NBFCs are an integral part of the Indian Financial systems. They are emerging as an alternative to banking, and people are developing confidence in NBFCs due to lower risks and higher returns on limited investments. NBFCs are also making a commendable contribution in Government initiatives of Financial Inclusion. They serve to the smaller and weaker sections of the society. They cater to the masses and they have successfully formed a large customer base for such institutions. Also, as their presence is more prominent in the market, they make use of upgraded technologies that are customized in accordance to the needs of the customer. They play a key role in the development of important sectors like Road Transport and Infrastructure, which are the lifeline of our economy.
Return on equity for NBFCs has also been better than banks, and non- performing assets in NBFCs have been lower than banks.
They serve the unorganised sectors and convert them into organised ones, fill in credit gaps while meeting needs of small retailers and small borrowers. They are more flexible and cost effective. The market share of NBFCs in total credit increased to 13% in 2015 from 10% in 2005, while that of Banks have fallen. Currently, credit is growing at an average of 24.3% per year for NBFCs as against 21.4% for banks.
CREDIT GROWTH at NBFCs as a % of total credit
DEFINITION AND DETAILS OF NBFCs
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956, engaged in the business of
- loans and advances,
- acquisition of shares/stocks/bonds/debentures/securities issued by the government or local authority, or
- other marketable securities like nature, leasing, hire-purchase, insurance business, chit business
NBFCs do not include any institution whose principal business (company’s financial assets constitute more than 50 percent of the total assets and income from financial assets constitute more than 50 percent of the gross income) 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.
It can also be a non-banking institution whose principal business is of receiving deposits under any scheme or arrangement in one lump sum or in installments, by way of contributions or in any other manner also known as Residuary non-banking company.
NBFCs whose asset size is of ₹ 500 crores or more as per last audited balance sheet are considered as systemically important NBFCs.
INDUSTRY SHARE AND WORLD SHARE
According to a Crisil report, the share of NBFCs in the housing finance industry has increased from 26% to 38%, thus, shrinking the share of banks from 74% to 62%.
NBFCs are still small in terms of outstanding credit, at an annualised growth rate of over 15%, they are slowly making their way into the balance sheets of companies, especially those in the small and medium size category and in the real estate business irrespective of size.
RBI’s financial stability report says NBFC loans expanded 16.6% in the year, twice as fast as the 8.8% credit growth across the banking sector. NBFC sector expanded 15.5% in fiscal 2016 compared with 15.7% the previous year. NBFC credit as a percentage of GDP is only 13% in India compared to 26-27% in Malaysia and Thailand, and 33% in China.
Journey of NBFCs in India
The advent of NBFCs in India can be traced back to the 1960s. NBFCs served the people who did not have access to the banking systems of the country. It provided easy finance to small businesses and to the underprivileged or part of the weaker section of the society. Initially, they operated on a limited scale and could not make a significant impact on the financial system.
Between 1980’s and 1990’s NBFCs had a firm base owning to its customer friendly reputation. As they facilitated access to credit for semi-rural and rural India where the reach of traditional banks has traditionally been poor, it got huge investors.
In January 1997, RBI made drastic changes in the Chapters III-B, III-C, and V of the Act to put in place the regulatory and supervisory structure of NBFCs to protect the interest of the depositors as well as ensuring efficient functioning of the NBFCs.
After the amendments made in 1997, the NBFCs have evolved substantially in terms of operations, the variety of market products and instruments, technological sophistication etc.
In the year 2016, RBI allowed all sub-sectors falling within NBFCs 100% FDI either through automatic route or approval route and also removed any form of additional capitalisation norms linked to foreign ownership prescribed under the FDI policy, thereby aligning the capitalisation norms.
In recent years the NBFCs have gained significance by adding considerable depth to the overall financial sector.
Regulatory body of NBFCs in India
NBFCs are regulated and governed by Reserve Bank of India within the framework of Reserve Bank of India Act, 1934 which was amended on 1st December, 1964 by Reserve Bank Amendment Act, 1963 (Chapter III- B).
In 'Chapter III-B' rules to regulate ‘Deposit Accepting’ NBFCs were introduced.
There are different types of committees which review NBFCs. They are:
•James S. Raj Committee
• Chakravarty Committee
NBFCs registered with the Reserve Bank of India may take part in the insurance agency business on a fee basis and must obtain permission from the Insurance Regulatory and Deveas a "composite corporate agent" with insurance companies.
Similarities Between NBFCs and Banks
Difference between NBFCs and Banks
Difference between NBFCs and Chit Funds
AREAS served by NBFCs in India
Most of the Indian population live in either the semi-urban or rural India. The increase in margin and higher demand is leading to the growth of rural financing through NBFCs. Companies like Shriram Transport, L&T Finance, Magma Fincorp etc. are exploring this untapped financial market. The agricultural equipment finance market is moving towards maturity and is becoming competitive. The margins in the market are high because of low competition, high-interest rates and dealers support.
There is a need for financing and funding in the semi-urban and rural India for tractors, equipment, SHUVs, agricultural products such as pesticides, fertilizers, et cetera which is being served by NBFCs.
Home loans by Home Financing Companies are continuously rising because they take into consideration the stamp duty and registration cost while calculating the total cost of the property. For example, banks can lend 80% of the property value (only cost); whereas HFCs also consider stamp duty while calculating the cost of the property and thus, give a higher amount of housing loans. HFCs are best suited for someone who wants to borrow a higher amount of loan and wants to contribute less from his/her own pocket.
The higher disposable income, government initiatives, increase in credit penetration and strong urban demand drives the consumer finance segment. The market expects a healthy growth in the consumer finance segment. In the coming time, business loans will see a growth unlike the loan against property which is unlikely to witness substantial growth as the competition has risen. With the advent of technology, the vast digital customer data is being used to serve the customers better.The EMI based consumer finance shall see a 40%-50% growth as per V Vaidyanathan of Capital First.
Vehicle financing is gaining an edge over the gold companies as they offer more stability than gold loan firms which are subject to business risks such as price fluctuations and quality of collateral. Rural and semi-urban population who seek vehicle loans to build up their businesses tend to go for NBFCs rather than bank loans as they are easily available. The number of unbanked individuals in India has decreased to 233 million but still the number of unbanked is quite large and there is a great demand for low-cost credit for commercial vehicles. This unleashes great opportunity for vehicle financing.
- Latent Credit Demand.
- Increased Consumption.
- Stress on the PSUs.
- Distribution outreach.
DIFFERENT TYPES OF NBFCs in INDIA
EFFECT OF DEMONETISATION ON NBFC
Though demonetisation had a positive effect on the banks, the Non-Banking Financial Institutions experienced a free fall. It has lost massive shares due to the withdrawal of the currencies. Most of the NBFCs have lost more than half of the gains made during the year. Customer confidence has lowered, the effect of which was borne by conglomerates like Bajaj Finance, Mahindra Finance, and L&T Finance to microlenders like Bharat Financial Ltd, Satin Creditcare and Gruh Finance etc.
The investors' too lost confidence on the viability of Return on Investment from investing in these as the loan books are slowly piling up and there has been a reduction in demand for loans in the economy.
The sector was hit adversely by Demonetisation, as NBFCs are actively involved in financing smaller enterprises which take up small loans and are cash intensive. This explains the fall in shares of Shriram Transport Finance Ltd, Mahindra Finance, Mannapuram etc.
However, the housing loan segment and low proportion of loan against property have withstood the demonetisation storm.
NBFCs constitute a significant part of the financial system and compliment the services provided by the commercial banks in India. NBFC and the retail credit are carrying a high amount of growth promise ranging between 25 to 30 percent.
NBFCs have various sub-segments like mortgage, unsecured loans and micro finances that are dominating the market and are drivers of growth. Customised and flexible services have built a large customer base which includes small borrowers to large clients
NBFCs also have a large share in niche segments, such as commercial vehicle finance, the share of which is estimated to increase up to 25% to 30% in future years.
- Post demonetisation effect on NBFCs.
- How can NBFCs overcome from becoming shadow banks?
- How is restricting powers of NBFCs beneficial to the Indian economy?