THE IMPACT OF GOVERNMENT INTERVENTION ON THE NBFC CRISIS

RIYA REGMI
POORNIMA KUKRETI
ABSTRACT
The NBFC crisis started with the failure of one of the most respected and largest NBFCs in
India IL&FS.Starting August 2018,IL&FS started to default on its loans.A rapid fall in its
credit ratings dragged the entire NBFC in a lifetime crises that brought India’s shadow
banking sector to the knees.In this paper, we analyze the prevailing crises in the NBFC
sector.A special focus has been placed on how the government has managed to ease NBFC’s
woes through various reforms in the economy.We also assess how the Reserve Bank of India
and the government plan on robust measures to flush the economy with liquidity in the short
run.

INTRODUCTION
“Non-banking financial company, also known as NBFC, functioning as per the Indian
CompaniesAct,1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit
business but does not include any institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods (other than securities) or providing
any services and sale/purchase/construction of immovable property.” In simpler words,
NBFCs are financial institutions that provide banking services but do not hold a banking
license. These firms offer a wide array of financial services like loans, chit-funds, and are
different from banks. NBFCs are often small players that largely go unnoticed. However,
they are still important to the economy, especially in a developing country like India where
70% of the population lives in rural areas. Here is how they act as game changers in
reinvigorating the sagging economy: -
Size of sector:
The NBFC sector has grown considerably in the last few years despite the slowdown in the
economy. As of March 2013, it accounted for 12.5% of the country’s Gross Domestic
Product (GDP) – a measure of the size of the economy. This is up from 8.4% in March 2006.
However, this only counts NBFCs with assets more than Rs 100 crore.
Growth:
In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most
years between 2006 and 2013. On an average, it grew 22% every year. Even when the
country’s GDP growth slowed to 6.3% in 2011-12 from 10.5% in 2010-11, the NBFC sector
clocked a growth of 25.7%. This shows, it is contributing more to the economy every year.
Profitability:
NBFCs are more profitable than the banking sector because of lower costs. This helps them
offer cheaper loans to customers. As a result, NBFCs’ credit growth – the increase in the
amount of money being lent to customers – is higher than that of the banking sector. Credit
grew an average 24.3% per year for NBFCs as against 21.4% for banks. This shows that
more customers are opting for NBFCs.
Infrastructure Lending:
NBFCs contribute largely to the economy by lending to infrastructure projects, which are
very important to a developing country like India. But they require large amount of funds,
and earn profits only over a longer time-frame. As a result, these are riskier projects. This
deters a lot of banks from lending to infrastructure projects. In the last few years, NBFCs
have contributed more to infrastructure lending than banks. NBFCs lent over one third or
35.8% of their total assets to infrastructure sector as of March 2013. In contrast, banks lent
only 7.6%.
Promoting inclusive growth:
NBFCs cater to a wide variety of customers – both in urban and rural areas. They finance
projects of small-scale companies, which is important for the growth in rural areas. They also
provide small-ticket loans for affordable housing projects. All this help promote inclusive
growth in the country.
NBFCs lend and make investments and hence their activities are akin to that of banks;
however, there are a few differences as given below:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques
drawn on them;
iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not
available to depositors of NBFCs, unlike in case of banks.
NBFCs contribute 24.3 percent of GDP whereas banks contribute 21.4 percent, so they play a
vital role in managing the financial sector. NBFCs typically borrow money from banks or sell
commercial papers to mutual funds to raise money. Theyon-lend these to small and medium
enterprises, retail customers and so on. Corporate groups aren’t allowed to run to the banks so
they run to NBFCs. This sector has an important role in reinvigorating the sagging economy.
Objectives of the report-
The objectives of the report are:-
1) To analyze the prevailing crisis in the NBFC sector.
2) To analyze the government intervention to manage the NBFC crisis.
Method of data collection-
Only secondary data will be used, secondary data will be collected from Finance Bill 2019,
Finance Bill 2020, Economic Survey 2020, RBI reports and various websites and news
articles along with opinions of experts and industry leaders.
IL&FS Default and Policy Measures for the Ailing NBFC Sector
NBFCs have to be regulated with RBI but there are some which are regulated by SEBI,
IRIAD. The NBFC model has reasons to be called flawed, one of them being that NBFCs
raise short term funds which are lent out as long-termloans. Basically,there is a possibility of
asset liability mismanagement. When the economy is in a stable position the NBFCs function
smoothly but if the economy goes through slowdown or a liquidity crunch, it adversely
affects the cycle of renewing debt papers or raising fresh loans and repaying the old debt
papers, which is mostly how NBFCs operate. Money is usually taken from mutual funds, thus
when NBFCs don't have any money to lend, they can't provide loans to medium and small
industries and this in turn reduces the credit flow which hits the economic growth of the
country. Output is also limited, so the businesses which have taken loans previously aren’t
able to repay it causing defaults. A blaring example of the previously mentioned scenario was
the IL&FS Financial Services default in September 2018. IL&FS, a group company,
defaulted in payment obligations of bank loans (including interest), term and short-term
deposits and failed to meet the commercial paper redemption obligations due on September
14, 2018. The defaults also jeopardized hundreds of investors, banks and mutual funds
associated with IL&FS. The defaults sparked panic among equity investors even as several
non-banking financial companies faced turmoil amid a default scare.
In the aftermath of the IL&FS episode in September 2018 sudden changes in sentiment, risk
perceptions and asset liability mismatches surfaced. In order to restore confidence and
maintain stability, the Reserve Bank and the government responded with several measures.
We have explained some of them below: -
 The Finance Bill 2019 bestowed powers on the Reserve Bank to strengthen
governance of NBFCs through amendments in the RBI Act, 1934 so as to
protectdepositors’/creditors’ interest and secure financialstability. The amendment
provided certain power to the Reserve Bank to eliminate the directors of NBCs’ board
and appointed administrators were displaced in order to improve governance and
protect the interests of depositors and creditors. This also included imposing penalties
in case of non-compliance with various requirements. In addition to this, it helped to
settle an NBFC by amalgamation, reconstruction or splitting an NBFC into different
units or institutions.
 The government amended the Companies (Share Capital and Debentures) Rules by
removing Debenture Redemption Reserve (DRR) requirement for NBFCs and HFCs.
25 percent of the value of outstanding debentures through public issues has been
omitted, which would reduce the cost of raising funds and provide a helping hand in
strengthening the corporate bond market.
 A Working Group constituted by the Reserve Bank to review regulatory and
supervisory framework for Core Investment Companies has submitted report and
recommended that the number of layers of CICs in a group should be restricted to two
along with measures to strengthen the governance practice by constituting board level
committees, appointing independent directors and a Group Risk Management
Committee.
 Entitled borrowers are allowed to raise ECBs from recognized lenders, excluding
foreign branches or overseas subsidiaries from a minimum average maturity period of
10 years for working capital purposes, general corporate purposes and repayment of
rupee loans availed domestically for purposes of on-lending (other than capital
expenditure) by NBFCs and a minimum average maturity period of 7 years for
repayment of rupee loans availed domestically for capital expenditure regarding the
end-use restrictions to external commercial borrowings
 Banks were allowed to provide partial credit enhancement (PCE) to bonds issued by
NBFCs-ND-SI(Non Deposit-Taking Sytemically Important) registered with the
Reserve Bank and HFCs registered with National Housing Bank, provided the tenor
of the bonds is not less than three years, proceeds from such bonds shall only be
utilized for refinancing existing debt of the NBFCs-ND-SI/HFCs.
 The Reserve Bank has taken charge of the government-owned NBFCs-ND-SI and
government-owned NBFCs-D(Deposit Taking) on-site inspection framework and off-
site surveillance starting from the inspection cycle 2018-19. The asset size was
extended to ₹100 crore under the Ombudsman Scheme for eligible NBFCs-ND.
 Bonds issued by NBFCs-ND-SI registered with the Reserve Bank and HFCs
registered with National Housing Bank were allowed Partial credit enhancement from
banks. These bonds were to be utilized for refinancing existing debts of the NBFCs-
ND-SI/HFCs.
 Extension of The Ombudsman Scheme was made possible to eligible NBFCs to play
with an asset size of 100 crore or above depending on their customer interface. The
Reserve Bankalso relaxed the minimum holding period (MHP) requirement till
December 31, 2019 in order to encourage NBFCs to securitize/assign their eligible
assets under certain conditions.
 A new category constituting Asset Finance Companies, Loan Companies, and
Investment Companies came to action called NBFC- Investment and Credit Company
(NBFC-ICC). This would aim to reduce the complexities arising from multiple
categories and providing greater flexibility. All scheduled commercial banks
(excluding Regional Rural Banks and Small Finance Banks) were allowed to co-
originate loans with NBFCs-ND-SI for the creation of eligible priority sector assets,
facilitating sharing of risks and rewards.
 The Government of India has rolled out the scheme to provide a one-time partial
credit guarantee for the first loss up to 10 per cent to public sector banks (PSBs) for
purchase of high-rated pooled assets amounting to ₹1 lakh crore from financially
sound NBFCs/HFCs.NBFCs, not registered as NBFCs-Factor, will be brought on the
Trade Receivables Discounting System (TReDS) platform, through amendment in the
Factoring Regulation Act, 2011.All NBFCs would directly participate on the TReDS
platform.
 A functionally independent Chief Risk Officer (CRO) was to be appointed by Large
NBFCs, with asset size of more than ₹5000 crore were required to appoint with
clearly specified role and responsibilities, with involvement in the process of
identification, measurement and mitigation of risks.
 FIIs/FPIs are permitted to make investments in debt securities issued by Infrastructure
Debt Fund–Non-Bank Finance Companies (IDF-NBFCs) to be transferred/soldto any
domestic investor within the specified lock-in period. Interest on bad or doubtful
debts is to be taxed by the government in the year NBFCs-ND-SI (Non Deposit-
taking and Systemically Important) actually receive interest.
 A new revised guideline to raise the standard asset liabilities management was formed
which specifies gritty tolerance limits and maturity period with funding diversification
and tools like liquid risk monitor. The framework requires maintenance of a liquidity
buffer in terms of a liquidity coverage ratio (LCR) starting at 50 per cent for all
deposit taking NBFCs and all non-deposit taking NBFCs (NBFCs-ND) with an asset
size of ₹10,000 crore and above and 30 per cent for all NBFCs-ND with an asset size
of ₹5,000 crore and above but less than ₹ 10,000 crore, from December 1, 2020 to
reach 100 per cent on December1, 2024.
 Exposures to all NBFCs excluding CICs (Core Investment Companies) would be risk
weighted as per the ratings assigned by the rating agencies registered with the SEBI
and accredited by the Reserve Bank in a manner similar to that of corporates under
the existing regulations; exposure to CICs, rated as well as unrated, will continue to
be risk-weighted at 100 per cent. An increase in the liquidity coverage ratio
(FALLCR) of 0.5 per cent each of banks’ NDTL(Net Demand and Time Liabilities)
was scheduled for August 1 and December 1, 2019, respectively, by The Reserve
Bank.

ANALYSIS AND FINDINGS

Analysis
1) Analysis of Balance-Sheets of NBFCs

FIGURE 1: ABRIDGED BALANCE SHEET OF NBFCs

The size of NBFC sector was 2617790 crore rupees in the year ending March 2018 and it
grew to 3085480 crore rupees in the year ending March 2019. Post budget of 2019 it grew to
3257642 crore rupees during the half year period up to September 2019 .The
annualizedgrowth rate fell from around 26.8% in the year ending March 2018 to 17.9% in
the year ending March 2019 and then to 13.2 % in the period post budget up to September
2019.
In case of ND-SI this fall was from 27.2% in the year ending March 2018 to 17 % in year
ending March 2019 and to 13.1% in the half-year ending September 2019. In case of NBFCs-
D it fell from 24% % in the year ending March 2018 to 23.7% in year ending March 2019
and to 14.1% in the half-year ending September 2019.
The deceleration was mainly in the NBFCs-ND-SI category, whereas, NBFCs-D did maintain
its growth. However, in 2019-20 (up to September) growth in balance-sheet size of NBFCs-
ND-SI as well as NBFCs-D moderated due to a sharp deceleration in credit growth.
2) Major components of Liabilities and Assets of NBFCs by activity
a)NBFCs-ND-SI
FIGURE 2: MAJOR COMPONENTS OF LIABILITIES AND ASSETS OF NBFCs-
ND-SI BY ACTIVITY

Amongst NBFCs-ND-SI, ICCs and IFCs together account for 85.6 per cent of the total asset
size of the segment at end-March 2019. Despite liquidity stress faced by the sector, there was
expansion in asset size of IFCs. Balance sheets of micro finance institutions or NBFCs-MFI
also expanded on the back of strong growth in their loans and advances, especially to the
agriculture sector. For other categories of NBFCs, excluding CICs, however, the growth of
loans and advances moderated during2018-19.
b) NBFCs-D
FIGURE 3: MAJOR COMPONENTS OF LIABILITIES AND ASSETS OF NBFCs-D
BY ACTIVITY

ICC is the new category formed by the merger of AFC(Asset Finance Company) and
LCs(Loan Companies) is the major component of NBFCs-D. The slowdown in credit
expansion led to the share of investments in total assets rising from 3.5 per cent in 2017-18 to
5.44 per cent 2018-19. On the liabilities side, LCs and AFCs witnessed a spurt in deposit
growth in 2018-19 and 2019-20 (September), augmenting their resource base.
2) Sectoral Credit of NBFCs
FIGURE 4: SECTORAL CREDIT DEPLOYMENT BY NBFCs
TheCredit extended by NBFCs continued to grow in 2018-19 through 2019 September
though the growth rate came down to 16% in the period ending Sep 2019 from 31.8 in the
period ending march 2019. There was substantial fall in credit growth in Industrial and
Service Sector loans of around 20%. Retail sector was also hit by around 5% but in
agriculture and allied sector it grew from 18.4% to 49.9%. Industry is the largest recipient of
credit provided by the NBFC sector, followed by retail loans and services.
3) Resource Mobilization
FIGURE 5: SOURCES OF BORROWING OF NBFCs-ND-SI
 FIGURE 6: 3-MONTH CP RATES: NBFCs AND NON-NBFCs

70% of resources come from bank borrowings and debentures for NBFCs (Non Deposit).
Debenture borrowings remained stagnant in 2017-18 and 2018-19 but increased slightly by
September 2019.Bank borrowings increased at a robust pace during 2018-19 but stagnated in
the post Budget period.. The share of CPs(Commercial Papers) declined marginally and CP
issuances also decelerated in 2018-19 (Figure 5). This happened even as the 3-month CP
rates of NBFCs have been declining in the post IL&FS period barring occasional spikes
(Figure 6).
 FIGURE 7: BORROWINGS OF NBFCs-ND-SI

Contribution of banks in the total borrowings of NBFCs-ND-SI increased to 26.9 per cent at
end-September 2019 from 24.7 per cent to the year ending March 2019.
FIGURE 8: INSTRUMENTS OF BANK LENDING TO NBFCs-ND-SI

Banks along with direct lending also subscribe to the debentures and CPs issued by NBFCs,
bank subscription to debentures and CPs issued by NBFCs-ND-SI has fallen in 2018-19
(Figure 8) though direct lending by banks grew at 21.9 percent (September2019).

5) NBFCs-D: Deposits
FIGURE 9: PUBLIC DEPOSITS OF NBFCs-D (At end-March/September)
Deposit mobilization by NBFC has consistently increased at a steady pace especially post
March 2018.
FIGURE 10: FINANCIAL PARAMETERS OF THE NBFC SECTOR

NBFCs’ profitability declined from growth of 20.15% in 2017-18 to 12.2% in 2018-19 and
further declining to 11.1% by September 2019. Major fall in income was seen in NBFCs-ND-
SI segment where operating expenditures and interest payments grew significantly, evident
from their higher cost-to-income ratio. Increase in expenditure outpaced income growth, net
profit stagnated. In case of NBFCs-D profit grew robustly in 2018-19, but fell in first half of
2019-20.
6) Asset Quality
 FIGURE 11: ASSET QUALITY OF NBFCs (At end-March)

FIGURE 12: CLASSIFICATION OF NBFCs’ ASSETS (At end March/September)

The asset quality declined in 2018-19, the gross non-performing assets (GNPAs) ratio
increased, net non-performing assets (NNPAs) ratio increased marginally, reflecting
sufficient provisioning (Figure 12). In 2019-20 too (up to September), asset quality of the
sector showed deterioration with ease in GNPA ratio increasing slightly. In terms of asset
composition, the proportion of standard assets declined, part of it being downgraded to the
substandard category in 2018-19. In first half of 2019-20 the proportion of sub-standard
assets remained unchanged and an increase in proportion of doubtful assets was observed.
7) Capital Adequacy
 FIGURE 13: CAPITAL POSITION OF NBFCs

FIGURE 14: CRAR OF NBFCs BY CATEGORY (At end-March/September)

The system level capital to risk-weighted assets ratio (CRAR) is above the stipulated norm of
15 per cent, including in 2018-19 when increase in non-performing assets occurred (Figure
13). The sector maintained the capital position although there was deterioration in asset
quality in first half of 2019-2020. The CRAR for all categories of NBFCs-ND-SI except
NBFCs-MFI and IDF-NBFCs, decreased from 2017-18 levels, but still remained above the
regulatory norm. In case of NBFCs-MFI, the CRAR improved with rising profitability. The
CRAR for NBFCs-D too registered a marginal improvement as growth in own funds
outpaced expansion in loans and advances (Figure 14 a and b). At end-September 2019,
CRAR of NBFCs-ND-SI and NBFCs-D remained above the stipulated norm.
MAJOR REASONS BEHIND THE CRISIS
The fall of DHFL (believed to have blue chip NBFC stock) and IL&FS (another stalwart in
the NBFC sector) caused many to reason the situation out. The major reasons that stood out
were:-

Timing Mismatch: Indian Non-Banking Financial Companies (NBFCs) have been known to
borrow money short term and to lend it out long term. This asset liability timing mismatch
was a key reason behind the disaster. NBFCs were doing fine until IL&FS mismanaged its
funds. The IL&FS debacle has scared away investors; hence NBFCs are not able to issue new
debt in order to roll over the old debt.

Mutual Funds: The market crash caused by NBFCs made retail and institutional investors
wary of them, causing the reduction in the support from debt mutual funds on which NBFCs
heavily relied. This has compounded the problems of the Non-Banking Financial Companies
(NBFCs).

Asset Quality Issues: A lot of these Non-Banking Financial Companies (NBFCs) are
classified as housing finance companies that provide money to developers or to homebuyers.
Hence the housing sector is heavily reliant on these companies. The Indian housing sector is
in shambles with big names like Amrapali group, Supertech, Unitech, etc. going bust. Thus
the asset quality of these Non-Banking Financial Companies (NBFCs) is also in question.
All this is pushing down on the net worth of these companies and driving them towards
insolvency.

EFFECTIVENESS OF 2019 RBI POLICIES REGARDING NBFCs

Increasing exposure limit- The RBI raised the counterparty exposure limit of banks to a
single NBFC to 20% of tier 1 capital from 15%. Although the measure was expected to
encourage banks to lend more to NBFCs, banks are largely wary and have held back from
making the optimum use of the greater limits. Many banks are still below the previous limit.
Priority sector classification- Loans provided by banks to NBFCs for on lending to
agriculture, micro and small enterprises, and housing are to be classified as Priority Sector
Lending (PSL). The measure has benefited a number of the larger and specialized NBFCs.
However, it has not directly taken into consideration the refinancing challenges of the NBFC
sector.
Easing of risk-weightage norms for banks- The central bank has approved of banks to risk-
weight their exposures to NBFCs based on their credit ratings. The move is predicted to
expand flow of credit to better-rated NBFCs.
Partial credit guarantee- The government has created a mechanism where they will allow
partial credit guarantee for purchase of high-rated pooled assets of NBFCs, amounting to INR
1 trillion during the current fiscal. The guarantee will be provided on a one-time basis for six
months for a public-sector bank’s first loss of up to 10%.The measure could not take off due
to various problems and was modified in the 2020 budget.
Co-origination model- NBFCs must accept a minimum exposure of 20% with the remaining
contribution by the participating bank as per RBI guidelines on the co-origination model.
There are clear benefits from this proposition in terms of the liquidity support, predominantly
for ailing NBFCs. The NBFCs will most probably benefit from the risk-sharing model and
will be able to target a new customer base.
Securitisation- RBI guidelines on securitisation allow NBFCs to securitise loans originated
by them with original maturity of more than 5 years. Problems like the ALM mismatch would
be addressed by the liquidity created for NBFCs by securitization.
NBFCs IN BUDGET 2020
 Partial Credit Guarantee Scheme
To meet the liquidity constraints of Non-Banking Financial Companies (NBFCs) and
Housing Finance Companies (HFCs), the Government has proposed to setup a Partial
Credit Guarantee Scheme. In the previous Budget, the government had proposed a
partial credit guarantee (PCG) scheme to aid ailing NBFCs trapped in the liquidity
crisis. Regardless, the scheme that was conceived in August 2019 failed to come into
effect due to some problems. The scheme was later adapted to factor in feedback from
the industry. In December 2019, the cabinet allowed the extension of the PCG scheme
to 30 June 2020, with an option to extend it by another three months depending upon
the progress.
Finally this budget in 2020 allows banks to purchase 'BBB+' rated assets of NBFCs.
Earlier they could buy only 'AA' rated assets.. The NBFCs that had slipped to SMA-0
category in one year prior to IL&FS crisis are also eligible for purchase.
 Debt recovery under SARFAESI
The eligibility requirement for enforcement of Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act has been
reduced thus allowing recovery of Small Accounts by NBFCs. The eligible asset size
reduced from Rs 500 crore to Rs 100 crore and the loan size from Rs 1 crore to Rs 50
lakh.
 Access to TReDs
The amendment in Factor Regulation Act 2011 will enable NBFCs to extend invoice
financing to MSMEs through TReDs (online bill discounting platform). This move is
aimed in order to enhance economic and financial sustainability of MSMEs.
 NABARD refinance scheme
In order to increase credit availability for women Self Help Groups through
NABARD or Mudra, the refinance scheme is extended to NBFCs that are in agro-
related lending.
 Extension of Loan Restructuring Window
The loan restructuring window for MSMEs has been extended by one year, i.e.from
March 2020 to March 2021.

OPINIONS OF EXPERTS AND INDUSTRY LEADERS ON BUDGET 2020

REGARDING NBFCs

UmeshRevankar, MD and CEO, Shriram Transport Finance

"Under the SARFAESI Act, the debt recovery has reduced from Rs 1 crore to Rs 50 lakh is
one step ahead. We would still expect it to be on par with banks which currently stand at Rs 1
lakh,".
JaspalBindra, Executive Chairman, Centrum Group and Former Standard Chartered
Bank Asia chief
"All these measures are helpful and positive. However, the mega challenge is around credit
growth and the resultant liquidity crisis, which has not been addressed,"

AbizerDiwanji, partner & leader, financial services, EY India,

“It (the Budget) seems to be reiterating the same message around enhancing financing to
NBFCs.
Frankly, there is a sentiment issue which is more systemic and a one-time allowance of
transfer of project loans at cost to special purpose vehicles like alternative investment funds
would have been a better move.”

CA Siddharth Agarwal -CACLUBINDIA

“This is indeed a welcome step, which will enable easy recovery of stressed by NBFCs, and
thus contributing to recovery in their financial health.This is however still not at par with the
Banks who can enforce security interest under the Act for recovery of assets as small as Rs. 1
lakh, and who recovered close to Rs.42000 crores in FY 18-19 through this channel ( as per
RBI report on Trends and Progress of Banking in India). The NBFC sector needs a TARP
like programme whereby the government will buy assets of distressed NBFCs on lines of the
Troubled Assets Relief Plan (TARP) put in place by US government post the 2007-08 crisis.”

The Reserve Bank of India (RBI) noted that challenges faced by some of the NBFCs were
reflective of inherent fragilities rather than merely a liquidity crunch."Consequently, financial
markets have been discriminating between strong NBFCs and those having perceptible
weaknesses," it added.The regulator said that NBFCs with asset-liability mismatches or asset
quality concerns are facing constraints on market access and/ or higher borrowing costs.

INDUSTRY EXPECTATIONS:

The NBFC Industry expects that they be brought at par with Banks regarding implementation
of Indian Accounting Standards (Ind AS).

Indian Accounting Standards accrue interest income on Stage 3 loans and credit it to the
Profit and Loss account but the implementation of this standard is different for banks. Here
the interest income for an NBFC becomes taxable in the year of accrual as per section 43D of
the Act.

The Industry wants section 43D amended to substitute the word “credited” by "receipt".

The section 194 A of the Act where tax is deducted at source, the Industry expects an
amendment to exclude NBFCs from the list of deductees. Thus the person paying interest to
NBFCs (other than interest on securities) shall not be required to deduct tax at source.

The Section 94B should also be exempted for NBFCs like it is for Banks. This provision was
inserted in order to control quasi means of transfer of Profits by paying high interests on
company’s debt.

In order to avoid unnecessary litigations the industry expects a framework be made for
taxability of returns from perpetual bonds issued by NBFCs.
The government has taken many measures for liquidity in NBFCs but more measures like
taxrelief are required to accelerate financial stability, credit growth, etc.

SUGGESTIONS
The RBI along with Government has taken many measures like increasing of exposure limits,
priority sector classification, easing of risk weightage norms for banks, partial credit
guarantee schemes, co-origination model and securitisation of loans, this should be a
continuous process.
RBI should also study various measures taken in other countries in the times of crisis like the
Troubled Assets Relief Plan (TARP) in USA post the Sub-Prime Mortgage Crisis in 2008.
Gradually NBFCs should be brought at par with the banks to fulfil the Industry expectations
highlighted above through the following;-
-Indian Accounting Standards accrue interest income on Stage 3 loans and credit it to the
Profit and Loss account, but the implementation of this standard is different for banks. Here
the interest income for an NBFC becomes taxable in the year of accrual as per section 43D of
the Act. Hence Section 43D should be amended to substitute the word “credited” by
"receipt".
-The section 194 A of the Act, where tax is deducted at source , should be studied and if
possible amended to exclude NBFCs from the list of deductees.
-The Section 94B should also be studied and if possible NBFCs should be exempted from its
provisions like the Banks.
-The government has taken many measures for liquidity in NBFCs but more measures like
tax relief are required to accelerate financial stability, credit growth. It should also allow
NBFCs more freedom in case of availing cheap funds from International market etc.
Other suggestions:-
-The government can also be more careful in the future by assessing the riskiness of NBFCs
with the help of indices like the Health Score Index as highlighted by the Economic Survey
2020.

-The present challenge of NBFCs/ HFCs is to maintain balance-sheet maturity profile of the
assets they finance and their borrowings they take during this crisis.

CONCLUSION

Post the IL&FS crisis the government and the Reserve bank have taken measures to revive
the NBFC sector which included enhancing systemic liquidity and strengthening the
governance and risk –management framework of NBFCs. In view of the measures taken by
the regulators and government the trends in the Balance-Sheet of the NBFCs were analyzed
up to September 2019 with respect to the following parameters –total assets ,Sectoral
credit ,Resource Mobilization, Deposits, Financial Performance and Profitability ,Quality of
Assets etc.

The trends continued their slowing down in all the parameters such as growth in the size of
the sector, sectoral credit, resource mobilization, financial performance and profitability,
asset quality and capital adequacy with the exception of deposit mobilization, despite
measures taken by the regulators and government. There is not much time elapsed between
announcement of measures and the study so more time is required for the measures to have
an impact.

It is therefore concluded that NBFCs in India or across the globe have the same sample model
of borrowing either from banks or capital markets in forms of Non-Convertible Debentures or
commercial papers. In the present scenario NBFCs as well as HFCs have to face low growth
rate because of sharp increase of interest rate (cost of Funds) and therefore they can maintain
only thin margins in their business.

Rise in NPA is a great concern for all NBFCs and Banks. NBFCs and HFCs are not able to
improve their profitability and are struggling to get new acquisitions to increase their book
size due to steep increase in interest rates. Simultaneously there are more loan rundowns in
the portfolio of NBFCs, which impact the book size of these institutions.

India’s financial sector was overwhelmed by failures of large non-banking financial

companies even while the effort to resolve the crisis resulting from non-performing assets in
the banking sector was underway. In the collapse of these NBFCs, what came forth in most of
the cases was the absence of due diligence, poor financial management and downright fraud.
The environment these firms found themselves in did encourage such tendencies, but there
were structural reasons as well too that led to bad debts accumulated by these institutions.
Hence the interventions by the Government and RBI should address these structural reasons
for the crisis along with due diligence.

REFERENCES
RBI Report on Trend and Progress of Banking in India 2018-19
Fit-for-future NBFCs: A key pillar of the USD five Trillion Economy, October 2019,
Assocham India
A Study on Current Liquidity crunch faced by NBFC’s & HFC’s in India -R.Balaji Kumar,
Dr. R.B.Ayeswarya
www.business-standard.com
www.livemint.com
www.economictimes.indiatimes.com
www.financialexpress.com
www.taxmann.com
www.caclubindia.com
www.moneycontrol.com

List of Abbreviations
1 NBFC-Deposit Taking NDFC-D
2 NBFC-Non deposit taking NBFC-ND
3 Investment and Credit Company ICC
4 NBFC-Infrastructure Finance Company NBFC-IFC
5 NBFC-Systemically Important Core Investment NBFC-CIC-ND-SI
company
6 Infrastructure Debt Fund-NBFC IDF-NBFC
7 NBFC-Micro Finance Institution NBFC-MFI
8 NBFC-Factor NBFC-F
9 NBFC-Non-Operative Financial Holding Company NBFC-NOFHC
10 Mortgage Guarantee Company MGC
11 NBFC-Account Aggregator NBFC-AA
12 NBFC-Peer to Peer lending platform NBFC-P2P
13 Housing Finance Companies HFCs
14 Asset Finance Company AFC
15 Loan Company LC
16 Commercial Paper CP