBFC’s total exposure are
closely examined to arrive at the potential NPAs of the NBFC.

b) Resource Profile
Resource base of the NBFC is analysed in terms of cost and composition. Proportion of deposits
/loans/bonds in funding mix is examined. Deposit growth rates and their rollover rates are also
analysed. Average as well as incremental cost of funds is examined in the context of prevailing interest
rate regime. Ability of the NBFC to raise additional resources at competitive rates is examined
critically.

c) Liquidity Management
It is important for an NBFC to maintain a favourable liquidity profile for the smooth functioning of its
funding activity (fresh asset creation) and to honour its debt commitments in a timely manner. It is also
important that an NBFC manage its interest rate risk, as the same could impact its future profitability.
In assessing an NBFC’s liquidity profile, the evaluation is done on the company’s policy on liquidity,
the maturity profiles of its assets and liabilities, the asset-liability maturity gaps, and the backups
available to plug such gaps. The evaluation also focuses on the diversity of the NBFC’s funding
sources and their quality (i.e. availability of these sources in a stress situation). The short term external
funding sources in the form of unutilized lines of credit available from banks, etc along with directed
and other investments if any are important sources of reserve liquidity.

d) Profitability
The purpose of the evaluation here is to assess the level of future earnings and the quality of earnings
of the NBFC concerned, which is done by looking closely at the interest spreads, fee income, operating
expenses, and credit costs. The evaluation of an NBFC’s profitability starts with the interest spreads
(yields minus cost of funds) and the likely trajectory of the same in the light of the changes in the
operating environment, the company’s liquidity position, and its strategy. The ability of the NBFC to
complement its interest income with fee income is
 CHAPTER-2
RESEARCH METHODOLOGY ON NBFC

2.1 OBJECTIVES

1 financial Inclusion With an emphasis on small enterprises, rural communities, and people without
traditional credit histories, NBFCs greatly expand financial services to underbanked and underserved
portions of the population.

2 Activating saves and Directing Investment: By providing appealing deposit alternatives, they
encourage saves, which in turn stimulates lending and investment in a range of industries.

3 Economic Development: By assisting with microfinance, small and medium-sized businesses

(SMEs), infrastructure projects, and commercial vehicle financing, NBFCs promote economic
expansion and job creation.

4 Encouraging Innovation: Compared to traditional banks, NBFCs are frequently more flexible and
nimble, which encourages innovation in the financial sector's offerings in terms of goods, services, and
distribution methods.

5 Adding to the Depth and Diversity of the Financial System: They operate in tandem with banks,
concentrating on certain niche markets or offering specialized financial services.

2.2 SCOPES

1 Lending and Credit Facilities:

Loans for various purposes: Personal loans, business loans, vehicle financing, home loans,
etc.

* Microfinance to support small-scale entrepreneurs

* Infrastructure financing for large-scale projects

* Lease financing and hire-purchase agreements

2 Investment Products:

* Mutual funds

* Fixed deposits
 * Insurance Products

* Stockbroking

* Portfolio management services

3 Financial Infrastructure:

* Participation in money markets

* Facilitating currency exchange

* Discounting bills of exchange

2.3 LIMITATION OF THE STUDY

*Data Availability: It can be difficult to obtain accurate and thorough data on NBFCs, particularly the
smaller or private ones.

*Complexity of Regulatory Landscape: It is challenging to generalize findings due to the frequently

complex and jurisdiction-specific regulaty environment for NBFCs.

* Dynamic Nature of the Sector: New goods, services, and technological advancements mean that NBF
Cs are always changing, which could soon render study findings obsolete
.
*Diversity of NBFCs: It might be challenging to draw generalizations that apply to the whole industry
due to the extensive diversity of NBFC categories (such as infrastructure finance, asset finance busines
ses, and microfinance).

* Limited Historical Data: Due to the fact that NBFCs are a relatively new phenomenon in comparison
to traditional banks, it may be difficult to analyze long-term trends based on the available historical dat
a

*Data Availability: It can be difficult to obtain accurate and thorough data on NBFCs, particularly the
smaller or private ones.

*Complexity of Regulatory Landscape: It is challenging to generalize findings due to the frequently

complex and jurisdiction-specific regulatory environment for NBFCs.

* Dynamic Nature of the Sector: New goods, services, and technological advancements mean that
NBFCs are always changing, which could soon render study findings obsolete.

*Diversity of NBFCs: It might be challenging to draw generalizations that apply to the whole industry
due to the extensive diversity of NBFC categories (such as infrastructure finance, asset finance
businesses, and microfinance).
* Limited Historical Data: Due to the fact that NBFCs are a relatively new phenomenon in comparison
to traditional banks, it may be difficult to analyze long-term trends based on the available historical
data.

The Companies Selected Are :

Bajaj Finance

Shriram Finance

Muthoot Finance

Chola Invest & Fin.

SBI Cards And Payment

among the players in the sector, the committee appreciated that it was to be primarily triggered

CHAPTER-3

LITERATURE REVIEW

In spite of not having a banking license, a non-banking financial institution (NBFC) may nonetheless
offer a wide range of banking-related services. While NBFCs don't normally accept deposits from the
public, they do provide services governed by banking rules, such as loans, retirement planning,
underwriting, and more. Over the last several years, a growing number of VC, retail, and industrial
firms have joined the lucrative NBFC lending market, causing the total number of these firms to surge.
Insurance companies, money changers, check cashing services, payday lenders, and pawn shops are all
examples of non-bank financial institutions. Getting a loan is simplified by NBFCs. More people will
be able to get loans since there will be more options to choose from besides traditional banks. Some
NBFCs focus only on serving particular industries or clientele. Borrowers in urgent need of funds who
have been turned down for a more conventional bank loan will find them particularly useful. However,
NBFCs are riskier than conventional banks since they are subject to less oversight and fewer reporting
requirements. A hefty interest rate is attached to their loans. Before signing up with an NBFC,
borrowers should be aware of the terms and conditions associated with the loan. They've mastered the
art of providing a broad variety of services throughout time. Originally conceived to meet the
requirements of savers and investors, NBFCs have evolved into organizations that may offer services
comparable to banks. There are a number of reasons behind the expansion of NBFCs in India. Their
services are customized for each customer. Some of the key reasons for the expansion of NBFCs have
been the extensive regulation of the banking sector and the lack of or comparatively lesser degree of
regulation over NBFCs. Some studies have shown a correlation between economic growth and the
expansion of NBFCs. According to the World Development Report, financial institutions such as banks
control a far larger proportion of total assets in developing nations than they do in industrialized ones.
The expansion of non-bank financial companies (NBFCs) and the securities market is necessary for
governments to meet the rising demand for financial services while also fostering greater levels of
competition and efficiency in the sector. On July 24, 1996, NBFCs were separated into two categories,
a) equipment leasing and hire purchase firms (finance companies) and b) lending and investment
companies, in an effort to reward the well-managed NBFCs. However, non-bank financial companies
(NBFCs) have historically been subject to fewer rules and regulations than other parts of the financial
sector. The Reserve Bank of India recognized the need to enhance restrictions for NBFCs in the wake
of the CRB scandal and the failure of certain NBFCs to satisfy investors' demands for the recovery of
money. Companies are considered NBFCs if their financial assets make up more than half of their total
assets (after deducting intangible assets) and their financial assets generate more than half of their
entire revenue, according the 8/4/99 guidelines. Bank credit limits for non-bank financial companies
(NBFCs) whose primary business is equipment leasing, hire purchase, lending, or investment
operations were lifted by the Reserve Bank of India in June 1999. In light of the measures taken by
RBI, it is clear that the
 1. On the basis of deposits:
• Deposit accepting Non-Banking Financial Corporations
• Non-deposit accepting Non-Banking Financial Corporations

3.1.1. On the nature of their activity:

• ASSET FINANCE COMPANY:

It is a financial organization that facilitates the service of financing the varied assets for
people and therefore the businesses which include machinery, heavy industrial
equipment, production and farming equipment and enormous power generators.

The income arising from there from shouldn't less be than the 60% of its total assets.
UTI AMC, ICICI AMC, BIRLA SUN LIFE AMC are few samples of asset
management company.

• LOAN COMPANY:

Loan Company as its name states is a financial institution which offers loan for
various purposes other than of the AMC which also includes the Housing Finance
Firms.

LIC finance ltd, PNB Housing Finance Firm, HDFC are some examples of the Loan
companies.

• MORTGAGE GURANTEE

COMPANY

• : It is a financial institution where -

❖ At least 90% of the business turnover is of mortgage guarantee or

❖ At least 90% of the gross income is from mortgage guarantee business or
❖ Net owned Fund is 100 crores
 INVESTMENT COMPANY

It is a financial institution whose principal business is the acquisition of securities. In a simple

term, these companies take money from the public which invested in various securities and
financial products.

Thereafter, company deducts its operational cost from the earned profit and later distribute to
shareholders. Bajaj Alliance General Insurance Company, IDFC, HDFC mutual fund are
examples of some Investment company.

• CORE INVESTMENT COMPANY:

It is a Non- Banking Finance Company –

❖ That deploys 90% of its total assets in the form of investment in shares, stocks, debt
or loan Group Company.
❖ Out of 90%, 60% should be invested in equity shares or those which compulsorily
converted later in equity shares.
❖ Does not carry any activity referred in section 45(c) or 45(f) of RBI act 1934.
❖ That accepts public funds

• INFRASTRUCTURE FINANCE COMPANY:

It is a Non- Banking Finance Company:

❖ That deploys three- fourth of its total assets in infrastructure loans

❖ That has a minimum Net Owned Fund of 300crores
❖ That has minimum ‘A’ credit rating or equivalent
❖ CRAR of 15%

Few examples are GMR infrastructure ltd, Hindustan Construction Company.

 MICRO FINANCE COMPANY
People in the urban, semi-urban or rural area of India need financial help to start their business
and fulfil other requirements but they are hesitant to seek the help from banks because of the
formalities which need to fulfil to get the required money.

Now, here the microfinance company come out, they provide financial help to these
underprivileged people. Bandhan Financial Service Ltd, Ujjivan Financial service are few
examples.

• HOUSING FINANCE COMPANY

•
❖ Principal business of financing of acquisition or construction of houses.
❖ Regulated by National Housing Finance
❖ Net owned fund of Rs.10 Crores
❖ E.g. HDFC ltd, India Bulls Housing Finance ltd.

3.1.2 On the basis of deposits:

There are two types in classification of NBFCs by Liability.

• Deposit accepting NBFCs
• Non-Deposit accepting NBFCs
All Non-Banking Financial Companies don’t accept deposits. Only those NBFCs which
are holding a legitimate Certificate of Registration (CoR) with authorization to simply
accept Public Deposits can accept/hold public deposit.

Section 45-I (bb) of the Federal Reserve Bank of India Act, 1934 defines the
term deposits as-

Stores (Deposits) incorporates and can be deemed always to possess included any receipt
of money by way of deposit or credit or in the other structure, however does exclude –

I. Amounts raised by the way share capital;

II. Amounts contributed as capital by partners of the firm;
III. Amounts received from scheduled bank or co-operative bank or the other depository
financial institution as defined in clause (c) of section 5 of the banking regulation act,
1949;
IV. Any amount received from, - a State financial corporation, any financial organization
laid out in or under section 6 a of IDBI act, 1964, or the other institution which will be
specified by bank during this behalf;

V. Money came normal course of business, by method for – Security Deposits,

Dealership Deposits, sincere cash, and advance against request of
merchandise, properties or administrations.
VI. Any sum got from a private or a firm or a relationship of nation not being a body
corporate, enlisted under any institution identifying with cash loaning which is for
now in power in any state;
VII. NBFCs are categorized into two different categories viz. Deposit accepting and
Non-Deposit accepting. The non-depositing NBFCs further bifurcated into:
❖ Systematically Important-
The term “Systematically important non-deposit taking non-banking financial
company” has been defined to means a Non-Banking Financial Company not
accepting/holding public deposits and having total assets of Rs. 500 crores and
above.

❖ Non-systematically Important-
The term “Non-systematically important non-deposit taking non-banking financial
company” has been defined to means a Non-Banking Financial Company not
accepting/holding public deposits and having total assets but Rs. 500 crores.

3.1Challenges Encountered by NBFCs

NBFCs are strengthening their presence within the market and have made significant
progress than the banks. However, newer or small NBFCs encountered challenges in
safeguarding their existence against their popular counterparts.

❖ Challenge of Funding due to the absence of Refinancing Option

In India, banks are outfitted with many refinancing options. Similarly, housing financing
companies even have several refinancing alternatives at their disposal and it refinances
from the regulator of Housing Financing Companies.
On the opposite hand, the NBFCs entirely depend upon the capital market or banks for
obtaining resources. This acts as a resistance to the expansion of the NBFCs.

Furthermore, confine mind the flows of finds from these sources can get evaporates
anytime.

❖ Challenges associated with Obtainment of NBFC license

The process of obtaining NBFC is way more complicated and cumbersome as compared
to other licenses. The method involves tedious and sophisticated documentation processes
and approval from RBI. Confine mind that RBI regulates the method which needs to be
followed by the applicant to avail of the registration.

❖ Intricate NBFC Compliances in India

After the NBFC incorporation, it's also needed to deal with multiple compliances. NBFC
compliance differs from one company’s type to a different. Therefore the difficulty
sneaked on when a private running a corporation of loans and advances, etc. it becomes
increasingly tiresome to deal with all aspect in consolidation. Moreover, it also becomes
tedious to understand about the filing requirement of the prescribed returns. This is often
probably one among the foremost intricate challenges encountered by NBFCs.

❖ No Versatility in Loan Classification of NPAs

The Non-Performing Assets (NPA) bears significant importance for the main players, but
businesses with inconsistent income encounter a negative impact on payment related
delays.

Classification under Non-performing assets and adaptability in scheduling is significant.

The classification of NPA need to be supported assets financed instead of the borrower’s
profile.
❖ Absence of a Statutory Recovery Tool

The inadequate statutory recovery tool is another complex issue taunting the NBFCs for
an extended.

❖ Several Representative Bodies

At present, multiple representative bodies govern NBFCs activities across the country.
It must be noted that NBFC is within the initial phase and still distant from being
acknowledged as a well-established entity. Hence, it might be a perfect proposition if
these entities are curbed by one representative body. It’s also crucial that each segment
is acknowledged sufficiently within the apex body that ensures the seamless growth of
NBFCs.

❖ Lacking in Capacity Building

Non-banking finance companies must establish a receptive ecosystem for capacity

building on a private also as a collective basis. Then the bulk of the NBFCs still lack the
said potential, thus; it should be addressed as swiftly as possible.

❖ Undue Tax Treatment

There exists an incredible variation within the tax structure for banks vs NBFCs like
TDS, double taxation on the lease or hire purchase, etc.

❖ Absence of Defaulter Database

NBFCs are more susceptible to credit risk under the influence of inadequate information.
Additionally thereto, there's a requirement of important legislative changes to leverage
the utility payments database within the process of the credit assessment.
 ❖ Stripping of Priority Sector Status to Bank Lending To NBFCs

This is one among the critical obstacles encountered by Non-banking finance companies.
The restoration must be deployed for the priority sector, bank lending, and NBFCs.

Henceforth, the synergy model between banks and NBFCs ensures uninterrupted support
to the underprivileged section of the society. It’ll empower the NBFCs to make wealth
and assets within the rural parts of India. The RBI can implant a provision to route a
hard and fast percentage of bank lending priority via NBFC.

❖ Minimum Mandatory Credit Rating for NBFC

It is now mandatory for the NBFCs (deposit-taking ones) to get investment-based credit.
It’ll empower them to simply accept deposits with none legal obstacles. If the rating of
the NBFC is degraded below the minimum rating, it cannot obtain deposits in any case
whatsoever. Furthermore, the NBFCs must intimate the Federal Reserve Bank regarding
its position.

3.2SOURCES OF FUNDING FOR NBFC’S

NBFCs are playing as a media between investors and users of funds. The most function
of NBFCs is to ask deposit and lend money within the sort of leasing, hire purchase or
granting loans. In finance, this is often called financial intermediation. It’s going to be
mentioned that just in case of NBFCs hooked in to one source of funds for entire
requirements, there arises a greater risk in their operations. It leads to problems
contributing to increasing or decreasing its reliance on different sources of borrowings.
The NBFCs which were relying completely on public deposits face problems now after
the introduction of RBI (Amendment) Act, 1997 and therefore the several restrictions
regarding acceptance of public deposits imposed therein. The most objective of such
restrictions is to guard the interest of small investors.

Total sources of funds for NBFCs could also be divided into two categories.
• Owned Funds:

The promoters of NBFCs can start their business within the sort of non-banking business
with the prescribed amount of cash and initially invest money counting on the need of
business and therefore the scale of operations. Investment by promoters within the initial
stage is own as owners’ funds. Such funds should be enlarged by issue of equity capital.
Finally, this consists of equity share capital, preference share capital and reserves and
surplus.

• Borrowed Funds:

Operations of NBFCs in India generally depend upon borrowed funds. Borrowed funds
are necessary for various fund-based activities of NBFCs, be it leasing, hire purchase or
loans. NBFCs can raise borrowed funds from one source or multiple sources depending
upon the size of operations or requirement of funds. In leasing decisions, the traditional
practice is to assure borrowing for creating comparisons in cash flows, bonds, cash
equivalent, bank borrowings, inter-corporate deposits, etc. Besides the general public

deposits, there are different sources of borrowed funds which is required for the efficient
functioning of NBFCs. That source is: ·

• Commercial Banks; ·
• Commercial Finance Companies;
• Loan from Financial Institutions;
• Debentures;
• Insurance and Pension Funds;
• Inter-corporate Deposits; · market.

➢ Borrowing from Commercial Banks

Apart from public deposits collected by NBFCs, borrowing from commercial banks may
be a major source of finance. Banks provide short-term funds which they raise from
loanable funds by way of demand deposits and which may be withdrawn quickly by the
investors. This restricts the banks in providing long-term loans. It’s well-known that
banks have extended credit 34 exposure to the NBFC sector. Banks like better to lend to
one borrower rather than sizable amount of small customers. It’s beneficial for credit
administration and more likely to satisfy the credit appraisal requirements than within the
case of individual customers. After the CRB fiasco, banks are unwilling to increase credit
to the NBFCs. This has created problems within the capital management of this segment.
Commercial banks are lending credit to NBFCs with high precautionary measures and
that they provide credit less than twice of NOF. They also consider credit rating in
granting loans to NBFCs.

➢ Commercial Finance Companies

NBFCs raise funds from investment companies as borrowed funds. Cost of borrowed
funds from commercial finance companies is usually above other sources of borrowed
funds. If a lease company raises funds from investment companies and provides assets on
lease basis, such company earns a really small margin from these funds. Therefore,
NBFCs engaged in leasing business, borrow from this source once they fail to avail all
other sources. Small NBFCs which haven't any access to borrow funds from other
sources, generally take this source of borrowing.

➢ Inter-Corporate Deposits

It is a really short-term fund for NBFCs, generally less than one year. It’s a source of
borrowing from one company to a different. It’s a well-liked source of borrowing for
NBFCs to satisfy their short term requirements. This arrangement should be used as a
short lived use of funds and will not be used as a permanent source of funds. RBI has
advised the NBFCs to not 35 heavily depend upon ICDs for creating investments in lease
or hire-purchase assets since this might create an asset-liability mismatch. The speed of
interest on ICDs is generally above other sources of borrowings. RBI has also prescribed
the ceiling limit on ICDs – borrowing. It’s twice of the NOFs just in case of leasing and
hire-purchase business within the general ceiling limit.

➢ Money Market

Sometimes NBFCs raise resources for short-term requirements from the cash market.
These market instruments are commercial papers and certificate of deposits etc.

➢ Debentures

NBFCs issue debentures to boost funds from the capital market as per guidelines issued
by Securities and Exchange Board of India (SEBI) under the SEBI Act, 1992.Debenture
may be a document issued by a corporation to the lender of funds. It’s fixed interest
bearing document. The debenture are often secured or unsecured. The interest paid on
debentures may be a deductible expenditure under the tax law but the payment of interest
is obligatory, regardless of the profit or loss.

➢ Insurance and Pension Funds

It has been argued that financial development of a rustic is synergistic with the economic
development. Insurance and pension funds support economic process by providing long-
term loans to NBFCs, particularly those engaged within the leasing business. These
institutions provide for extended term than banks’ demand deposits.

➢ Loans from Financial Institutions

Financial institutions like Industrial Credit and Investment Corporation of India Ltd
(ICICI), Industrial Development Bank of India (IDBI) and Industrial Finance Corporation
of India (IFCI) are extending funds to NBFCs to market their businesses. After the CRB
capital market fiasco, major financial institutions are unwilling to increase loans to the
NBFCs. This has raised a crucial question about the reliability of the judging procedures
of credit rating agencies concerning the financial position of the NBFCs. at the present
they're cautious in handling NBFCs.
 3.3 CREDIT RATING (INTERNAL RATING)

A credit rating organisation is an organisation that rates accounts holders which are
getting to pay back the quantity of credit which are availed to them on the idea of their
ability to pay back interests and principal amount on time and therefore the probability of
defaulting. These companies also analyse the creditworthiness of debt and issuers and
supply the credit ratings to only organisations and not individuals consumers. The
assessed entities could also be companies, special purpose entities, state governments,
government bodies, non-profit organisations and even countries. There are specialized
credit bureaus which are found out for the individual. These bureaus assign credit score
to every of the individual on the idea of their history of payment towards interest on
loan and Principal amount.

Credit rating agencies, these aren't too old agencies within the India. They came into
existence within the last half of the 1980’s. There are 6 Credit rating agencies which are
recognized because the best Credit rating agencies in India namely; CARE, CRISIL,
ICRA, Brickworks rating, SMERA and IRRP. From above, I buy to find out about three
agencies namely, CISIL, CARE, and ICRA. Rating provided by these agencies determine
the character and integrals of the loan. Banks, NBFCs, or any Financial Institutions
search for Credit rating which are assigned by the recognized Credit Rating Agency of
the borrowing party. If Credit rating is high of the borrower company then they will tend
loan on lower rate of interest. There's common parameter to rate companies called as
CAMELS (Capital Adequacy, Assets Quality, Management Quality, Earning, Liquidity,
and Sensitivity) which is employed by the credit rating agency. This CAMELS are
explained as follows.

Capital Adequacy

❖ Assess through Capital analysis.

❖ Compliance with regulations concerning risk based net worth requirement.
❖ Compliance with interest and dividend rules and practice.
❖ Other factors are involved in rating and assessing capital adequacy are its growth
plans, economic environment, ability to regulate risk, and Loan & investments
concentration.
Assets Quality

❖ Covers an institutional loan’s quality, which reflects the earnings of the corporate
❖ Analysing investment risk factors that company may face and comparing these risks
with company’s capital earnings, which shows the steadiness of the corporate when
faced with particular risks.
❖ Analysis of Company’s fair market price of investments when mirrored with the
company’s value of investments.
❖ It reflected by the efficiency of a company’s investment policies and practices.

Management Quality

❖ Management assessment determines whether company is in a position to properly

react to financial stress or not
❖ This parameter is reflected by the management’s capability to means, measure, take
care of and control risks of the company’s daily activities.
❖ Management of resources in systematic way which can reflect in efficiency.
❖ It covers management’s ability to make sure the safe operation of the corporate as
they suits necessary and applicable internal and external regulations.

Earnings

❖ Company’s ability to create appropriate returns to be ready to expand, retain

competitiveness, and add capital may be a key think about rating its continued
viability.
 ❖ Determined by assessing the company’s growth, stability, valuation allowances, net
interest margin, net worth level and therefore the quality of the company’s existing
assets.

Liquidity

❖ Analyst check out rate of interest risk sensitivity, availability of assets which will be
easily be converted into cash, dependence on short term volatile financial resources
and Assets Liability Management (ALM) technical competence.

Sensitivity

❖ Covers how particular risk exposures can affect institutions.

❖ Analyst assess an institution’s sensitivity to plug risk by monitoring the management
of credit concentration.
❖ How lending to specific industries affects company.
❖ Exposure to exchange, commodities, equities, and derivatives also are included in
rating the sensitivity of a corporation to plug risk.

3.4 The role of NBFCs in the Indian Economy

NBFCs (Non-Banking Financial Companies) play a crucial role in promoting inclusive

growth within the country, by catering to the various financial needs of bank excluded
customers. Further, NBFCs often take lead role in providing innovative financial services
to Micro, Small, and Medium Enterprises (MSMEs) best suited to their business
requirements. NBFCs do play a critical role in participating within the development of an
economy by providing a fillip to transportation, employment generation, and wealth
creation, bank credit in rural segments and to support financially weaker sections of the
society. Emergency services like financial assistance and guidance is additionally
provided to the purchasers within the matters concerning insurance.

NBFCs are financial intermediaries engaged within the business of accepting deposits
delivering credit and play a crucial role in channelizing the scarce financial resources to

capital formation. They supplement the role of the banking sector in meeting the
increasing financial needs of the company sector, delivering credit to the unorganized
sector and to small local borrowers. However, they are doing not include services
associated with agriculture activity, industrial activity, sale, purchase or construction of
immovable property. In India, despite being different from banks, NBFC are bound by
the Indian banking system rules and regulations.

NBFC pays attention on business associated with loans and advances, acquisition of
shares, stock, bonds, debentures, securities furnished by government or agency or other
securities of like marketable nature, leasing, hire-purchase, insurance business, chit
business.

The banking sector would always be the foremost important and influential sector within
the field of business due to its credibility in favoring and supporting manufacturing,
infrastructural development and even being the support for the common man's money.
But despite this, the role of NBFCs is scathing and their presence during a country would
only boost the economy within the correct directi
P Vijaya Bhaskar, ex – Executive Director, RBI, explained how NBFC companies
are game-changers that are very important to the economy

❖ Size of sector:
The NBFC sector has grown considerably within the previous couple of years despite the
slowdown within the economy.

❖ Growth:

In terms of year-over-year rate of growth, the NBFC sector knocks the banking sector in
most years between 2006 and 2013. On a mean, it grew 22% per annum. This shows, it's
contributing greater to the economy per annum.

❖ Profitability:

NBFCs are more profitable than the banking sector due to low-costs. This helps them
offer inexpensive loans to customers. As a result, NBFCs' credit growth - hikes within the
amount of cash being lent to customers – is above that of the banking sector with more
customers opting NBFCs.

❖ Infrastructure Lending:

NBFCs pitch in largely to the economy by lending to infrastructure projects, which are
essential to a developing country like India. Since they require ample amount of funds,
and earn profits only over an extended time-frame, these are riskier projects and deters
banks from lending. Within the previous couple of years, NBFCs have given out more to
infrastructure lending than banks.

❖ Promoting inclusive growth:

NBFCs cater to a good sort of customers - both in urban and rural areas. They finance
projects of small-scale companies, which is vital for the expansion in rural areas. They
also provide small-ticket credits for affordable housing projects and these help encourage
all-round growth within the country.
❖ Up-liftmen within the Employment Sector:

With the expansion in operations of the tiny industries and businesses, the policies of
NBFCs are uplifting the work situation. More opportunities for employment are arising
with the influence of the NBFCs within the private also as government sectors. The
business activities within the private sector provide more employment opportunities and
occupation practices. And NBFC plays an important role in their growth and solidity.

❖ Mobilization of Assets:

With more public preferring to deposit in NBFCs due to their higher rate of interest,
NBFCs allow mobilization of resources; funds, and capitals. Thanks to their easier norms
for investing, these companies create a balance between intra-regional income and asset
distribution. Turnout the savings into investments, these companies contribute to
economic development as compared to traditional bank practices. Proper operation of
capital helps within the growth of the trade and industry, resulting in economic progress.
They operate not meaning to maximize their profit and are, therefore, engaged in
activities that generate zero or very low revenue.

❖ Financing for Long-Term:

NBFC plays an important role in supplying firms with funds through equity participation.
As against traditional banks, NBFCs supply long-run loan to the trade and commerce
industry. They lubricate the fund to large infrastructure projects and up-lifts economic
development. Long-term resources permits growth with firm and soft interest rates. The
economy hits when businesses of SSIs and MSMEs flourish.

❖ Raising the quality of Living:

NBFCs collaborate with the government for the hike of the society. The NBFCs attract
deposits from the overall public and converts it into capital for industrial and other
sectors for trouble-free economic development. The increase in businesses necessarily
raises the demand for workforce and creates employment opportunities to increase the
purchasing power of people and, subsequently, raising demands.
 This works to improve the living standards of a society. Also, foreign deposits are
interested in these financial institutions and supports in process and development.

❖ Innovative Products:

NBFCs, by being adaptable in terms of lending and investment opportunities than

banks, are more driven in innovating financial products. This helps in their growth in
an exceedingly sensible manner. They fine-tune their selling strategy in reference to
their target customers. These corporations are the sport changers within the
developing economy.

NBFCs aid economic development in the following ways

• Mobilization of Resources - It converts savings into investments

• Capital Formation - Aids to increase capital stock of a company

• Provision of Long-term Credit and specialized Credit

• Aid in Employment Generation

• Help in development of Financial Markets

• Helps in Attracting Foreign Grants

• Helps in Breaking Vicious Circle of Poverty by serving as government's instrument

•
 The Technology Backbone

With the increasing role of NBFCs within the Indian Economy, the Reserve Bank of
India has issued the notification Master Direction - Information Technology Framework
for the NBFC Sector this year. The directions thereon Framework for the NBFC sector
are expected to reinforce safety, security, efficiency in processes resulting in benefits for
NBFCs and their customers. NBFCs with asset size above 500 crores are expected to
stick to the new "recommendations" by 30th September 2018. Suggestions for small
NBFCs include developing basic IT systems mainly for maintaining the database. While
huge NBFCs stare at a strict time-limit, smaller NBFCs, especially Fintech startups have
a much bigger problem at hand; an identity crisis! The business models of startups like
BankBazaar mandate that they are doing not become a NBFC, while the character of
operations of startups like Lendingkart makes them a NBFC as a part of the legal
compliance.

3.6 ADVANTAGES ANF DISADVANTAGES OF NBFC

Advantages of NBFC Over Bank:

Is NBFC More Profitable Than Bank?

The NBFC sector is growing at the value of banks in India, which are saddled by bad
loans and poor profitability. Gone are the times once you use to face in line for getting
loans from banks. The arrival of Non-Banking Finance Companies makes it easier for the
folk to avail loan facility. The straightforward accessibility and remote coverage make
NBFCs the foremost opted option for borrowers as compared to banks. There are many
advantages of NBFC over banks in India. Here during this article, we'll enter the in-depth
advantages of NBFC over banks and therefore the main difference between them
What Is An NBFC? Is It Different From A Bank?

A financial company incorporated under the businesses Act, 2013 having a minimum net
owned fund of Rs.2 crores is named a Non-Banking Financial Company. Consistent with
the RBI Act, it deals within the business of loans and advances, shares, bonds,
debentures, and securities which are issued by the govt agencies or agency, hire-
purchase, and insurance business. In other words, we will say that it's a corporation
having principal business of receiving deposits under the scheme or arrangement. A bank
may be a government authorized financial intermediary which aims at providing banking
services to the overall public.

Following are few advantages of NBFC over Bank-

NBFC are more profitable than Banks due to their lower costs. This aids in giving cheaper
loans to customers. It’s also easier to urge a loan from an NBFC as banks have stringent
regulations and cumbersome paperwork. Since the necessity for finance is increasing day by
day, banks alone cannot cater to the increasing demand. So NBFCs provide finance to both the
general public and personal sectors.

❖ NBFC registration is simpler as compared to Bank license.

❖ Banks check out the financial needs of huge business, whereas NBFC are more
targeting small borrowers.
❖ The loan processing facility of NBFC is quicker than what most banks provide. The
banks are more stringent when it involves giving loans. They need long paperwork
with strict eligibility and requirements.
❖ Banks put tons of stretch on the credit score of a person; therefore if the credit score
is low, the borrower are denied finances.
❖ When a borrower takes a gold loan, the NBFC’S gives leverage to them for repaying
their regular interest throughout the term of the loan and pay the principal within the
end. But it's different just in case of banks, both the principal and interest need to be
paid at regular intervals.
 ❖ Since NBFC has no penalty clauses, the repayment of loans is simpler as compared to
banks.
❖ Another key point is that while computing the loan amount over a property during the
calculation, they take into consideration the statutory charges like stamp tax and other
enlistments. But an equivalent doesn't happen within the case of banks.

Hence, it are often summarized that NBFC may be a hassle-free option for availing a fast
loan. It takes around 10 working days to avail the loan facility through NBFCs.

3.7 Advantages and Disadvantages of

NBFC’S. Following are the advantages of

NBFC’S.

❖ Can provide loans and credit facilities

❖ Can trade market instruments
❖ Can do wealth management like managing portfolios of stocks and shares
❖ Can underwrite stock and shares and other obligations
❖ NBFCs are the last resorts of borrowing; NBFCs are there where banks aren't there
❖ NBFCs are the most important propellants of ushering finance into the country

❖ Agility is extremely important for NBFCs because it sets the banks apart. Banks
function slower as compared to the NBFCs
❖ The use of recent methods by NBFCs has overcome key challenges that had
overwhelmed conventional lending. NBFCS have made great use of technological
advancements just like the use of mobile phones and therefore the internet which has
helped in making information easily accessible anytime anywhere. it's reduced the
demand and reliance on bank branches
❖ Technology isn't only at the top of banking and financial services, but also an
increasingly digitized India has underpinned the increase of NBFCs. Digitalization
has given NBFCs the power to present multiple choices and reach the larger audience
at quicker pace. This indirectly gives rise to larger NBFCs

❖ Combination of partnership and database helps in increasing penetration of monetary

inclusion. To succeed in large numbers of consumers successfully, and minimize
 risks, NBFCs have forged partnerships including the govt to use their database and
identify customer worthiness. Thus lending has been productive.

Another major advantage of NBFCs is that the ground level understanding of their customers
profile and therefore the need for his or her credit, which provides them a foothold, as their
ability to customize their products consistent with client needs

Following are the Disadvantages of NBFC’S.

❖ NBFCs cannot accept demand deposits because it falls within the realm of activity of
economic banks

❖ An NBFC isn't a neighborhood of the payment and settlement system and intrinsically an
NBFC cannot issue cheques drawn on itself

❖ Deposit insurance facility isn't available for NBFC depositors unlike just in case of banks

❖ All NBFCs cannot accept deposits; just some can. Only those NBFCs holding a legitimate
Certificate of Registration with authorization to simply accept Public Deposits can
accept/hold public deposits

❖ The regulatory mechanism for NBFCs is stringent

RBI has prescribed strict norms on capital adequacy and NPA so as to bridge the regulatory
gaps between NBFCs and Banks, asking NBFCs to take care of minimum capital adequacy
norms. It’s reflected from a press release of the RBI which said that seven NBFCs weren't
ready to meet the regulatory minimum capital adequacy norms of 15% as of March 2016.

CHAPTER-4
 EFFECT OF COVID-19 ON NBFC’S.

NBFCs are an integral component of the Indian lending eco-system aside from banks
particularly over the last 20 years. An increasing number of NBFCs became systemically
important through a uniform record growth over the amount 2009-19 and lots of of them are
larger in scale today as compared to the median private sector bank in India. Needless to
mention, their sustainability within the current context is a crucial aspect within the overall
domestic financial stability. Although NBFCs had witnessed a favorable operating
environment since the top of the worldwide financial crisis in 2008, they faced serious
headwinds from September 2018 with the credit event in IL&FS Group, an infrastructure
conglomerate which was closely followed by successive defaults in 2-3 large NBFCs and
HFCs. Clearly, this had a severe impact on the financial flexibility and liquidity position of the
NBFC sector at large, constraining their growth and profitability. Because the economy went
into a slowdown mode in FY20, cracks have begun to surface in their erstwhile healthy asset
quality position, particularly within the wholesale and therefore the SME segments.
However, the govt and RBI took some significant measures to enhance the NBFCs’ access to
funding like the partial credit guarantee mechanism to facilitate securitization transactions.

While the liquidity position of the NBFCs with an extended diary and a solid business
franchise were beginning to return to comfortable levels in H2FY20, the Covid-19 outbreak
hit both the worldwide and therefore the Indian economy with an unprecedented lockdown
scenario and wide spread economic disruption. We believe that the impact of Covid-19 on the
general NBFC sector won't only be limited to their liquidity position and their ability to
manage debt servicing within the short term but there also are going to be an extended term
impact of the shutdown on their asset quality, business volumes and profitability levels.
4.1 A timeline of the crises that brought India’s $370 billion
shadow banking sector to its knees
The Covid-19 outbreak and ensuing lockdown have hurt most industries in India, except
for the country’s $370 billion shadow banking sector, this could be the last nail within the
coffin.

Over the past two years, several non-banking financial companies (NBFC) in India are
handling bad news upon bad news, including a cash crunch, the high cost of capital, and
burgeoning bad loans.

In a recent report, Moody’s said the lack of borrowers to repay loans amid the Covid-19
crisis, including a six-month moratorium on repayment allowed by India’s financial
institution , will cause an interruption of inflow for NBFCs, whilst outflow will need to
continue.

“Most NBFCs don't have substantial on-balance sheet liquidity because they primarily
manage liquidity by matching cash inflows from loan repayments by customers with cash
outflows to repay their own liabilities,” the ratings agency said during a report on May
18.

Once praised for reaching every nook and cranny of India, today NBFCs are struggling
for survival. But how did they get here?

There is a decline in consumption which has led to a decline in the GDP growth. There is
no recession because recession means two-quarters of negative growth. We don't have
negative growth, we have a 5% growth rate. We have to go back to September 2018
when the IL&FS scandal happened.

When it happened those who got caught were debenture holders of the company--
pension fund, mutual fund and the lenders from the NBFCs who had lent to IL&FS.

It all began in September 2018, when financing behemoth Infrastructure Leasing &
Financial Services (IL&FS) collapsed.
4.1.1 Here’s a timeline of what went wrong for India’s

NBFCs: June 2018:

IL&FS defaults for the primary time on repayment of economic paper (short-term
borrowing) and inter-corporate deposit (unsecured borrowing) worth Rs450 crore ($60
million).

July 2018:

Non-executive chairman Ravi Parthasarathy, who played a pivotal role within the company’s
growth, resigns after over 30 years of service at IL&FS. He’s swiftly replaced by Hemant
Bhargava, director of life assurance Corporation of India (LIC).

While the resignation is an exercise in control, news reports claim that each one isn't well with
IL&FS. Knowledgeable in infrastructure financing space tells Business Standard newspaper
that Parthasarathy’s tenure was “too long and too opaque.” The article also states that the
corporate is much leveraged as its subsidiaries have an outsized capital requirement.

September 2018:

IL&FS defaults on repayment of an Rs1, 000 crore short-term loan from Small Industries
Development Bank of India. This alarms credit rating agencies, which start downgrading the
corporate and its subsidiaries.

CNBC-TV18 reports that the IL&FS group is saddled with a debt of Rs.91,091 crore and is
facing losses to the tune of Rs1,887 crore within the fiscal year 2018.

News reports also say IL&FS has been funding long-term projects via short-term borrowing.
Because the cost of borrowing rises thanks to a rise in debt, short-term liquidity dries up and
projects get delayed, and IL&FS finds it difficult to form repayments.

Mumbai-based DSP Mutual Funds dumps Rs300 crore worth of economic papers of another NBFC,
Dewan Housing Finance Limited (DHFL), at a reduced rate in September, sparking speculation that
the corporate is watching a rating downgrad
These developments make investors nervous and therefore the market cap of NBFCs is
decimated. Between Sept. 21 and 24, large NBFCs like development and Finance Corporation
(HDFC) and Bajaj Finance’s market cap erodes by around Rs18,600 crore and Rs13,800 crore,
respectively. Twelve other NBFCs including L&T Finance Holdings, DHFL, and Indiabulls
Housing Finance also witness a pointy fall in market cap.

October 2018:

The effect of NBFC rout spreads sort of a wildfire across the stock and debt markets. On Oct.
11, Nifty and Sensex hit a six-month low of 10,234 and 34,001, respectively.

Bond prices fall thanks to the sell-off and yields still rise, making it costlier for NBFCs to
borrow. the typical cost of borrowing for corporates has gone up by 100 basis points since
April 2018, making it harder for NBFCs to borrow, and hits their ability to remain afloat.

February 2019:

Anil Ambani-owned Reliance Home Finance defaults on loan repayment of Rs40.08 crore to
Punjab & Sind Bank.

April 2019:

Another Anil Ambani-owned firm, Reliance Commercial Finance, is additionally on the verge
of default, consistent with CARE Ratings.

May 2019:

Investors flock to strong private NBFCs like HDFC and quasi-sovereign financing
companies like Rural Electrification Corporation, Power Finance Corp, commercial bank for
Agriculture and Rural Development, National Housing Bank, and LIC Housing Finance.

June 2019:

DHFL, one among the leading housing finance companies, fails to repay cash equivalent
worth Rs225 crore thanks to the shortage of liquidity and inability to boost fresh funds.
 July 2019:

Federal Reserve Bank of India (RBI) governor Shaktikanta Das says the financial institution is
taking steps “to ensure a collapse of another NBFC, especially an outsized one, doesn’t
happen.”

August 2019:

Mutual funds, which are a primary source of funding for NBFCs for long, turn extremely
cautious. The exposure of debt mutual funds to the world drops by 20% year-on-year.

September 2019:

The value of borrowing continues to rise for NBFCs.

Reliance Group decides to pack up Reliance Home Finance and Reliance Commercial
Finance, which had become insolvent.

Real estate financier Altico Capital defaults on interest payment and credit rating agencies
downgrade its debt to junk status.

December 2019:

The RBI observes (pdf) that bad loans within the sector have risen between March 2018 and
September 2019, and therefore the higher cost of borrowing and increased risk aversion has
led to a drop by loan growth.

March 2020:

As a part of the measures to fight the Covid-19 crisis, the RBI offers a three-month
moratorium for repayment of loans. But it's unclear if beleaguered NBFCs can avail of it.

April 2020:
 NBFCs seek clarification from the RBI on whether or not they are eligible for a
moratorium.

The financial institution announces long-term repo operation (offering money at a less
expensive price to banks for lending to a specific sector) targeted at shadow bankers with
a condition that half the funds availed by banks must attend small and mid-sized NBFCs.
This attempt fails because the RBI receives a subdued response from banks, which try to
remain far away from risky moves.

Chennai-based open-end fund house Franklin Templeton shuts down six debt schemes
with around Rs.30,000 crore assets under management. Investors are unnerved. “Mutual
funds are lending only to chosen few NBFCs as there's risk aversion within the market.
And now they're facing redemption pressure so how will they lend money to other
entities?” asks says Pankaj Naik, associate director of India Ratings and Research.

In a bid to ease NBFCs’ woes, the RBI issues clarification, stating that banks can decide
if they need to supply a moratorium on repayment of loans to shadow bankers

May 2020:

India’s largest lender depository financial institution of India and government-owned

Punjab commercial bank provide moratorium to NBFCs.

The Covid-19 lockdown starts impacting even those NBFCs that had an impeccable
record thus far. As an example, Pune-based Bajaj Finance says 27% of its loan book is
under moratorium while its net income drops sharply because it makes Rs900 crore
provisioning for Covid-19 related issues.

The RBI declares it's extending the moratorium on repayment of loans by another three
months till end of August. Moody’s believes this may find yourself “weakening solvency
of NBFCs (and) successively will pose a risk to the steadiness of the broad economic
system because banks have large direct exposures to them.”
4.2 The impact of Covid-19 on NBFCs
❖ Markets rolling down, once known as the most preferred stocks, most of the NBFCs
have lost close to approximately 30% to40% value in the last one month.
❖ The revenue outflow of all NBFCs will be hugely affected as there would be a
significant drop in proceedings, loan repayments, etc. at all levels countrywide. This
means less collection by the NBFCs impacting their day to day operations and
profitability.
❖ Affected businesses due to COVID-19 may take time to repay their loans and would
further require financial assistance to weather the storm once the crisis is over.
❖ NBFCs depended on digital process of payment & bills can get their proceeds due to
hardware shortages since importing countries like Korea and China are not re-
starting their factories.
❖ A crucial pillar to the Indian economy, MSMEs will now struggle to sustain business
and this will impact the NBFCs asset quality requirements.
❖ New policy measures or accounting rules could make the NBFCs vulnerable because
the coronavirus pandemic looms to push the planet into a downturn.
❖ Larger work pressure on NBFC employees to finish all the pending accumulated
work once the crisis is stable and stretched targets on each employee to grow
business.

According to CRISIL, Fitch, SBI Research, India could dive into a full-blown recession
with Arthur D Little saying it'll push 120 million people back to poverty and destroy
opportunities of up to 1 trillion dollars in GDP. The RBI states out that, banks have credit
arrears of roughly 1.92 trillion dollars and occupy deposits worth about 1.69 trillion
dollars.

NBFCs, which are the key sources of funding for tons of diverse segments not funded by
banks, are hit severely by COVID 19. They were immediately faced with an enormous
credit crunch and declining asset quality. Sectors critical to NBFCs, like manufacturing,
auto, land, and retail, are still operating at a subpar level. This has added to the pressure
for NBFCs earlier suffering from the IL&FS defaults.
 While banks finance loans through public deposits, most NBFCs rely mainly on
borrowing from banks to fund their disbursements. With the pandemic, banks are
reluctant to lend to NBFCs. to feature to their woes, NBFCs were directed to supply
moratorium to their debtors, whereas they didn't receive any similar support from banks.

The RBI took several steps, first in April then in August, to supply relief but there was no
moratorium announced for capital market borrowings, which also form a big chunk for
NBFCs. In October, as a part of its 20 trillion stimulus package, the government
announced liquidity support of Rs 75000 crores to NBFCs – MFIs, to be imparted under
two separate schemes. This comes as a relief but the reluctant approach of banks remains
a matter of concern.

4.2.2 The future of NBFCs - Surviving and thriving

With their core business shrinking due to Covid-19, NBFCs are being forced to diversify
and find other sources of income and reimagine their business. They’re going to need to
redefine themselves with a market-driven platform, leveraging their fortes – customer
base, distribution reach, and collaboration with varied ecosystems.

It has become clear that to affect the changing business scenarios, NBFCs will need to
specialize in their strengths which are essentially their five main functions.

❖ Origination, underwriting, and decision-making which is that the crucial role of

assessing the danger potential or creditworthiness of a possible borrower.
❖ Loan fulfilment and servicing by using different strategies to succeed in the
audience and providing end-to-end customized services.
❖ Risk management with proper risk mitigation measures and enhanced
governance protocols.
❖ Collections with a prioritization framework and a well-regulated process
through different collection strategies avoiding delinquencies.
❖ Funding involves raising money to perform the above four functions.
❖ In a perfect situation, to tackle the 2 main issues NFBCs face, severe credit crunch and declining
asset quality, they might look out of their asset quality by focusing on the primary four of their
functions. Since taking care of the credit crunch requires different skills, NFBCs could concentrate
on doing what they excel in and leave sponsoring to the bank, who are the authority.
This might be a win-win situation for both if banks combat the liquidity risks on behalf of
NBFCs with loans remaining on their balance sheets and NBFC bearing the default risk.
 This is able to solve issues at two levels, banks providing liquidity without hesitation, and
NSFCs focusing their core strengths.

With Bloomberg reporting that NFBC is extremely slowly recovering, even with the
economy struggling, the assumption is that NBFCs can effectively begin of the Covid-19
induced depth they were flung into, by enabling an efficient marketplace driven platform.
This may further expand with data-driven need-based servicing not limited to only in-
house offerings.

4.3 COVID-19 Lockdown – How it impacts India’s NBFCs?

1 Payment defaults
As of March 27, 2020, Indian banks have lent over 8 trillion (in Indian rupees) to NBFCs,
according to the latest data released by the Reserve Bank of India. This is an increase of
26% from the previous year. After borrowing money from banks, NBFCs lend it out to
borrowers at higher margins. As a majority of borrowing customers for NBFCs are small
business owners, the probability of defaulting on their due payments has increased – due
to lack or restricted business activity. Given their focus on business sectors with higher
risks, NBFCs are now more vulnerable than banks when it comes to making timely loan
repayments. Despite the three-month moratorium package offered by RBI, the NBFC
industry faces an overall debt of 1.75 lakh crores maturing by June 2020.

2. Delayed EMI repayment

It’s not just the NBFCs that could default on their payments. NBFC customers can also
default on their EMI repayments – thus adding to the overall cash crunch and an increase
NPA’s
 While large banks can still afford to lend to high-earning executives in top-level
companies, NBFCs or smaller banks will find it harder to lend to reliable borrowers, even
in the post Covid era. With a further extension of the current economic lockdown, delays
in EMI repayments could slow down loan disbursements that could finally affect the
GDP figures. As NBFCs are a safe source of funding for many businesses, a drop in loan
disbursement can reduce the liquidity and increase the cash crunch.

3. Loss of credit

The impact of delayed payments is likely to reduce the liquidity within NBFCs.
Additionally, this can have a subsequent impact on the credit quality of loans and other
portfolios. To alleviate the industry concerns, the RBI has announced an Rs30,000cr
emergency package for NBFCs that could allow some short-term relief. However, this
government package is not sufficient for solving the funding-related problems within
NBFCs. The core problem that separates NBFCs from commercial banks is that they are

More exposed to riskier industry segments - like real estate, which were declining even before
the virus outbreak. As reported by Economic Times, Financial experts even project that the
weakening quality of assets could further worsen the liquidity crunch in leading NBFCs
 4. Depleting capital

. It’s not just the loss in credit that NBFCs have to face up to – there is also a major loss
of capital. With the significant size of NBFC loan and investment portfolio, mark to
market (or MTM) losses could wipe out NBFCs capital reserves. This could result in a
violation of the industry’s capital adequacy norms. The RBI requires both banks and
NBFCs to maintain their Capital to Risk Assets Ratio (or CRAR). While the minimum
CRAR for banks is set at 9%, NBFCs have it much tougher with a minimum CRAR of
15% - that is distributed as 10% for Tier-1 and 5% for Tier-2 capital.

To counter this problem, NBFCs are now seeking relief from RBI, particularly in the
norms for Tier-2 capital that has been hit the worst. How do all these factors ultimately
impact the projected earnings among leading NBFCs? That brings us to the final impact.

5. overall earning

Thanks to the increasing cash crunch and depleting capital, NBFCs are staring at a
potential fall of 30-70% in their earnings for the financial year 2021. While adequate
liquidity can take care of loan repayments or even asset quality, lower earnings are going
to adversely impact the net profit and balance sheet in this industry.

According to UBS analysts, the earnings for the NBFC sector in India is likely to be
reduced in the range of 11-65% for the financial year 2021-22. Even as large private
sector banks are projected to post good earnings in the third quarter of 2020, NBFCs will
continue to see weak earnings for all remaining quarters

D S Tripathi, managing director & Chief executive officer, Aadhar Housing

Finance Pvt Ltd says,
“Immediately after the announcement of the lockdown, an unprecedented situation occurred for the
economy. Not just the economic disruption but the uncertainty on how lock the lockdown goes to
continue was an enormous matter of concern. By now we've realized that we've to embrace uncertainty
and accept it. Which this example occurred, liquidity was a priority for everybody across the world
alongside lending business and asset quality. Response from the Federal Reserve Bank of India (RBI)
and therefore the Government has been very proactive and timely but the chief of the steps was a
challenge.
There are 10,000 NBFCs in India and hardly 274 NBFCs out of the lot are systematically
important and therefore the reform the rest all are small size NBFCs and MFI having an asset
size between 100-200 crore and the rating is BBB or BB or A. Though there has been an
enormous influx of liquidity, infused by the RBI, by various initiatives like reduction CRR,
introduction of TLRTO, and therefore the banking industry is additionally filled with liquidity
but it's questionable how the liquidity will reach the NBFCs. Bigger HFCs or NBFCs with AA
or AAA rating never had a liquidity problem. Till May 2020, the liquidity was available but
when RBI infuses liquidity, they introduced special TLRTO with 2. 0 for NBFCs.”

As a results of this, the Supreme Court on Thursday directed the Federal Reserve Bank of
India (RBI) to make sure that its circular on the three-month moratorium on loan

repayment between March 1 and should 31 is implemented in its letter and spirit because it
appears that banks aren't extending the benefit to borrowers, as quoted by the days Of India.

4.4 Steps NBFCs are taking to mitigate their liquidity and interest rate risks.

The threat of COVID-19 makes it important to calculate or measure risk caused by the
crisis and therefore the steps banks and NBFCs apply to avoid risks.

The COVID-19 outbreak is causing an unprecedented crisis with direct impact on public
health, social life and therefore the economy across the planet. One among the fallouts
would be heightened credit and profitability pressure on an already stressed economic
system within the country.

Accumulation and debt Monitoring evolution in Retail Lending: Response to COVID-19

To alleviate the burden on debit-servicing, the reserve bank of India (RBI) has given
permission to the lenders to grant a deferment of three months on payment of all hire-
purchase coming in duel between the 1st March 2020 and 31st May 2020. The purpose is
to shift the repayment dates by three months to release the income for the consumers who
are impacted by the present situation.

There are many unanswered questions on how and when the COVID crisis will recover
from. Taking a view of the impact on retail and microfinance business and breaks up the
outlook into the immediate future, the medium range view and extended term, keeping
full-favored action swing for mobilizing credit monitoring and hoarding capability with
an aim to diminish the impact on banks and NBFCs.

While the uncertainties are looming large and it'll not be a simple period, breaking the
amount into tranches can help evolve and focus as banks and NBFCs progress.

Today or now, is clearly about keeping the show on the road, executing postponement
and estimating out the impact.

Tomorrow, or subsequent two months, is about looking beyond the present shocks to
organize for holding the impact on loss, capital and profitability. It’s about deep diving

into portfolio, using analytics to reinforce collections efficiency and enabling digital
payment and digital contact with the purchasers.

Beyond is about building resilience to face up to current and future shocks. a number of
the ways of driving this are creating data-driven organizations, digitizing customer and
process journeys (like collections management, frontline payment), fixing Early Warning
Systems (EWS), building new models and analytics capabilities and leveraging the
facility of alternate data.

4.5 Are Indian NBFCs able to absorb COVID-19 impact?

The Indian financial services sector had just started seeing an overall recovery from slow
debt off-take and increased agitated assets, when new challenges have arisen. Recently,
financial services non-performing assets (NPAs) declined from its peak of over 10% of
advances and improved their profitability.

However, soon afterwards, the telecom AGR (adjusted gross revenue) liability and
personal sector bank stress impacted market sentiment and caused loss in market
valuations. The Covid-19 pandemic was sort of a bolt from the blue. The sudden
lockdown experienced by businesses starting from airlines and hotels to automobiles
could mean heightened credit risk for companies in these sectors even after the three-
week lockdown imposed by authorities is lifted.

Re-booting of business post the lockdown is bought up, would be a severely a challenge
for especially corporate and Small and medium Enterprises borrowers. This is able to
have a downstream stress on repayment and credit off-take for the financial services
 sector. With this backdrop, it's important to research how prepared the financial services
sector is to weather this unprecedented storm, which is playing call at full force globally
as we analyze current exposure of banks and NBFCs.

If the impact of Covid-19 pandemic prolongs, banks may need to deploy more capital for
provisioning and should create an enormous impact on NBFCs and MFIs thanks to
additional higher provisions. This might further impact their exposure to NBFCs, and that
they may find yourself losing money causing significant impact on financial institutions.

Considering current capital and liquidity position of monetary institutions, they need to
be extra cautious for brand spanking new loan book and need to include five main factors
in amended credit lending policy.

❖ RESOLVE
 Address the immediate challenges that COVID-19 represents to institutions, workforce,
customers and business partners.

❖ RESLILENCE

Address near term cash management challengers, and broader resiliency issue during
virus-related shutdowns and economic knock-on effect.

❖ RETURN
Create a detailed plan to return the business back to scale quickly, as the virus evolves
and knocks-on effects becomes clear.

❖ REIMIGINATION

Re-imagine the next “NORMAL” what a discontinuous shift looks like and implication
for the how institution should reinvent.

❖ REFORM

Be clear about hoe the regulatory and competitive environment in the industry may shift.

4.6 Re-aligning Liquidity & rate of interest strategy for NBFCs post COVID-19

Being there the Covid-19 outbreak and its subsequent impact on NBFCs, Investors
Service changed its outlook for the Indian banking industry to ‘negative’ from ‘stable’
through the following:

❖ Deterioration in financial institutions’ asset quality and liquidity.

❖ Increasing risk shutting within the system following stress on a well-known private
sector bank creating funding and liquidity pressure.
❖ Credit supply to the economy already remains severely obstruct due to serious
liquidity constraints within the
❖ Non-banking financial sectors.

While the Monetary Policy Committee of the RBI has taken several measures to reinforce
liquidity there are still multiple risk factors looming such as:

❖ Near term liquidity mismatches

❖ Stress on liquidity coverage ratio (LCR)
❖ Funding risk
❖ Intraday liquidity

Therefore, it becomes critical NBFCs need to steel oneself against liquidity stress and
rate of interest changes, man oeuvre dynamically through current and potentially pro-
longed volatility and uncertainty thanks to COVID-19. The hassle testing exercise need

be influence as a proactive tool for driving deliberate action and survival by the head
management and not just basic academic exercise. If these exercises are weak or
improper in anticipating the collision while the damage has already made, it's going to
need a serious overhaul.

4.7 Centre’s Support to NBFCs-MFIs

A series of measures were announced by the center during a bid to rescue the NBFC
sector from the credit crunch within the sort of COVID-19 regulatory relief package by
the Federal Reserve Bank of India (RBI) on March 27, 2020.

This was announcement was made with an in depth annexure released on April 17, 2020
from the RBI concerning asset classification and provisioning norms (RBI Relief
Package) which was intended to ease borrower investment stress.

According to RBI’s Relief Package, the NBFCs-MFIs were allowed to supply a

moratorium of three months on payment of all instalments falling due between March 1,
2020 and should 31, 2020.

This is now extended by another three months i.e., from June 1, 2020 to August 31, 2020,
vide the notification dated May 23, 2020 issued by the RBI.

But, as a matter of fact, NBFCs use the income within the sort of loan repayments made
by their borrowers to repay the liability owed towards their lenders. But the supply of
moratorium to its borrowers on payment of loan instalments brings more trouble fir the
industry as NBFCs operate a short-term liquidity on their balance sheets.
4.8 Challenges faced by NBFC’S during and post covid.

NBFC-MFIs were already under stress thanks to liquidity crunch and with the
announcement of the RBI Relief Package, a mismatch of asset and liability is now the
new challenge.

While NBFCs are directed by the banking regulator to grant moratorium to the loan
holders, its lenders (banks) aren't supporting them well in terms of extending the relief.
Several experts while interacting with Elets News Network on virtual discussion

platforms have shared their concern on how they're facing the double-edge sword blow
thanks to things.

Experts fear that during this situation the NBFCs with a far better portfolio can still
survive but small and Medium NBFCs with an asset size around 100-200 crore will have
major sustainability issues. In their view, the relief announcement was timely and indeed
a good deal but its transmission to the banks is where the matter lies.
Pavan K. Gupta, Chief EXECUTIVE, Muthoot Housing Finance says,

“Tons of initiatives are taken by the govt and that they were all made within the right
direction. The moratorium was definitely needed and days overdue (DPD) freeze was
equally important else the Non-Performing Assets would have gone too high which
would have resulted during a serious situation of capital getting blocked. However, the
implementation of those policies has been a challenge. The delay is large and in most
cases, it's the banks that need to implement it. Within banks, private sector lenders I don’t
think are proactive in implementing any of the govt initiatives. Despite of all the
initiatives taken by the govt , banks are extremely reluctant which has been the challenge.
The capital could also be getting to the simplest players within the market but those who
need it and deprived. Things haven't changed much for little and medium NBFCs. For
them it’s sort of a double edge sword, first there's a severe fund crunch and on top,
moratorium had to give to the prevailing customers.”

NBFC administration also means that the IL&FS incident has somehow dented the
religion of the banks on NBFCs but it’s time that they now analyze the repayment
capacity of NBFCs then plan to lend them instead of being reluctant during the days of
urgent need.

Sanjay Sharma, Co-Founder & managing director, Aye Finance says,

“There are several initiatives taken by the govt to support NBFCs but they're challenges
concerning the execution of these steps. Government has tried to set-up certain schemes
like partial credit guarantee scheme which are anesthetize SIDBI and NABARD. It also
tried to lift TLTRO.NBFCs play an important role in seeing the micro and little
enterprises and emerged as a woolmark of employment within the country. From that
perspective, more must be finished the NBFCs not just small and medium but right across
the platform if we've to succeed in the micro enterprises.”

“Transmission are some things where the major challenge lies. I don’t agree that the
banks are behaving as they normally do and that they have every right to be picky about
fund dispersal. In my view banks are there to require risk and asses risks. If we enter
details, what percentage NBFCs have did not repay their loans and gone out of business?
Check out the diary of how NBFCs are run. We are very prudent lenders and need to
form sure that our portfolios are well protected,” adds Sharm
 CHAPTER-6

SUGGESTIONS, LIMITATIONS AND CONCLUSION

5.1 SUGGESTIONS

Based on the data following suggestions seems feasible.

While looking forward to the objectives of monetary inclusion and balanced economic
process I feel, pose significant challenges for the financial sector given the dimensions
and uniqueness of the Indian economy relative underdevelopment of rural and semi-
urban segments; low investment in agriculture; the necessity to develop self-employment
opportunities; the necessity to make equal opportunities and economic empowerment for
ladies and backward groups are amongst the various challenges that need quick and
innovative solutions.

❖ According to me there should be equal Distribution Backbone for Insurance

Companies with low insurance penetration in India. Like banks, NBFCs are likely to
evolve synergistic models with insurance companies, whereby they not only provide
distribution services, but also offer their customer base and supply feedback on
product performance and customer needs.
❖ Providing Collection Services for Portfolios Originated by Banks and Other NBFCs
Typically, have robust collection mechanisms while banks generally depend upon
third party service providers for support in collection.
❖ Leasing Flawed policies concerning taxation on leasing transactions has driven the
leasing industry into a comatose situation. An emerging economy needs a vibrant
leasing sector, as this stimulates the expansion of SME enterprises.
❖ Improving Corporate Governance Standards to become real game changers,
business transparency is inevitable for any financial entity. Within the case of NBFCs,
there's an important for adopting good corporate governance practices.
 ❖ There should be significant information provided to shareholders and directors at
the time of registration as it had been observed there are not any prescriptions for
qualifications for directors, change in directors, etc.
❖ Customer Protection Issues against unfair, deceptive or fraudulent practices has
become top priority. Incidentally, the Bank has received and is receiving number of
complaints against charging of exorbitant interest rates, raising of surrogate deposits
under the garb on various sorts of preferred stock , Tier II Bonds, etc. so there
should be strict rules for the NBFC’S to avoid such issues.
❖ Greater Innovation should be made in NBFCs in designing innovative products to suit
the client and market conditions.
❖ The sophistication of monetary services should be been gradually increase within
the recent past. There’s an important need for NBFCs to aggressively involve in
designing innovative products to become real game changers within the economy.
❖ There is Need of supporting laws like those governing accounting rules, property
rights and contract enforcement are going to be of prime importance to the
longer term growth of NBFCs.
❖ NBFC should be granted with some concession and flexibility after the COVID-19
situation
❖ I suggest that there is need for the RBI to continue to take more intensive measures
for a sustained depositor’s awareness campaigns.

SECONDARY DATA-

Information which have been collected previously, by someone else, other than
researcher. Secondary data can either be qualitative such as diaries, newspaper, articles or
government report, or quantitative, as with official statistics, such as league tables.
5.2 Limitations of the Research.

❖ This project being secondary so it does not involve opinions of people through
questionnaires.
❖ There was limited data available on my topic
❖ There was time constraint as we had to complete our research work in given time.
❖ Due to ongoing COVID-19 pandemic, visits to concerned offices were not possible.
❖ Data collected from some sites may be outdated and bias.

5.1CONCLUSION

Non-banking Financial Companies are playing a significant within the Indian Financial
Market from both perspectives of Macroeconomics and Indian economic system. It’s
been a really conventional way to meet various financial requirements within the
commercial enterprise point of view. Customers find it very reliable and versatile because
it provides quick and efficient services without making any very complex banking
formalities.

As per recent crisis within the NBFC sector, now this sector has been struggling with
staying within the financial market of India. Due to IL&FS (Infrastructure Leasing and
Financial Limited.) fraud the entire NBFC sector has been affected. Due to this fraud, it's
affected other good NBFCs like Dewan Housing Financial Limited., IndiaBulls Housing
Finance Limited. Non-Performing Assets of these NBFCs are increased which affected
this NBFC sector. To recover this loss, Federal Reserve Bank of India is now constantly
striving to bring necessary regulatory changes within the NBFC sector to make sure
financial stability within the end of the day.

NBFCs are already game changers, as are often seen from the analysis earlier in areas of
monetary inclusion, especially micro finance, affordable housing, second user vehicle
finance, gold loans and infrastructure finance. NBFCs can play an important role going
forward, in closing the loop as regards financial inclusion for people and MSMEs. As
regards individuals, NBFCs can after various financial products offered by the market ,
viz., shares, mutual funds, depository services etc., as also insurance products both life
and non-life alongside their current product offerings.
 As regards ministry of micro, small and medium enterprise, non-banking financial
services can be a revolution by providing factoring and bill payment service which are
importance at this juncture. The way forward is to make sure that both the NBFI sector
and every one the concerned regulators play a lively part in attending on the imperatives
mentioned at above. The complimentary role of the financial sector and every one the
regulators hardly needs overemphasis within the context of NBFCs morphing as
revolutionary for providing the walk connectivity and shutting the loop as regards
financial inclusion. During this context, NBFCs have a special responsibility against the
background of the necessity to enhance the customer service by conducting their
operations as per the simplest practices of corporate governance. Within the ultimate
analysis, adhering to best corporate governance and ethical practices is that the only way
for gaining the arrogance of their customers especially, and therefore the society
generally. Consequently, the NBFC sector would be ready to garner greater trust of both
its customers and therefore the society. That might provide the springboard for increasing
their business levels within the process of fulfilling their role as game changers within the
areas mentioned above. NBFCs becoming true revolutionary would be fruitful for
financial inclusion efforts in our country.

Thanks to investment exposure in risker domains, the NBFC industry is facing serious
challenge because it is combat to the economic impact of COVID-19 outbreak. Whilst the
Indian economy is probably going to reopen towards the later a part of the year. NBFC’s
will still face challenges in improving their asset quality and cash crunch.
REFERENCES

A. BIBILOGRAPHY

❖ Research paper on: how banks and NBFCs can survive, and then thrive, in the
post Covid-19 world by Ashwin Anand.
❖ Growth and development of non-banking financial companies in India by
Ranjan Kshetrimayum.
❖ Financial performance of non-banking financial companies in India by Suneel kumar
and Dr. A.P Hosmani.
❖ NBFC crisis and its domino effect on Indian economy. By T.V Mohandas Pai
❖ NBFC crisis: Govt issues guidelines for Rs 1-lakh crore partial guarantee scheme. to
revive sector by BusinessToday.In.
❖ Why NBFCs may be more vulnerable to Coronavirus than banks article by India
Infoline News Service.
❖ Pros and Cons of NBFC Business in India by Isha Malik.
❖ Non-banking financial company and their services in India by Vinod Kothari
Consultants.
❖ The Top 10 NBFCs in India, 2021by Nelito.
❖ Growth and development of NBFC in India by K.D Reddy and A Dhanunjaya.
 B.WEBLIOGRAPHY

❖ http://www.managementparadise.com/balajiv.ganesh/documents/7441/non-
banking- financial-company-nbfc/
❖ https://www.nelito.com/blog/the-role-nbfcs-in-indian-economy.html#:~:text=NBFCs

%20do%20play%20a%20critical,weaker%20sections%20of%20the%20society.
❖ https://nbfclicenseindia.com/blog/nbfc-role/
❖ https://qz.com/india/1860466/how-indias-nbfc-crisis-deepened-from-ilfs-defaults-
to- covid
❖ https://www.businesstoday.in/opinion/columns/nbfc-crisis-domino-effect-on-
indian- economy-ilfs-scam-gdp-growth/story/378109.html
❖ https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92#:~:text=
❖ https://www.acuite.in/Sector-alert-Covid-19-intensifies-headwinds-for-NBFCs.htm
❖ https://eprajournals.com/jpanel/upload/131pm_9.EPRA%20JOURNALS-3774.pdf
❖ https://www.slideshare.net/Enterslicellp/nbfc-company-registration-what-is-
nbfc- company-non-banking-finance-company?qid=
❖ https://muds.co.in/pros-cons-nbfc-business-india/#:~:text=NBFCs%20cannot%20accept

%20demand%20deposits,unlike%20in%20case%20of%20banks
❖ https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/01AR101017F2969F6115EB4B5992BD73
976F9A905D.PDF