BENGAL INSTITUTE OF BUSINESS STUDIES

PROJECT REPORT
ON

“CHALLENGES FACED BY NBFCs IN INDIA”

SUBMITTED TO

BENGAL INSTITUTE OF BUSINESS STUDIES

BY

NAME: - PRAYAS SARKAR

MBA+PGPFM
BATCH: - 2019-2021
UNDER THE GUIDENCE OF:
PROF. SUMITAVA PAUL
PROF. SULAKSHANA SINHA

1
 PREFACE

This project report attempts to bring under one cover the entire hard work and
dedication put in by me in the completion of the project work on
“CHALLENGES FACED BY NBFCs IN INDIA” I have expressed my
experiences in my own simple way. I hope who goes through it will find it
interesting and worth reading. All constructive feedback is cordially invited.

Prayas Sarkar

PGPFM

2
CERTIFICATE OF THE PROJECT

3
 ACKNOWLEDGEMENT

I take this opportunity to acknowledge the assistance and

contribution of the people who had faith in this project. I am
extremely thankful to my faculty guide, Prof. Sumitava Paul and
Prof. Sulakshana Sinha, Bengal Institute of Business Studies,
Kolkata. His and her constant guidance helped me overcome
many barriers in the course of my study. I am fortunate to have
got such encouraging guides who made me push my limits and
strive for bigger accomplishment. I would also like to thanks my
parents for their unwavering support and encouragement
throughout my course.

4
 DECLARATION
I, Prayas Sarkar, hereby declare that the study entitled “CHALLENGES
FACED BY NBFCs IN INDIA”, is being submitted by me as my final year
dissertation project in the partial fulfilment of the requirement for the award of
masters of business administration. The study is based on secondary sources of
data/information.

The material borrowed from similar titles other sources and incorporated in the
dissertation has been duly acknowledged.

The matter embodied in this project report has not been submitted to any other
university or institution for the award of degree. This project is my original work
and it has not been presented earlier in this manner. This information is purely of
academic interest.

Signature

Name of the Student

Prayas Sarkar

5
 TABLE OF CONTENTS
DESCRIPTION PAGE NO.

EXECUTIVE SUMMARY 7

CHAPTER 1 : INTRODUCTION 9-47

AND DESIGN OF THE STUDY

CHAPTER II : REVIEW OF 49-59

LITERATURE

CHAPTER III : SOME RECENT 61-64

NEWS OF NBFCs

CHAPTER IV : CRISIS OF THE 66-95

SECTOR

CHAPTER V : CAMEL MODEL 97-127

ANALYSIS OF LEADING NBFC
COMPANIES OF INDIA

CHAPTER VI : SUMMARY OF 130-148

FINDINGS,SUGGESTIONS AND
CONCLUSION

BIBLIOGRAPHY 149-150

6
 EXECUTIVE SUMMARY
Study has been included the holistic view of Non-Banking Financial Companies
Sector in our country and it has been included Understanding of Risk
Assessment Model (RAM) and Credit Assessment Memorandum (CAM Model).

Study has shown that Non-Banking Financial Companies are working as

shadow banks for Consumer and Commercial banks where it covers many
financial segments such as Housing Finance, Infrastructure Finance, Asset
Finance, Power Finance, Vehicle Finance etc. There are many rules and
regulations of Reserve Bank of India which have to be followed by Non-Banking
Financial Companies. In Risk Assessment Model, study has been done on the
internal rating of financial companies with CAMEL approach which is used to
evaluate the company on the parameters such as Capital, Asset quality,
Management, Earnings, and Liquidity on the other hand Understanding of the
Credit Assessment Memo has been studied where how to prepare Credit Memo
has been studied.

The research has been done by selecting random two Non-Banking

Financial Companies, from which one is Housing Finance Company and other
one is Infrastructure Finance Company of which ratio analysis, Comparative
analysis and Common size analysis have been done. By this research, it has been
analysed that how the company has been grown over the years.

As per recent crisis in the Non-Banking Financial Companies, rising in

the Non-Performing Assets of Non-Banking Financial Companies and Public
Sector Banks degrading down them in the Financial Market which is resulted in
the Slowdown of this sector. Reserve Bank of India has taken major decisions
regarding banking industry which will make ease to get into this market and run
the business.

7
CHAPTER I : INTRODUCTION AND
DESIGN OF THE STUDY

8
 CHAPTER I

INTRODUCTION AND DESIGN OF THE STUDY

NBFCs: A HISTORICAL BACKGROUND

Non-Banking Finance Companies (NBFCs) in India have evolved over the last
fifty years to emerge as notable alternate sources of credit intermediation. The
non-bank sector in India is wide and encompasses several financial
intermediaries like the loan and investment companies, housing finance
companies, infrastructure finance companies, asset finance companies, core
investment companies, micro finance companies and factoring companies. In a
broad sense, the NBFCs include stock brokers, insurance companies, chit fund
companies, etc. The NBFCs are also into distribution of financial products,
acting as business correspondents to banks, and facilitating remittances. The
sector regulated by the Reserve Bank of India has changed dynamically since the
time an enhanced regulatory framework was placed on them in 1996 in the wake
of the failure of large sized NBFCs. The changes in the sector have partly been
regulation induced; the prudential regulations on systemically important NBFCs
and deposit taking NBFCs made them financially sound and better managed,
while the light touch regulation on them gave them ample head room to be
innovative, and dynamic. Today, while the numbers of registered NBFCs have
come down, from the peak of 14,077 in 2002 to 12,029 by March 2014, those in
the business found a niche for themselves, in the financial fabric of the country.

In a country like India, where large sections of the population are still
unbanked, there is space for several forms of financial intermediation. Without
sounding clichéd, the NBFCs have emerged as a very important and significant
segment, financing small and medium enterprises, second hand vehicles, and
other productive sectors of the economy and have very effectively tried to bridge
the gaps in credit intermediation. They have played a supplementary role to
banks in financial intermediation and a complementary role in the financial
inclusion agenda of the Reserve Bank of India. NBFCs bring the much needed
diversity to the financial sector thereby diversifying the risks, increasing liquidity

9
in the markets, thereby promoting financial stability, and bringing efficiency to
the financial sector.

Although regulated, NBFCs sector is considered as a shadow banking

sector. This is because they are lightly regulated; there are pockets within the
sector that are not subjected to regulation and or supervision and they are also
allowed to conduct activities that may not fall under regulation. The Principal
Business Criteria (PBC) for registration allows NBFCs the freedom to conduct
other activities, beyond financial activities, from their balance sheets. There are
several large entities, undertaking financial business, but do not come within the
definition of the NBFC. Here, there are several corporate treasuries. Examples of
light touch regulation are as follows: The registered NBFCs are not supervised as
intensively as banks; the reporting requirements are very little as compared to
banks; capital and other prudential requirements on banks based on Basel III
have not been required of theNBFCs; there are no or less pre-emptions in the
form of CRR or SLR for NBFCs; nor is prescription of priority sector lending
requirements; unlike banks, there are no restrictions on the number of NBFCs
that can be set up by a single group nor is there any restriction on the number of
branches of NBFCs; and corporate governance have not been as stringent as that
for banks. There are also no regulations on connected lending for NBFCs.

NBFCs today have grown considerably in size, form and complexity and
operations with a variety of market products and instruments, technological
sophistication, entry into areas such as payment systems, capital markets,
derivatives and structured products. Some of the NBFCs are operating as
conglomerates with business interests spread to sectors like insurance, broking,
mutual fund and real estate. The inter-connectedness with other financial
intermediaries has increased with increased access to public funds through
NCDs, CPs, borrowings from banks and financial institutions. NBFCs being
financial entities, are exposed to risks arising out of counterparty failures,
funding and asset concentration, interest rate movements and risks pertaining to
liquidity and solvency. Risks of the NBFCs sector can hence be easily
transmitted to the financial sector or the NBFCs can get affected by adverse

10
developments in the financial sector. We can easily draw reference to the 2008
financial crisis when the NBFCs sector came under pressure due to the funding
inter-linkages between NBFCs and mutual funds. The ripple effects of the
turmoil in the western economies led to liquidity issues and redemption pressures
on mutual funds which in turn led to funding issues for NBFCs as mutual funds
were unable to roll over the corporate debt papers of NBFCs. Many had to
downsize their balance sheets or enter into distressed sale of their loan portfolios.
A slew of measures had to be taken then, both conventional and unconventional
to assist the NBFCs.

The institution of hire purchase or installment credit is well organized in

countries like U.K and U.S. In India hire purchase credit first made its
appearance after the First World War. The system grew steadily in the 30s and
40s. It was only after the Second World War that the growth picked up
momentum. Hire purchase credit in India is given by hire purchase finance
companies and state financial corporation as well as by a large number of firms
and individuals.

In a broader sense, NBFC means a company 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 variety of services. The
service mix of NBFCs has all dimensions-width, depth and consistency-the three
essential characteristics of any product mix. Width refers to variety, depth refers
to range 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 in a variety of ways.

Growth and diversification of non-banking financial companies are

integral parts of the development process of the financial market of the economy.
NBFCs and unincorporated bodies have been competing and complementing the
services of commercial banks since yester-years all over the world. While the
financial system in a country generally develops through a process of gradual
evolution, it has been observed that there was a stage in evolutionary process

11
wherein the growth of NBFCs were more pronounced during the first three
decades of 20th century and two of the top five commercial lenders are NBFCs
and three of the four top providers of consortium finance are non-bank firms. In
many countries, NBFCs have been able to serve the household, farm and small
enterprises sectors on a sustainable basis. It was Gurley and Shaw (Money in the
Theory of Finance, 1960) which, for the first time, established that the NBFCs
compete with the monetary system and there is need to regulate them.

The literature on the emergence of finance companies can be explained in three

alternative ways on the basis of the existing theoretical literature.

The first strand of literature is based on the experience of the growth of non-
banking intermediaries in the industrial economies such as the US during the
1960s.This literature suggests that the impetus for the emergence and growth of
Non-Bank Financial Intermediaries (NBFIs) may have come mainly from the
competitive handicaps (such as reserve requirements) imposed on commercial
banks for the purpose of monetary control. Gurley and Shaw (1960) argued that
the techniques of monetary control discriminated against banks in their
competition with non-bank financial intermediaries. They argued in favour of
extending the central bank’s regulatory powers with respect to the liabilities of
NBFIs as well. Growth of non-banking financial intermediaries has also been
explained in terms of financial innovations which are undertaken in response to
credit control measures by the central bank.

The second strand of literature follows from the work of McKinnon and Shaw
(1973) who were mainly concerned with the consequences of ‘repressive
controls’ on the formal credit sector (especially banks) and its effects on the
structure of the financial sector and the allocation of credit in developing
economies . According to them, financial systems in most developing countries
are characterized by financial repression which, among other things, includes
public ownership of banks, high reserve ratios, interest rate ceilings, directed
credit programmes, restrictions on market entry for banks, etc. Distortionary
controls like a ceiling on loan and deposit rates, etc. raise the demand for credit,

12
but depress its supply. A parallel market for credit develops in the informal
sector in response to the unsatisfied demand for credit. In such a fragmented
credit market, favoured borrowers get credit from banks at subsidized rates,
while others seek credit in inefficient expensive informal markets. This segment
assumes the form of urban markets and private finance companies.

The third strand is based on the work of Stiglitz and Weiss (1999) who showed
that in the presence of informational asymmetries, the problem of adverse
selection and moral hazard could characterize credit markets. Banks could
therefore ration credit using non-price means. This rationing may be particularly
severe in the case of certain categories of borrowers, such as small enterprises,
traders, etc. Higher proportionate transaction costs on small sized loans, absence
of marketable collateral, etc. may lead to these categories of borrowers being
rationed out by banks. Large banks could also find it difficult to collect the
information required for lending to small firms and traders.

Apart from the theoretical evidence of NBFCs, the experience worldwide shows
that the important factor contributing towards the growth of NBFCs are changes
in the international financial markets and the increasing integration of domestic
and international markets and the rapid development of technology in the
financial sector like introduction of new communication and transmission system
which reduce transaction costs and speed up information flows. To an extent, all
these factors have contributed to the growth of NBFCs in India, especially during
the later part of eighties.

In Indian multi-tier financial system, the NBFC sector stands apart for more than
one reason. Though the sector is essentially doing the job of financial
intermediation, it is still not fully comparable with the other segments of the
Indian financial system. This is so in view of the wide variations in the profile of
the players in this sector in terms of their nature of activity (leasing, investment,
lease, hire purchase, chit fund, pure deposit mobilisation, fee based activity,
etc.), the volume of activity, the sources of funding they rely on (public deposits
and non-public deposits), method of raising resources, development pattern, etc.

13
This has naturally resulted in the creation of multifarious categories of NBFCs
and therefore, leads to diverse regulatory dispensation by RBI.

In India, such marked growth in the non-bank financial sector was noticed in the
last two decades. During the last two decades NBFCs have witnessed a marked
growth. Some of the factors which have contributed to this growth have been
lesser regulation over this sector, higher deposit interest rates offered by this
sector, higher level of customer orientation, the speed with which it caters to
customer needs and so forth.

Started to cater to the needs of the society, NBFCs later on developed into
institutions that can provide services similar to those of banks. The tailor-made
services, higher level customer orientation, simplicity and the speed of their
services have attracted customers to these companies. The monetary and credit
policy followed by the country has left a section, of the borrowers outside the
purview of the commercial banks and NBFCs cater to the needs of this section.

The NBFCs are also seen as the outer fringe of organized financial sector, the
core of which is constituted by commercial banks. However, there are only
tangential contacts between the two segments in various forms such as bill
discounting and lines of credit from banks to certain categories of NBFCs.
During the beginning of 1990, Indian economy was going through a period of
increased financialisation. Extensive financial deepening occurred and the share
of assets of the financial institutions to the GDP increased considerably. The
Indian financial system has since then grown rapidly with considerable stability
and increased saving rate.

The September 2008, Global Financial Crisis has put more pressure for this
industry because of funding inter-linkages among NBFCs, mutual funds and
commercial banks. The ripple effect of the turmoil in American and European
markets led to liquidity issues and heavy redemption pressure on the mutual
funds in India, as several investors, especially institutional investors, started
pulling out their investments in liquid and money market funds. Mutual funds
are the major subscribers to commercial papers and debentures issued by

14
NBFCs, The redemption pressure on MFs translated into funding issues for
NBFCs, as they found raising fresh liabilities or rolling over of the maturing
liabilities very difficult. Drying up of these sources of funds along with the fact
that banks were increasingly becoming risk averse, heightened their funding
problems, exacerbating the liquidity tightness. RBI undertook many measures,
both conventional as well as unconventional, to enhance availability of liquidity
to NBFCs such as allowing augmentation of capital funds of NBFCs through
issue of Perpetual Debt Instruments (PDIs), enabling, as a temporary measure,
access to short term foreign currency borrowings under the approval route,
providing liquidity support under Liquidity Adjustment Facility (LAF) to
commercial banks to meet the funding requirements of NBFCs, Housing Finance
Companies (HFCs) and Mutual Funds, and relaxing of restrictions on lending
and buy-back in respect of the certificates of deposit (CDs) held by mutual fund.

NBFCs operations can largely be categorized into equipment leasing, hire

purchase, investments and loans. There are 12,029 NBFCs, of which 241 are
public deposit accepting companies. At end-March 2014, about 5 per cent of
NBFCs – as deposit taking companies had an asset size of more than Rs. 5,000
million and accounted for about 97 per cent of total assets of all NBFCs-D.

However, the size of NBFCs is very small compared to the banking industry.
The number of NBFCs (Deposit taking) is consistently declining over a period of
time. It declined from 875 in 2003 to 777 in 2004 and further to 241 in 2014.
The key differentiating factor working in favour of NBFCs is service. Today, a
borrower is looking for more convenience, quick appraisal and decision making,
higher amount of loan to value and longer term of repayment.

Non-Banking Finance Institutions play a crucial role in broadening access to

financial services, enhancing competition and diversification of financial sector.

It may be recalled that until some years back, the prudential norms
applicable to banking and non-banking financial companies were not
uniform. Moreover, within the NBFC group, the prudential norms applicable
to deposit taking NBFCs (NBFC-D) were more stringent than those for

15
nondeposit taking NBFCs (NBFC-ND).Since the NBFC-ND was not subject
to any exposure norms, they could take large exposures. The absence of
capital adequacy requirements resulted in high leverage by the NBFCs.
Since 2000, however, the RBI has initiated measures to reduce the scope of
‘regulatory arbitrage’ between banks, NBFCs-D and NBFCs-ND

The NBFCs-ND has inter-linkage with financial markets, banks and other
financial institutions. They have witnessed substantial growth in number, product
variety and size in the case of non-deposit taking NBFCs; NBFCs-ND with an
asset size of Rs. 100 crore and above have been classified as Systemically
Important NBFCs (NBFC-ND-SI) and these are subjected to limited regulations.
A system of monthly reporting on important parameters such as capital market
exposure has been introduced. A system of AssetLiability Management (ALM)
reporting and additional disclosures in the balance sheet were also introduced.

With a view to further strengthening their resilience, their Capital to Risk-

Weighted Assets Ratio (CRAR) has been enhanced to 12 per cent to be
reached by 31 March 2009 and further to 15 per cent by 31 March 2010. In
order to address their funding requirements, NBFCs-ND-SI have been
permitted to augment their capital funds by issuance of Perpetual Debt
Instruments (PDI) in rupees subject to certain conditions.

In October 2008, the issue of transient liquidity strain faced by NBFCs-ND-

SI was addressed and as a temporary measure, they were also permitted to
raise short term foreign currency borrowings under the approval route,
subject to certain conditions. On 1 November 2008, the facility of liquidity
support, which was earlier introduced for mutual funds, was extended to
NBFCs.

With a view to protecting the interest of the depositors, the RBI initiated
steps for creating a charge on the SLR securities in favour of depositors. In
order to contain the systemic risk relating to NBFC-D, measures were
initiated to ensure that only financially sound NBFCs accept deposits. It was,
therefore, prescribed in June 2008 that NBFCs with net owned funds (NOF)

16
of less than Rs.200 lakh may freeze their deposits at the level held by them.
Asset Finance Companies (AFCs) with minimum grade credit rating and
CRAR of 12 per cent may bring down public deposits to a level that is 1.5
times their Net Owned Funds (NOF), while all other companies may bring
down their public deposits to a level equal to their NOF by 31 March 2009.

The issues relating to Residuary Non-Banking Companies (RNBCs), which have

raised substantial deposits from public, in the last few years and thus have
acquired high leverage position, are being addressed under the provisions of the
RBI Act. In fact, two of the three RNBCs holding almost 99.9 per cent of the
RNBC segment have agreed to migrate to another business model and the
companies would reduce their deposit to nil by the year 2015. The third
company, with miniscule deposit, has been converted into a non-deposit taking
NBFC.

Along with measures for enhancing the financial strength of NBFCs, initiatives
to inculcate fair corporate governance practices and good treatment of customers
were also undertaken. The RBI in February 2008 laid down guidelines for
registration of Mortgage Guarantee Companies.

Prudential and investment guidelines applicable to them were also evolved.

NON-BANKING FINANCIAL ENTITIES REGULATED BY RBI

The developments in the NBFC sector in terms of policies and performance

during 2001-02 and for the subsequent periods (to the extent information is
available) are discussed in the subsequent paragraphs.

Non-banking financial entities partially or wholly regulated by the RBI

include (a) NBFCs comprising Equipment Leasing (EL), Hire Purchase
Finance (HP), Loan (LC), Investment (IC), including Primary
Dealers (PDs) and Residuary Non-Banking Companies (RNBC); (b) Mutual
Benefit Financial Company (MBFC), i.e., Nidhi Company; (NC) Mutual

17
Benefit Company (MBC), i.e., Potential Nidhi Company; (c) Miscellaneous
Non-Banking Company (MNBC), i.e., chit fund company. A chart on the
same is given below.

Non-Banking Financial Institutions in India

18
MEANING AND TYPES OF NBFCs

Section 45I of the Reserve Bank of India Act, 1934 defines a ‘‘non-banking
financial company’’ as

(i) a financial institution which is a company;

(ii) a non-banking institution which is a company and which has as its

principal business the receiving of deposits, under any scheme of
arrangement or in any other manner, or lending in any manner;

(iii) Such other non-banking institution or class of such institutions, as

the bank may, with the previous approval of the central government
and by notification in the Official Gazette, specify;

Hence in short an NBFC may be defined as a company registered under the

Companies Act, 1956 and also registered under the provisions of Section 45-IA
of the Reserve Bank of India Act, 1934 and which provides banking services
without meeting the legal definition of bank such as holding a banking license.
NBFCs are basically engaged in the business of loans and advances, acquisition
of shares / stocks / bonds / debentures / securities issued by government or local
authority or other securities of like marketable nature, leasing, hire-purchase,
insurance business and chit business but does not include any institution whose
principle business is that of agricultural activity or any industrial activity or sale,
purchase or construction of immovable property.

NBFCS VS CONVENTIONAL BANKS

· An NBFC cannot accept demand deposits, and therefore, cannot offer a

cheque facility.
· It is not a part of payment and settlement system which is precisely the
reason why it cannot issue cheques to its customers

19
 · Deposit insurance facility of Deposit Insurance Credit Guarantee
Corporation (DICGC) is not
available for NBFC depositors unlike in case of banks.
· SARFAESI Act provisions have not currently been extended to NBFCs.
Besides the above,
NBFCs pretty much do everything that banks do.
CLASSIFICATION OF NBFCS BASED ON THE NATURE OF
BUSINESS

The NBFCs that are registered with RBI are basically divided into 5 categories
depending upon their nature of business:

· Loan Company

· Investment Company

· Asset Finance Company

· Infrastructure Finance Company

· Core Investment Company

Reclassification of NBFCs with effect from 6th December, 2006

However in terms of the NBFC Acceptance of Public Deposits (Reserve

Bank) Directions, 1988 with effect from December 6, 2006, NBFCs
registered with RBI have been reclassified as:

Loan Company (LC)

Loan company 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.

20
Investment Company(IC)

Investment Company is a company which is a financial institution carrying on as

its principal business the acquisition of securities.

Asset Finance Company (AFC)

AFC would be defined as any company which is a financial institution carrying

on as its principal business the financing of physical assets and 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. Financing of physical assets may
be by way of loans, lease or hire purchase transactions.

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.

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 Owned Funds of Rs.
300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of
15%.

Core Investment Companies

The Reserve Bank of India vide its Notification No. DNBS (PD) CC.No.
197/03.10.001/2010-11 dated August 12, 2010, defined a new class of NBFCs by
the name ‘Core Investment Companies’ (CIC) was added.

Core Investment Companies in terms of RBI’s notification means: a non-

banking financial company carrying on the business of acquisition of shares

21
and securities and which satisfies the following conditions as on the date of
the last audited balance sheet:-

(i) it holds not less than 90% of its net assets in the form of investment
in equity shares, preference shares, bonds, debentures, debt or loans
in group companies;

(ii) its investments in the equity shares (including instruments

compulsorily convertible into equity shares within a period not
exceeding 10 years from the date of issue) in group companies
constitutes not less than 60% of its net assets Net assets, for the
purpose of this proviso, would mean total assets excluding –

• Cash and bank balances;

• Investment in money market instruments and money market

mutual funds
• Advance payments of taxes; and

• Deferred tax payment.

(iii) it does not trade in its investments in shares, bonds, debentures,

debt or loans in group companies except through block sale for the
purpose of dilution or disinvestment;

(iv) it does not carry on any other financial activity referred to in

Section 45 I (c) and 45 I (f) of the Reserve Bank of India Act, 1934
except:

• Investment in

o bank deposits,

22
 o money market instruments, including money market
mutual funds,
o government securities, and

o bonds or debentures issued by group companies;

• Granting of loans to group companies; and

• Issuing guarantees on behalf of group companies.

The above-mentioned types of NBFCs may be further classified into:

· NBFCs accepting public deposit (NBFCs-D) and

· NBFCs not accepting / holding public deposit (NBFCs-ND).

FURTHER CLASSIFICATION OF NBFCS-ND BASED ON THE SIZE OF

ASSET

NBFCs-ND may also be classified into (i) Systematic Investment and (ii) Non-
Systematic Investment NBFCs based on the size of its asset.

Systemically Important NBFCs-ND

An NBFC–ND with an asset size of Rs.100 crore and more as per the last
audited balance sheet is considered as Systemically Important

NBFCs–ND (NBFC-ND-SI). However NBFCs– ND– SI are required to

maintain a minimum CRAR of 10 per cent. No NBFC–ND–SI is allowed to:

a) lend to any single borrower / group of borrowers exceeding 15 per cent /

25 per cent of its owned fund; b) invest in the shares of another company /
single group of companies exceeding 15 per cent / 25 per cent of its owned
fund; and (iii) lend and invest (loans / investments taken together) exceeding
25 per cent of its owned fund to a single party and 40 per cent of its owned
fund to a single group of parties.

23
Non-Systematically Important NBFCs-ND

A NBFC–ND whose asset size does not exceed Rs.100 crore as per the last
audited balance sheet may be considered as Non-Systemically Important
NBFCs–ND (NBFC-ND-NSI).

RESIDUARY NON-BANKING COMPANIES

The deposit taking activities of the Residuary Non-Banking Companies

(RNBCs) are governed by the provisions of the Residuary Non-Banking
Companies (Reserve Bank) Directions, 1987. In view of low or negligible NOF,
the quantum of deposits which can be accepted by these companies is not linked
to their NOF and for the purpose of safeguarding depositors’ interest, they are
directed to invest at least 80 per cent of their deposit liabilities in the securities as
per a prescribed investment pattern. These securities are required to be entrusted
to a public sector bank and can be withdrawn only for the purpose of repayment
to the depositors.

With effect from November 1997, these companies are required to pay interest
on their deposits which shall not be less than 6 per cent per annum on daily
deposit schemes, 5 per cent for daily deposits up to two years and 8 per cent on
other deposit schemes of higher duration or term deposits.

Other provisions relating to (a) minimum and maximum period of deposits;

(b) prohibition from forfeiture of any part of the deposit or interest payable
thereon; (c) disclosure requirements in the application form and
advertisement soliciting deposits; (d) furnishing of periodical returns and
information to the RBI, which are in force since May 1987, have been kept
unaltered.

The operations of RNBCs are characterized by a host of features including (a)

systematic understatement of their deposit liability, (b) payment of high rates of
commission; (c) discontinuation of deposit certificates to the tune of 80 to 90 per
cent in some of the schemes; (d) forfeiture of deposits; (e) low or negligible rate

24
of return on deposits; (f) appropriation of capital receipt to revenue account and
consequent non-disclosure of the entire deposit liability in the books of account /
balance sheets; (g) negative or negligible NOF; (h) levy of service charges on the
depositors; etc. The RBI adopted several measures to remove these
unsatisfactory features.

The track record of regulatory compliance for RNBCs has been significantly
lower vis-à-vis other NBFC groups. Monitoring and inspection of these
companies, from time to time, revealed continuance of many unsatisfactory
features including non-compliance with the core provisions of the directions,
diversion of the depositors’ money to associate concerns and / or investment in
illiquid assets and violations of investment requirements / interests of the
depositors. The RBI could only prohibit the errant companies from accepting
deposits any further. However, keeping in view both the depositors’ interests as
well as the interests of the employees of these companies, imposing prohibition
of orders in all cases was not a solution to the problem, particularly in the case of
large RNBCs with substantial public deposits. Accordingly, persistent efforts
were made by the RBI to spruce up their operations and ensure compliance with
the directions. In cases where adherence to directions was found unavoidable, the
RBI has had to resort to issue prohibition orders on a case-by-case basis.

However, in many cases, the actions initiated by the RBI were constrained
when some of the companies approached the courts of law and obtained stay
orders and at the same time continue to mobilize deposits. Some of the
ingenious promoted or floated new companies started accepting deposits
through new entities or shifted their areas of operations to other
states.

Equipped with the new regulatory framework of Chapter III-B of the RBI Act,
1997, the RBI extended prudential norms to the RNBCs. The requirement for
compulsory registration for RNBCs before commencing business coupled with
other concerted actions against such companies has curbed the unhealthy
tendency of mushrooming growth of these companies. The inspections and

25
monitoring of the RNBCs have been stepped up to ensure that the erring
companies should rectify the irregularities and fall in line with the regulatory
framework.

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:

·  loan disbursed by an NBFC-MFI to a borrower with a

rural household annual income not exceeding Rs. 60,000
or urban and semi-urban household income not exceeding
Rs. 1,20,000;
·
 loan amount does not exceed Rs. 35,000 in the first cycle
and Rs.50,000 in subsequent cycles;

 total indebtedness of the borrower does not exceed Rs.

·
50,000;
·
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 75 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

26
MUTUAL BENEFIT FINANCIAL COMPANIES (NIDHIS)

A NIDHI company, notified under Section 620A of the Companies Act, is

classified as ‘Mutual Benefit Financial Company’ (MBFC) by the RBI and is
regulated by the RBI for its deposit taking activities and by the Department of
Company Affairs for its operational matters as also the deployment of funds. The
companies incorporated after 9 January 1997 have been considered as Mutual
Benefit Companies only if they have a minimum NOF of Rs. 25 lakhs and have
obtained a Certificate of Registration from the RBI under the provisions of the
RBI Act, i.e. from the provisions of RBI Directions except those relating to (a)
interest rate on deposits; (b) prohibition from paying brokerage on deposits; (c)
ban on advertisements, and (d) requirements of submission of certain returns.
However, they are allowed to deal only with their shareholders both for the
purpose of accepting deposits and making loans.

On the other hand, the companies which are purportedly working like NIDHIS
without their names being notified under Section 620A of the Companies Act
were adversely affected by the RBI’s direction to class such companies as loan
companies, as they could not obtain the special dispensation available to notified
NIDHI companies was created subject to certain norms, till they are notified as
NIDHI companies.

CHIT FUND COMPANIES

Operations of chit fund companies are governed under Chit Funds Act, 1982,
which is administered by state governments. However, their deposit taking
activities are regulated by the RBI and they are allowed to accept a miniscule
amount of deposits, i.e., up to 25 per cent of their NOF from the public and up to
15 per cent from their shareholders. The concerns regarding the protection of
depositors’ interests are further minimized to a great extent as the chit fund
companies usually accept deposits from their chit subscribers. Merchant banking
companies have been exempted from the provisions of the RBI Act, provided

27
they are registered with SEBI. These relate to (a) compulsory registration; (b)
maintenance of liquid assets; and (c) creation of reserve fund as well as all
provisions relating to deposit acceptance and prudential norms.

ALIGNMENT OF THE RBI’S REGULATIONS WITH COMPANIES

(AMENDMENT) ACT, 2000

Changes were effected in the RBI directions to NBFCs to align with those
contained in the Companies Act, 1956, as amended by the Companies
(Amendment) Act, 2000. Accordingly, all NBFCs were advised to report to
the company law board the defaults, if any, in repayment of matured
deposits or payment of interest to small depositors within 60 days of such
default. In addition to NBFCs with asset size of Rs. 50 crore and more, those
with paid-up capital of not less than Rs. 5 crore have to constitute audit
committees. Such committees would have the same powers, functions and
duties as laid down in Companies Act, 1956. Moreover, some NBFCs, which
were hitherto private limited companies holding public deposits, have now
become public limited companies under the Companies Act. Such NBFCs
have to approach the RBI after obtaining a fresh certificate of incorporation
from the Registrar of Companies, for change of name in the CoR to reflect
their status as public limited companies.

LIQUID ASSET SECURITIES OF NBFCS

Effective from 1 October 2002, all NBFCs should necessarily hold their
investments in government securities either in Constituent’s Subsidiary
General Ledger Account (CSGL) with a scheduled commercial bank or
Stock Holding Corporation of India Ltd, (SHCIL) or in a dematerialized
account with depositories [National Securities Depository Ltd, (NSDL) /
Central Depository Services (India) Ltd, (CDSL)] through a depository
participant registered with SEBI. The facility of holding government
securities in physical form, therefore, stands withdrawn. Government
guaranteed bonds, which have not been dematerialized may be kept in

28
physical form till such time these are dematerialized. Only one CSGL or a
dematerialised account can be opened by any NBFC. In case the CSGL
account is opened with a scheduled commercial bank, the account holder has
to open a designated funds account (for all CSGL related transactions) with
the same bank. In case the CSGL account is opened with any of the
nonbanking institutions indicated above, the particulars of the designated
funds account (with a bank) should be intimated to that institution. The
NBFCs maintaining the CSGL account for sales before putting through the
transaction. No further transactions in government securities should be
undertaken by NBFCs with any broker in physical form with immediate
effect. All further transactions of purchase and sale of government securities
have to be compulsorily through CSGL / demat account. Government
securities held in physical form were to be dematerialized by 31 October
2002.
ACCOUNTING STANDARDS

In terms of Accounting Standards (AS) 19 (Accounting for Leases) issued by the

Institute of Chartered Accountants of India (ICAI), it was clarified that (i) the
prudential norms applicable to hire purchase assets would, mutatis mutandis, be
applicable to the financial leases written on or after 1 April 2001; and (ii) the
leases written up to 31 March 2001 would continue to be governed by the
prudential norms relating to leased accounts, as hitherto.

STATUTORY AUDITORS

NBFCs have to reiterate in their letter of appointment to statutory auditors their

statutory responsibility to report directly to the RBI the violations, if any, of the
provisions of the RBI Act or Directions issued there under, and noticed by them
in the course of their audit.

29
ASSET LIABILITY MANAGEMENT

Based on the guidelines issued in July 2001, effective 31 March 2002, asset
liability management system in all NBFCs with public deposits of Rs. 20 crore
and above as also NBFCs with asset size of Rs. 100 crore and above has been
made operational. Based on liabilities, NBFCs are classified into two categories -
Category “A” companies (NBFCs-D), and Category “B” companies (NBFCs not
raising public deposits or NBFCs-ND). NBFCs-D is subject to requirements of
capital adequacy, maintaining liquid assets, exposure norms (including
restrictions on exposure to investments in land, building and unquoted shares),
ALM discipline and reporting requirements. Category “B” companies, in
contrast, were subject to minimal regulation till 2006. However, since April 1,
2007, non-deposit taking NBFCs with assets of Rs. 1 billion and above have
been classified as NBFCs- ND-SI and prudential regulations such as capital
adequacy requirements and exposure norms along with reporting requirements
have been made applicable to them. Capital Market Exposure (CME) and Asset
Liability Management (ALM) reporting and disclosure norms were also made
applicable to them at different points of time.

PRIMARY DEALERS

In order to strengthen the market infrastructure of the government securities

market and make it vibrant, liquid and broad based, the Primary Dealers (PDs)
system in the government securities market was introduced by the RBI in 1995.
The PD system has developed substantially over the years and presently it serves
as an effective conduit for conducting open market operations. There were 19
PDs in existence as at March-end 2008 of which 9 are stand-alone bank entities.

During 2000-01, the scheme of liquidity support to PDs was fine tuned to
provide at two levels: (a) assured support at a fixed rate and quantum; and (b)
discretionary support to be extended through Liquidity Adjustment Facility
(LAF).In May 2001, the assured liquidity support was further bifurcated into

30
‘Normal’ (two-third) facility at the bank rate and ‘backstops’ (one-third) facility
with a higher interest rate provided at a variable rate linked to cut-off rates
emerging in regular LAF auctions. In the absence of LAF operations, the rate is
fixed at 200 to 300 basis points over National Stock Exchange-Mumbai
interbank offered rate (NSE-MIBOR) as may be decided by the RBI.

The RBI prescribed new guidelines in January 2002 to improve the risk
management system of PDs. Accordingly, the capital adequacy requirements
of PDs take into account both credit risk and market risk. The PDs are
required to maintain the higher of the market risk capital calculated through
a standardized model and the Value at Risk (VaR) method. PDs without a
VaR system in place are required to maintain 7 per cent risk capital.

In January 2002, PDs were advised to provide back-testing results for the
year ended 31 December 2001 and follow a prudent distribution policy so as
to build up sufficient reserves even in excess of regulatory requirements
which can act as a cushion against any adverse interest rate movements in
the future. The need for putting in place appropriate exposure limits and
reviewing those limits periodically by the PDs was also emphasized.
Furthermore, in view of the risks involved in accepting Inter-Corporate
Deposits (ICDs) and deploying those funds in non-SLR bonds, PDs were
advised to restrict acceptance of ICDs after due consideration of the risks
involved.ALM discipline has also been extended to PDs during the year.
Unlike other NBFCs, the entire portfolio of government securities of PDs
has been allowed to be treated as liquid.

The off-site surveillance of PDs is done on the basis of three basic returns, viz.,
PDR I, II and III. PDR I is a daily statement of sources and uses of funds and is
used to monitor the deployment of call borrowing and the RBI liquidity support,
leverage and the duration of PDs portfolio.PDR I return has been revised to
capture more details on sources like ICDs, CPs, etc. PDR II is a monthly
statement on the basis of which the bidding commitments, success ratio,

31
underwriting performance, secondary market turnover of PDs, etc., are
monitored.

PDR III is a quarterly return on the basis of which the capital adequacy of the
PDs is monitored. Apart from these regular returns, additional details are called
for as and when necessary. The ALM guidelines for NBFCs with some
modifications were also made applicable to PDs.

The regulatory guidelines issued in July 2006 prohibited PDs from setting-
up step-down subsidiaries. Accordingly, PDs that already had step-down
subsidiaries (in India and abroad) were required to restructure the ownership
pattern of those subsidiaries.

Mutual Benefit Financial Companies (Nidhis)

Mutual Benefit Financial Companies (Nidhis) have been exempted from the core
provisions of the RBI Act, 1934 and directions, excepting those relating to
ceiling on interest rate, maintenance of register of deposits, issue of deposit
receipt to depositors, and submission of return on deposits in Form NBS-I.As
part of the implementation of the recommendations of an Expert Group to
examine various aspects of the functioning of Nidhi companies (Chairman being
Shri P. Sabanayagam), the Central Government prescribed entry point norms and
NOF to deposit ratio, liquid asset requirement, etc. These measures are expected
to strengthen the functioning of these companies. In July 2001, the central
government announced guidelines relating to acceptance of deposits, business
activity, prudential norms, etc., which were further awarded in April 2002.

UNINCORPORATED BODIES

The time limit for repayment of public deposits, except those from sources
permitted by the RBI Act, 1934, held by all the unincorporated bodies
engaged in financial business expired on 31 March 2000. Accordingly, the
RBI cautioned unincorporated bodies engaged in financial business to
neither accept any deposit from members of the public, nor issue

32
advertisements soliciting deposits. Consequently, members of the public
were also cautioned about the risk of depositing money with such
unincorporated bodies.

SOURCES OF FUNDS OF NBFCS

NBFCs have been playing as a media between investors and users of funds. The
main function of NBFCs is to invite deposit and lend money in the form of
leasing, hire purchase or granting loans. In finance, this is called financial
intermediation. It may be mentioned that in case of NBFCs dependent on one
source of funds for entire requirements, there arises a greater risk in their
operations. It results in problems contributing to increasing or decreasing its
reliance on different sources of borrowings. The NBFCs which were relying
completely on public deposits are facing problems now after the introduction of
RBI (Amendment) Act, 1997 and the several restrictions regarding acceptance of
public deposits imposed therein. The main objective of such restrictions is to
protect the interest of small investors.

Total sources of funds for NBFCs may be divided into two categories.

v Owned Funds: The promoters of NBFCs can start their

business in the form of non-banking business with the
prescribed amount of money and initially invest money
depending on the
requirement of business and the scale of operations. Investment
by promoters in 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.

v Borrowed Funds: Operations of NBFCs in India generally

depend on borrowed funds. Borrowed funds are necessary for

33
 different 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 scale of
operations or requirement of funds. In leasing decisions, the
normal practice is to assure borrowing for making comparisons
in cash flows, bonds, commercial paper, bank borrowings, inter-
corporate deposits, etc. Besides the 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;

· Money Market.
Borrowing from Commercial Banks

Apart from public deposits collected by NBFCs, borrowing from

commercial banks is a major source of finance. Banks provide short-term
funds which they raise from loanable funds by way of demand deposits and
which can be withdrawn quickly by the investors. This restricts the banks in
providing long-term loans. It is well-known that banks have extended credit
exposure to the NBFC sector. Banks prefer to lend to a single borrower
instead of large number of small customers. It is beneficial for credit
administration and more likely to satisfy the credit appraisal requirements
than in the case of individual customers. After the CRB fiasco, banks are
unwilling to extend credit to the NBFCs. This has created problems in the
working capital management of this segment. Commercial banks are lending

34
credit to NBFCs with high precautionary measures and they provide credit
not more 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 generally higher than
other sources of borrowed funds. If a lease company raises funds from
investment companies and provides assets on lease basis, such company
earns a very small margin from these funds. Therefore, NBFCs engaged in
leasing business, borrow from this source when they fail to avail all other
sources. Small NBFCs which have no access to borrow funds from other
sources, generally take this source of borrowing.

Inter-Corporate Deposits

It is a very short-term fund for NBFCs, generally not more than one year. It
is a source of borrowing from one company to another. It is a popular source
of borrowing for NBFCs to meet their short term requirements. This
arrangement should be used as a temporary use of funds and should not be
used as a permanent source of funds. RBI has advised the NBFCs not to
heavily depend on ICDs for making investments in lease or hire-purchase
assets since this may create an asset-liability mismatch. The rate of interest
on ICDs is normally higher than other sources of borrowings. RBI has also
prescribed the ceiling limit on ICDs – borrowing. It is two times of the NOFs
in case of leasing and hire-purchase business within the overall ceiling limit.

Money Market

Sometimes NBFCs raise resources for short-term requirements from the

money market. These money market instruments are commercial papers and
certificate of deposits etc.

35
Debentures

NBFCs issue debentures to raise funds from the capital market as per
guidelines issued by Securities and Exchange Board of India (SEBI) under
the SEBI Act, 1992.Debenture is a document issued by a company to the
lender of funds. It is fixed interest bearing document. The debenture can be
secured or unsecured. The interest paid on debentures is a deductible
expenditure under the income tax law but the payment of interest is
obligatory, irrespective of the profit or loss.
Insurance and Pension Funds

It has been argued that financial development of a country is synergistic with

the economic development. Insurance and pension funds support economic
growth by providing long-term loans to NBFCs, particularly those engaged
in the leasing business. These institutions provide for longer 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) have been extending funds to
NBFCs to promote their businesses. After the CRB capital market fiasco,
major financial institutions are unwilling to extend loans to the NBFCs. This
has raised an important question about the reliability of the judging
procedures of credit rating agencies relating to the financial position of the
NBFCs. At present they are cautious in dealing with NBFCs.

REASONS FOR POPULARITY OF NBFCS WITH THE CUSTOMERS

NBFCs are popular with the customers for the following reasons:

36
Procedural Convenience

Government attitude with regard to providing finance to industries has changed

since 1991, and as a policy matter, the government imposed restrictions on banks
to provide term loan as well as cash credit facilities to the industries. Not only
that, in getting finance from banks, industries have to follow rigid legal
formalities which not only create major problems in starting the projects but also
the possibility of cost over runs. NBFCs providing lease finance which is free
from cumbersome procedures, compliance of covenants and regulations as
compared to procuring finance from financial institutions. Leasing finance is the
quickest finance available for meeting the costs of capital expenditure of
business enterprises. It allows a client to acquire assets at a fast pace. Thus, in
case of NBFCs, the process of providing finance to industries is not lengthy and
as a result their businesses improve steadily.

Effect on Borrowing Capacity

The term borrowing capacity signifies the scope which the company enjoys to
increase its borrowed capital without damaging the credit rating and market price
of its shares. It is needless to mention that, if a firm increases debt without
increasing the equity, the borrowing capacity of the firm is reduced. Leasing is
not borrowing and as such the borrowing capacity of the firms remains intact and
preserved for future borrowing. Lease is equivalent to borrowing and it commits
a firm to a schedule of fixed payments. Equipment leasing under the garb of
NBFCs does not appear as debt on a firm’s debt-equity ratio. Thus, it helps in
increasing the borrowing capacity of the firm in the sense that it is off balance
sheet items of finance. On the other hand, companies which have exhausted their
borrowing capacity can pursue their growth of operations by means of lease
finance to acquire additional equipment for increasing their production
capacities.

Shifting Obsolescence Risk

37
It is undeniably true that if any industry does not use modern technology, it
cannot compete with other industries using the same. However, it should be
kept in mind that any such plant or equipment carries the risk of
obsolescence. This particular fact raises a great question mark to the
entrepreneurs who have been suffering from financial crisis. The risk of 100
per cent is shared by the lessor under the lease agreement. So, an
entrepreneur opts for leasing because under this agreement the risk of
obsolescence shifts from the user to the owner.

Piecemeal Financing Device

Lease financing is a less costly and more convenient piecemeal financing device
particularly in those circumstances when a firm is expanding by adding relatively
smaller amounts of fixed assets at regular intervals. In such a scenario, the firm
will have to locate a series of funds to finance its growth. However, with the
passage of time, the cost of financing will increase, thereby posing unnecessary
hardship on the financial position of the firm for raising funds from other
sources. Hence, NBFCs by means of offering the leasing facility helps the firm to
avoid high cost of piecemeal financing.

Cash and Tied Up in Fixed Assets

NBFCs provide equipment to the entrepreneurs under the lease agreements

and the firm uses the assets without incurring huge capital expenditure.
Hence, the surplus cash can be utilised by the firm for the building of
additional manufacturing capacity or financing the working capital. If the
return on working capital is higher than the cost of leasing then the acquirer
may opt for leasing the equipment instead of buying it.

38
Boon for Small Firms

Small firms which have no access to raise funds from capital markets can
acquire assets by means of leasing arrangements from NBFCs. Thus, NBFCs
serve the small firms in arranging funds for launching of new business or for
expanding the existing one. Therefore, NBFCs help to create better
employment opportunities for the society.

Image of the Country

Among the many factors responsible for under development, lack of capital
formation is considered to be a factor of prime importance. In case of India, lease
financing is beneficial for importing ships, aircrafts, etc., instead of borrowing.
This will create a better image of the nation than being a borrower with no
pressing service charges for unpaid loans. Thus, large-sized NBFCs can help big
companies and also the government to acquire capital assets under the lease
agreements. Overall, NBFCs contribute to the country’s economic growth.

Loan Financing to Small Operators

Small road transport operators generally acquire their vehicles by taking

finance from NBFCs. Loan financing from NBFCs is easier than the bank
financing. The auto finance sector has traditionally been dominated by the
NBFCs.

Wide Area Network

With the increasing services sector activity in India, NBFCs have been
playing a critical role in providing the credit. NBFCs have extensive
networks and many have appointed a large number of agents who collect
money from small depositors through door to door service. Thus
NBFCs provide a good investment opportunity for the small investors.

39
Attractive Rates of Return

The NBFCs have flourished well for the reasons that they have offered attractive
rates of return to the depositors. On many occasions, they have offered attractive
gifts to their depositors through their brokers and agents. They even offer at least
4 per cent more interest on their deposit than the public sector banks on 1-3 year
maturity deposits. This helps them in establishing a better position to collect
deposits from the small investors.

RATIONALE BEHIND THE STUDY

The financial sector contributes to economic growth through five main channels:
(1) facilitating the trading, hedging, diversifying, and pooling of risk; (2)
allocating resources; (3) monitoring and exerting corporate control; (4)
mobilizing savings; and (5) facilitating the exchange of goods and services. The
Indian financial sector includes NBFCs in the performance of the above said
functions. NBFCs serve the nation in economic reconstruction in the same way,
as non-government voluntary organizations rejuvenate the social structure. The
importance of NBFCs have been felt vehemently for uplifting the various sectors
of the economy and boosting the rate of economic growth, having learnt the
lessons from the experiences of the developed nations where NBFCs have played
a vital role in market based free economics.

In India, the role of NBFCs has been well recognized by the government since
the seventies. RBI’s regulations for giving boost to their fund raising, endeavor
in the form of fixed deposits from the public were enforced as early as in 1977 to
ensure their continued growth. The growth of NBFCs has helped the industrial
development to a greater extent. The common characteristic feature of these
institutions is that they mobilise savings and facilitate the financing of different
activities, but do not accept deposits from the public at large. The NBFCs play an
important dual role in the financial system. They complement the role
commercial banks, filling gaps in their range of services, but they also compete

40
with commercial banks and force them to be more efficient and responsive to the
needs of their customers. Most NBFCs are also actively involved in the securities
markets and in the mobilisation and allocation of long-term financial resources.
The state of development of NBFCs is usually a good indicator of the state of
development of the financial system as a hole. There are many factors
influencing the growth of NBFCs in India, especially during the last four
decades, notably in the eighties.

The growth of financial intermediaries including NBFCs, in general helps the

process of financial deepening of the economy. In India, it is worth noting that it
has been the NBFCs which have grown very rapidly since the imitation of the
process of economic liberalization in 1991. From 1992, the mobilization of
deposits gained further momentum. During the first half of the 1990s, NBFCs
also started to gather substantial funds from the stock market.

Srinivasan “Future of Non-Banking”, The Hindu, Dated 17th March 1999, p. 26.

Though the era of rapid growth of capital markets in India had started in the
late 1980s itself, the deregulation of control over capital issues in 1992 made
it easier for NBFCs to raise capital on the stock markets. These
developments, in addition to the explosion in their numbers, clearly
distinguish the first half of the 1990s from the past, as far as the NBFCs are
concerned.

The growth of NBFCs, which flourished during the first half of the 1990s,
was later affected with the collapse of relatively large NBFCs in the private
sector in 1997 due to the scams. This soon affected the working of NBFCs.
Though reforms were introduced in the areas of business relating to NBFCs,
it is the regulatory framework of 1998 which tightened the working of
NBFCs. Though there is greater need for credit, the downfall of NBFCs,
affected the availability flow of funds. The existence of NBFCs in India has
coincided with a major structural transformation in the Indian financial
system, which has an important bearing on the conduct of monetary policy.

41
Because of the financial widening and deepening, there was a shift from
monetary assets to non-monetary assets such as contractual savings and
other assets including shares, debentures, units etc., As the NBFCs and the
commercial banks act as financial intermediaries, the question arises as to
whether these NBFCs have been posing any competition for the commercial
banks. This is the question raised from the fact that there was a manifold
increase in the number of NBFCs in the nineties. The total number of
NBFCs in 1996 was nearly 52000, before the introduction of amendment to
RBI Act in 1997.
Regarding the financial sector reforms, in most developing countries, they have
been focused largely on the formal banking sector and the securities market.
Much emphasis has been laid in the literature on the possible increase in savings
and improvement in the allocative efficiency of the financial sector, especially
banks, following financial liberalisation.

The response of other non-bank financial intermediaries in the informal

sector and the semi-formal sector following such reforms has received
comparatively less attention. Given the increasing importance of non-
banking intermediaries, even in the developing countries, their functioning
deserves greater attention of researchers and policy makers.

It is interesting to note that in most developing countries, it has been the

semi-organized segment, particularly the finance companies, rather than
banks, that have expanded rapidly with the first flush of financial
liberalization. In Nigeria after 1986, Lewis and Stein note that with a
relaxation of barriers to entry in financial services, the market conditions
encouraged the emergence of new financial institutions (apart from banks
which continued to be dominant). They go on to state that the wholesale
entry of new firms drastically changed the structure and competitive
environment of the sector. A diversifying array of market made the system
more opaque and unstable, many of the new entrants focused on rent
seeking, speculation and fraud, rather than conventional intermediation. The
flow of personnel and capital to NBFCs created a vortex of activity which

42
altered the character of financial markets and eventually undermined the
foundation of the sector.

Hence, NBFCs provided an additional link between deficit units and surplus
units. Their role cannot be replaced by banks. In fact both NBFCs and banks can
be powerful engines of growth. Considering the role being played by NBFCs in
the economic development of the country, and the problems that these NBFCs
have been facing, examining the impact of financial sector reforms on NBFCs is
felt inevitable.

SCOPE OF THE STUDY

In order to analyse the impact of financial sector reforms on NBFCs, two

companies are considered. They are Shriram Transport Finance Limited and
Mahindra and Mahindra Financial Services Limited. The criteria adopted for the
selection of these companies was based on the nature of their business and their
coverage of areas. Till the year 1998, nearly more than 75 per cent of RoC
registered NBFCs were in south India.

Of these, more than 50 per cent were in southern states. Hence the selection
may be based on market capitalization of listed companies.

However, after 1998, due to the failure of many NBFCs, the number of
NBFCs with RBI in southern states has declined.

OBJECTIVIES OF THE STUDY

The overall objective of the present study is to understand the impact of

financial sector reforms on the NBFCs. However, the specific objectives of
the study are:

1. To analyze the role of NBFCs, after financial sector reforms.

2. To study the impact of NBFCs, after the slowdown due to

postreform and financial crisis.

43
 3. To study the complex nature of recommendations of various
committees appointed by RBI.
4. To examine the mismatch of asset and liability of NBFCs.

5. To evaluate the working of hire purchase and leasing companies

with reference to the performance of two leading NBFCs in India.
6. To compare the deposit pattern of NBFCs with commercial banks.

HYPOTHESIS

Based on the objectives, the researcher proposes the following hypothesis:

Research Question (1)

Is there any significant relationship between loans and advances made by

NBFCs and long term liabilities raised by NBFCs after mandatory credit
rating from Credit rating agencies.

Null Hypothesis (H0): There is no significant relationship between Loans

and advances of NBFCs and Long term liabilities of NBFCs.

Alternative Hypothesis (H1): There is a significant relationship between

Loans and advances of NBFCs and Long term liabilities of NBFCs.

Research Question (2)

Whether the impact of reforms and global financial crisis have affected the
NBFCs business like Number of Companies registered, Quantum of raising
different sources and Loans and advances provide by these institutions and
Investment made by these institutions.

Null Hypothesis (H0): There is no significant difference exists between pre-

reform period. Post-reform period and Global financial crisis.

44
Alternate Hypothesis (Ha): There is a significant difference exists between pre-
reform period, post-reform period and the Global financial crisis the indicators of
NBFCs used to analyse the impact are:

(i) The number of NBFCs

(ii) The quantum of deposits

(iii) The loans and investments

Research Question (3)

Is there any significant difference between MMFS and STFC in their

performance over the last 5 years for the two selected companies?

Null Hypothesis (H0): There is no significant difference between Mahindra

and Mahindra Financial Services (MMFS) and Shriram Transport Finance
Company (STFC)
Alternative Hypothesis (H1): There is a significant difference between
Mahindra and Mahindra Financial Services (MMFS) and Shriram Transport
Finance Company (STFC)

METHODOLOGY

Selection of NBFCs for Overall Study

NBFCs considered for the study on impact of financial sector reforms are
those which reported to the RBI every year. Though the number of NBFCs
registered with RoC is large, only 20 per cent to 40 per cent of them reported
to the RBI till the end of 1998. Due to the new registration process
introduced in 1998, from the year 1999 to 2013, the number of NBFCs
reported to the RBI to the number of NBFCs with RoC declined to 4.50% on
an average. The registered NBFCs include deposit taking and nondeposit
taking NBFCs. Hence, the overall study on the impact of financial sector

45
reforms on NBFCs includes only those that reported to the RBI during 1985-
2013.

SOURCES OF DATA

Data have been collected from secondary sources which include:

1. Annual Reports of banks, financial institutions, RBI Reports such as

RBI Bulletin, currency and finance, trends and Progress of Banking,
CMIE etc.

2. Leading Indian journals in the field of commerce and economics such

as Journal of Economics, The Economist, Journal of Finance, Journal
of Commerce, Business Today, Business World, Vikalpa, Indian
Economic Journal, Economic and Political Weekly, The Economist,
etc., including dailies.
3. Major international journals such as American Economic Review,
Journal Intermediation, and Reports and Working papers of World
Bank, IMF, NBER, WBER, ADB, BIS etc.

4. The performance of two leading CNX-NIFTY JUNIOR Index

Companies – Mahindra and Mahindra Financial Services and Shriram
Transport Finance Company over the past five years.

PERIOD OF STUDY

The study covers a period of 33 years, i.e., from 1981 to 2013. The period from
1981-82 to 1995-96 represents the pre-reform period which marks the period of
initiatives taken for liberalization and from 1996-97 to 2007-08 represents the
post-reform period which experienced the liberalization effects and 2008-09 to
2012-13 represents after financial crisis. The NBFCs sector started flourishing
with reform process that began earlier in the eighties, continued with remarkable
progress during the nineties and existing with the pruned regulatory system at

46
present. However, the period varies depending upon the availability of data and
the nature of the subject dealt with.

STATISTICAL TOOLS USED FOR THE STUDY

The study used the following techniques:
1. Simple and popular tools like percentages and ratios.

2. Multiple regression analysis for examining the impact of financial

sector reforms on the NBFCs in terms of select indicators viz.,
Number of NBFCs, quantum of deposits and loans and
investments.

3. CAMEL Model for assessing the performance of the select hire

purchase and leasing companies for studying the impact of
financial sector reforms in terms of norms.

4. ‘t’ test for examining the effective financial performance of hire

purchase and leasing companies in terms of few financial ratios.

LIMITATIONS

1. The number of NBFCs compiled by the Department of Company

Affairs on the basis of registered companies at work, classified in
terms of their main object clause at the time of registration.
However, they also include companies which may be dormant and
not carrying out any business. The information on the number of
NBFCs under the Companies Act, 1956 category-wise is not

47
 published. Hence, the study takes into account only the reporting
companies which submit reports to the RBI.

2. The data considered for assessing the effective performance of

hire purchase and leasing companies between 1991-92 to1995-96
and 1996-97 to 1999-2013 are based on the performance analysis
of finance and investment companies done by RBI at regular
intervals which includes varied number of companies.

3. Due to the Regulatory Framework 1998 which has included new

concepts like public deposits, entry norms, new prudential norms
etc., the data pertaining to the period from 1991-92 to 1997-98 are
not strictly comparable with the data pertaining to the period from
1998-99 to 2012-13. Hence, multiple regression model used for
assessing the impact of financial sector reforms on NBFCs
considered only those data till the year 1997-98.

48
CHAPTER II : REVIEW OF LITERATURE

49
 CHAPTER II

REVIEW OF LITERATURE

The literature available on economic reforms, financial sector reforms and

NBFCs can be broadly categorized as follows:

1. Reports of various committees;

2. Books;

3. Information brochures / booklets / seminar / conference / workshop

reports and papers;

4. Project reports and doctoral theses; and

5. Articles published in leading newspapers, journals and magazines.

A few important of them that have a direct relevance to the proposed study are
reviewed here under:

Goldsmith (1969) pioneered the cross-country work in the area of NBFCs. He

traced the relationship between the mix of financial institutions and economic
development for 35 countries over the period 1860-1963.

Srivastava (1984) in his paper entitled, “Two Leading Monetary and Fiscal
Reforms in India and their Impact”, asserted the view that fiscal reforms have
benefited the rich community and the monetary reforms have favoured the poor.

50
Goacher et. al. (1987) have reviewed the development of non-bank sector and
conducted a detailed economic analysis of its main components, with special
emphasis on building societies, insurance companies and pension funds. He has
attempted to study the growth of NBFCs taking into account its impact on the
banking sector.

Verma (1995) in his book “Concepts, Practices and Procedures of Non-Banking

Finance Companies” has discussed at length the concepts, practices and
procedures regulating and governing the NBFCs and has evaluated the role of
leasing industry in equipment buying decisions of business firms in private
corporate sector.

Goel (1996) stressed the need for having well regulated financial intermediaries
and identified the general reasons for the growth of financial institutions.

Bhattacharya (1998) evaluated the ongoing reforms in India. His study traced
the links between the fiscal and financial reforms and concludes that the fiscal
reform is a must for financial reform in India. His study concluded that the
Indian financial system is still in a critical condition and urgent reform measures
are necessary to make it viable.

Anand (2000) analysed the factors leading to the rapid growth of NBFCs during
the 1990s and showed that the transition phase from a regime of controls to one
based on market signals could be characterized by excessive entry into financial
services. This could be particularly true where the initial conditions are marked
by a weak regulatory regime. Institutional reform is perhaps the most difficult
part of the reform process, mainly because financial regulation is not an
exogenous process that can be imposed on the financial institutions and markets
of a country.

Ashok Desai (2002) in his article on ‘A Decade of Reforms’ was explained the
causes for the present economic crisis even after the reforms. He observed that it
is not due to the reforms in industry, trade and capital markets, but due to the

51
undone reforms in industrial protection, exchange rate policy, railways and
transport.

Bimal Jalan (2002) in his article on ‘Before and After Ten Years of Economic
Reforms’ emphasized urgent reform programme in addition to economic reforms
to revitalize the governance and public delivery system at all levels of
government-centre, state and districts.

Shiva Rama Krishna Rao (2002) in his keynote paper, “Prospects of Financial
Sector Reforms in India”, discussed the first and the second generation reforms
relating to financial sector in India and observed that financial sector reforms
have aggravated the imperfections in credit market and have led to regional
disparities by diverting credit from agriculturally rich states like Punjab to
business based states like Maharashtra, Tamil Nadu and Delhi.

Malla Reddy (2002) in his paper “Financial Sector Reforms and Capital
Markets in India”, explained that the wide fluctuations in BSE market are due to
the large scale inflow / outflow of Foreign Institutional Investments (FIIs). He
called for imposing regulatory norms of FIIs.

Anupam Sharma’s (2002) paper “Financial Sector Reforms and Capital

Markets” attempted to highlight some of the policy issues facing the
liberalization of the financial sector in India, with special attention to the capital
markets. It focuses on the initiatives taken such as formation of SEBI, NSE,
entry of FIIs, issue of GDRs / ADRs, introduction of rolling settlement,
electronic trading, incorporation of derivative instruments, rationalization of
margins, and introduction of book building mechanisms. He asks for suitable
modifications in the existing system to improve legal, accounting and physical
infrastructure.

Tandon (2002) in his paper “Financial Sector Reforms-Issues before the

Seminarians” opined that developing financial institutions and markets are
important for growth. According to him, the reforms cover institutional,
supervisory, legislative and technological aspects and these are preventive in

52
nature so as to build a strong and robust banking system that withstands the
pressures of globalization.

Vashist (2002) in his paper, “Capital Market Reforms in Retrospect” traced the
history of growth and development of capital markets. He argues that further
reforms are necessary to make capital market transparent, or sell extremely well
diversified portfolio of stocks.

Vasudeva (2002) in his paper “Financial Reforms and the Budget” has discussed
the shift in Budget (1999-2000) that took place as a part of a strategy of financial
reforms. He stated that the budget could not proceed far in the direction of
reduction of government expenditure and removal of the fiscal deficit. The study
stresses upon the demand for autonomy to RBI so that it is free to use monetary
policy as a device to control inflation, manage the balance of payments and
influence growth.

Agarwal and Naveen Kumar (2003) in their article “Economic Reforms _

Retrospect and Prospect” discussed financial sector reforms, stabilization and
economic growth in developing areas with special reference to India and set an
agenda for the new millennium. Their study attempted to examine the
contribution of financial liberalization in selected developing countries, including
India during the period 1980-1998 to economic growth, with the help of their
actual experience and by Regression Analysis both on cross-sectional and time
series data.

Arora (2003) in his article entitled, “Financial Sector Reforms and Service
Sector: A Study of Life Insurance Industry in India”, discussed the objectives of
LIC and examined the major improvements initiated by LIC since its inception.
It elaborates the likely impact of the Act on life insurance market, more
specifically on LIC with reference to autonomy granted, response of LIC to
market changes and competitors, professionalization in making investments,
consciousness of reduction of service cost, improvements of service quality,
facing promotional war with private insurers and the productivity of its field

53
force. It also discusses the competitive strengths, weaknesses, opportunities and
threats in the emerging scenario.
Kaur, Gian and Navdeep (2003) in their article, “SBI Group versus
Nationalized Banks: Impact of Banking Sector Reforms”, comparative analysis
of the SBI group and the nationalized banks over the pre-reform and post-reform
i.e., 1981-99 periods and indicated that the former group has been a better more
shock absorber than the latter group. The post-reform period and the growth of
most of the variables were moderate during 1991-98.

Anil Kumar et al. (2003) in their paper have examined the financial sector
reforms carried out in the first phase. They have discussed the role of the
financial sector and essence of reforms. They observed that the specific reform
measures undertaken have varied from country to country as also the pace of
reforms and their sequencing. They consider financial sector reforms important,
as financial sector is the lubricant for the entire economy.

Manwani (2003) states that the Committee on Financial System 1991 introduced
and gave real good direction to the banking system. The Second Committee on
Financial Reforms (1998) made the norms even more stringent. He feels that the
decision to introduce private sector banks in India has resulted into a healthy
competition amongst the banks and has helped in improving the technology of
banking.

Guru Murthy (2003) in his paper entitled, “Globalization in the Economic

Reforms Period of Indian Economy”, examined the meaning and scope of
globalization and other aspects such as foreign trade and investment, monitoring
and feedback. He called for a serious introspection of policy makers in view of
the large-scale nepotism and corruption, and oppression of women and poor
conditions prevailing in our country.

Venkata Narayana (2003) in his article on, “Impact of Economic Reforms in

India with special reference to Service Sector” analyzed the Sectoral
Contribution to GDP and revealed the fact that economic reforms have promoted

54
the growth of service sector in terms of both net value added and employment
generated.

Ramakrishna et al. (2003) in their book “Economic ReformsRetrospect and

Prospect” have examined the consequences of economic reforms by taking into
account the nature of the existing socio-economic structure within which these
reforms are being implemented. They have concluded that without
simultaneously pursuing reforms for restructuring the prevailing institutions,
economic reforms as conceived and implemented, at present, cannot yield
desired results.

Vastone et. al. (2004) conducted a study entitled “Enhancing Security Selection
in the Trading from the Aspect of Security Selection”. In practice, it is unrealistic
for a financial trader to participate in the full market of tradable securities
competing for investment capital. Essentially, there are two main methodologies
used namely, fundamental analysis and technical analysis. This paper examines
the practice of fundamental analysis and demonstrates how neural networks can
be practically employed to enhance the fundamentalist selection process.

Reddy (2012) in his paper “Industrial Financial Services by APSFC – A Study”

highlighted the relationship between sanctions and disbursements, gross
sanctions and sanctions granted to the SSI sector – purposewise, constitution
wise, loan type wise, social-class wise, region wise, classification of assistance
and some viable and useful suggestions were offered to tone up the overall
performance of the Corporation for industrial development in Andhra Pradesh.

Bhat (2012) in his article “Financial Statement Analysis of Andhra Pradesh State
Financial Corporation” found there is a need to reduce the operating expenses to
improve the profit ability and the corporation should frame a good credit policy
to speed up the collection period.

Mahesh Thakkar (2011) in his article “Figures Published by the RBI at the end
of March 2010” shows that the total assets of the NBFC sector, at Rs. 6,56,185
crore, forms 10.9 per cent of the assets of the commercial banking system.

55
NBFCs had borrowings of Rs. 1,70,746 crore, mainly from the banking system.
They had also issued debentures of Rs. 1,38,722 crore and the investors include
banks. Thus, a sizeable portion of the finance is lent by banks to NBFCs at lower
rate of interest against loans granted by the latter to agriculturists, with jewelry
as security. The provision to classify such loans as priority sector advance is
necessary, where this target is achieved by commercial banks through NBFCs.

Sornaganesh and Thangarani (2014) in “Global Financial Crisis and Its Impact
on Mutual Fund Industry in India” tell that the September 2008 global financial
crisis has put more pressure for this industry because of funding interlink ages
among NBFCs, mutual funds and commercial banks. The ripple effect of the
turmoil in American and European markets led to liquidity issues and heavy
redemption pressure on the mutual funds in India, as several investors, especially
institutional investors, started pulling out their investments in liquid and money
market funds. Mutual funds being the major subscribers to commercial papers
and debentures issued by NBFCs, the redemption pressure on MFs translated
into funding issues for NBFCs, as they found raising fresh liabilities or rolling
over of the maturing liabilities very difficult. Drying up of these sources of funds
along with the fact that banks were increasingly becoming risk averse,
heightened their funding problems, exacerbating the liquidity tightness. RBI
undertook many measures, both conventional as well as unconventional, to
enhance availability of liquidity to NBFCs such as allowing augmentation of
capital funds of NBFCs through issue of Perpetual Debt Instruments (PDIs),
enabling as a temporary measure, access to short term foreign currency
borrowings under the approved route, providing liquidity support under
Liquidity Adjustment Facility (LAF) to commercial banks to meet the funding
requirements of NBFCs, Housing Finance Companies (HFCs) and Mutual
Funds, and relaxing of restrictions on lending and buy-back in respect of the
Certificates of Deposit (CDs) held by mutual funds.

56
Ananda Bhoumik and Arshad Khan (2008) found that “since the 90s crisis,
the market has seen an explosive growth for five years (20022007); asset CAGR
of Fitch analysed NBFCs was 40 per cent. In comparison, the CAGR of Fitch
analysed banks was 22 per cent.”

Reddy (2009) avers that there is a general agreement now that the scope of
regulation in most countries had been restricted to banks in the past, and that it
should now be extended to non-banks as well as to the shadow banking system.
The scope of regulation in India currently includes NBFCs in addition to
insurance, pension funds and mutual funds. The RBI monitors and regulates
deposit-taking NBFCs and capital requirements are related to the nature of
business as well. Systematically important NBFCs, defined by size, are more
intensely regulated. Inspite of the RBI’s regulations, however, during the crisis
there was significant pressure on the liquidity of NBFCs and mutual funds,
warranting special windows of refinance by the RBI. The RBI also identified
conglomerates for purposes of supervisory coordination led by a ‘lead regulator’.

Milind Gadkariet et al. (2010) found that profitability is expected to be lower

than historical levels due to conservative ALM management, higher provisioning
and avoidance of high yielding unsecured loan segments. However, profits are at
the same time expected to be much more stable and less susceptible to liquidity
related pressures going forward.

Nidhi Bothra and Kamil Sayeed (2011) found that NBFCs have been
pioneering at retail asset backed lending, lending against securities, etc., and
have been extending credit to retail customers in under-served areas and to
unbanked customers.

Anandan (2010) says that “the real challenge in raising funds, either equity or
debt, lies in the organisation’s ability to demonstrate the capability by
maintaining growth and meet the expectations of the investors or lenders as the
case may be.

57
Suresh Vadde (2011) said that it was observed from the consolidated results of
NBFCs that growth in income, both main as well as other income decelerated
during the year 2008-09. Though growth in total expenditure also declined, it
was higher than the income growth. The growth in expenditure was mainly
driven by the growth in Interest payments. As a result, operating profits of the
selected companies declined along with diminishing profitability during 2008-09.
The share of external sources in total sources declined during 2008-09, when
compared with the previous year. However, they continued to be the major
sources of finance”.

Gill (2005) in her research paper, made an attempt to examine the performance
of ICRAs on the basis of average default rate. The study relates to the long-term
debt instruments over a period of seven years from 1995 to 2002. The author
brought out that ICRAs performance about the company rated by it had not been
up to the mark and defaults on ICRA rated long-term debt instrument are the
highest in manufacturing sector, followed by financial sector. Further, the study
found that many of the debt issues that defaulted during the period were placed
in ICRAs investment grade until just before being dropped into default grade.
So, the author has suggested that excessive reliance on credit ratings should be
reduced and proper steps should be taken to make the working of credit rating
agencies more accountable.

Upadhe (2005) in her study, concentrated on an overview of the credit rating

system in India. The paper explained the various factors being taken into
consideration by rating agencies which include past performance, profit turnover,
cash flow and fund flow, nature of competition etc., and various types of ratings
being done by ICRA. The paper also gave details of various credit rating
agencies in India like CRISIL, ICRA, CARE and ONICRA. The author has
criticized the working of these agencies and suggested that a standardized fee
structure and standardized rating grade system should be adopted by all rating
agencies in order to simplify the procedures.

58
Kanagaraj and Murugesan (2006) in their paper, tried to evaluate the
relationship between credit rating and financial variables. The sample of the
study includes the group of manufacturing firms whose debentures were rated by
CRISIL and the study covers a period of six years from 1996-97 to 2001-02. The
author had grouped the important variables which form the basis for rating
classification, into nine financial dimensions including profitability, liquidity,
activity, debt service coverage, liabilities structure, size, firm’s age, leverage and
sales turnover. The authors revealed that there is a very good relation between
the financial performance of a firm and its credit rating classification, while the
size of the firm, its working capital management and liabilities structure are
given a moderate consideration in rating assignments.

Vepa (2006) in her study, made an attempt to trace trends in the corporate
debenture issues of the private sector in India and the rating trends of the same
with special reference to the pioneer rating agency of India – CRISIL. The time
period of the study was from 1991-92 to 2004-05. The author observed that the
number of public and rights issues had decreased during the period under study,
whereas the percentage of private placement out of total issues had increased
consistently. Many of the debt instruments, including debentures, were
downgraded during the period but the presence of multiple credit rating agencies
gave scope to issuers to approach more than one credit rating agency with a hope
to secure better ratings. The author highlighted that when credit rating became
mandatory in 1992-93 in India, private placements of debentures gained
importance as a preferred route of financing as credit rating was not mandatory
for private placements; but in spite of that, the debentures or issues which were
rated were considered more safe and reliable than the unrated ones by the
investors.

Reddy and Gowda (2008) in their paper, explained the importance and
problems of credit rating in India. They also highlighted the basis of credit rating
and credit rating practices prevalent in India. For this purpose, the opinions of a
sample of investors from Hyderabad were taken. The results of the study inferred

59
that majority of the respondents were aware of the existence of various credit
rating agencies, including CRISIL, CARE, ICRA, etc., About 40 per cent (80 out
of 200) of the respondents depend on credit rating for their investment in debt
instrument than the other credit rating agencies. The study worked out that
though there is confusion among various investors due to existence of more than
one credit rating agency, majority of them are satisfied with the guidance of
credit rating agencies.

Bhattacharyya (2009) in her paper, evaluated the issuer rating system in India
with special reference to ICRAs issuer rating model, since ICRA introduced the
issuer rating services in India in 2005. The author identified various quantitative
variables with major impact on the issuer rating along with their relative
importance using the help of discriminate analysis. The time period of the study
is from the date when the issuer rating started in 2005 to March 2008 and the
sample consists of 17 companies which have been rated by ICRA during this
period. The study highlighted that out of the ten variables being used by ICRA
for issuer rating, the PBIT and debt plus net worth ratio, current ratio and net
sales growth rate play important roles but the qualitative factors can also affect
the ratings at any time.

60
CHAPTER III : SOME RECENT NEWS OF
NBFCs

61
 CHAPTER III

SOME RECENT NEWS OF NBFCs

Coronavirus Pandemic : Fitch Ratings Downgrades Long-Term

IDRs Of 3 NBFCs

Fitch Ratings has downgraded long-term issuer default ratings of three NBFCs
on increasing macro-economic challenges following coronavirus pandemic.

These non-banking financial companies are Shriram Transport Finance

Company Limited (STFC), Muthoot Finance Limited (MFL) and India Infoline
Finance Limited (IIFL).

The long-term issuer default ratings (IDRs) of STFC and MFL have been
downgraded to BB from BB+, while that of IIFL to B+ from BB+.

62
Fitch recently revised down India's GDP growth forecast for the fiscal year
ending March 2021 (FY21) to 5.1 per cent, from 5.6 per cent previously, and the
risks are skewed to the downside as the authorities attempt to contain the virus.

The support measures announced by the RBI on March 27 should help address
some near-term pressures on reported asset-quality metrics and market liquidity,
but will not materially change the anticipated deterioration in underlying
borrower repayment capacity.

The RBI has announced a host of measures for the financial sector to remain
healthy with a Rs 3.74 lakh crore liquidity support at a time when almost every
economic activity in the country has come to a grinding halt as maintaining
social distance is the only preventative measure to help contain the spread of
Covid-19.

NBFCs in a fix over RBI’s three-month moratorium offer

Non-banking financial companies (NBFC) are in a fix after the Reserve Bank of
India (RBI) asked all financial institutions to offer a three-month moratorium to
borrowers. Many NBFCs may need to service their debt obligations towards
banks, mutual funds and other financial institutions, they said.

Finance Industry Development Council (FIDC), an industry body representing

NBFCs, has written to the RBI and the ministry of finance raising concerns
about this. NBFCs have different sources of funding, including term loans from
banks and issuance of papers to investors.
The RBI notification on 27 March after its monetary policy review said financial
institutions are “permitted" to grant a moratorium, meaning it is at the discretion
of banks to give a moratorium.

“We have reasons to believe that banks would be choosy and picky in deciding
which NBFC to give a moratorium. They may use different parameters, such as

63
credit ratings, to decide the moratorium. We want RBI and finance ministry to
make the moratorium mandatory for all term loans outstanding as on 1 March
2020," said Raman Aggarwal, co-chairman, FIDC.

It means banks can decide to give a moratorium to NBFCs that are rated AAA or
AA, while asking others to continue repayment. According to the industry body,
most small- and mid-size NBFCs rely heavily on loans from banks. These
companies can face issues if banks decide not to give them a moratorium and
pressurize them to service their debt obligations. Some small- and mid-size
NBFCs that Mint spoke to said that they have asked their lending bank to offer a
moratorium. They spoke on the condition of anonymity, as they were still
negotiating with their lenders and also talking to the regulator. The banks have,
however, refused to provide any relief so far.
RBI measures for NBFCs unlikely to boost credit flow to broader
economy: Moody's
The Reserve Bank of India's (RBI) measures to help facilitate funds to the NBFC
sector are unlikely to boost the credit flow to the broader economy as NBFCs
would shore up their own liquidity rather than on-lending to customers, Moody's
Investors Service said on Sunday.

Moody's Investors Service Vice-President (Financial Institutions Group) Alka

Anbarasu said the measures will soften the near-term credit negative impact on
non-banking financial companies' (NBFCs) funding and liquidity.

On Friday, the RBI said it will conduct second tranche of targeted long-term
repo operation (TLTRO 2.0) for an aggregate amount of Rs 50,000 crore, to
begin with. Under this, banks can access three-year funding from the RBI that
should be invested in investment grade bonds, commercial paper and non-
convertible debentures of non-banking financial companies, with at least 50 per
cent of the total amount availed going to small and mid-sized NBFCs and
microfinance institutions (MFIs).

64
Under the TLTRO 2.0 window, banks availing funds will have to invest 10 per
cent in securities issued by MFIs, 15 per cent in securities issued by NBFCs with
asset size of Rs 500 crore and below, and 25 per cent in securities issued by
NBFCs with asset size of Rs 500-5,000 crore.

The RBI announced the liquidity facility under the TLTRO 2.0 window for
NBFCs and MFIs after these institutions failed to get funding under the earlier
TLTRO scheme announced late in March.

Need for speedy implementation of recent measures for NBFCs:

India Ratings and Research
There is a need for speedy implementation of the recent measures announced by
the government for NBFCs to provide maximum benefit to micro, small and
medium enterprises (MSMEs), according to a report.

In order to support NBFCs, the government had announced steps such as Rs

30,000 crore of special liquidity scheme for NBFCs, housing finance companies
and micro finance companies, Rs 45,000 crore of partial credit guarantee scheme
and Rs 50,000 crore equity infusion for MSMEs through Fund of Funds, among
others.

It said the Rs 30,000 crore special liquidity scheme, which is fully guaranteed by
the government, can incentivise banks to take exposure in the lower rated
investment grade non-banking financial companies (NBFCs).

The scheme allows for primary and secondary market transactions, which can
help mutual funds (especially credit funds) sell some of their papers and generate
liquidity, easing some pressure on them.

The report said Rs 45,000 crore partial credit guarantee scheme with 20 percent
first loss protection from the government is aimed at providing some incentive to
lenders.

65
The rating agency said MSMEs may continue to face the pain if the lockdown
persists for a longer time and resumption of business operations gets delayed.

CHAPTER IV : CRISIS OF NBFC SECTOR

66
\

CHAPTER IV

CRISIS OF NBFC SECTOR

ACTIVITIES AND GROWTH OF NBFCS

In the wake of liberalization, diversification of the financial system, institutions

and instruments during the mid-nineties significantly enlarged the scope and
activities of NBFCs. The need for alarge role for the NBFCs as financial
intermediaries involved in efficient allocation of monetary resources slowly
became evident. The increasing emphasis on global integration of our economy
has created the need for structuring international services offered by the NBFCs
to our traditional markets. Hence, the product profile changed with the NBFCs
shifting their focus from the traditional fund based activities to non-fund (fee –
based) activities. The new venture by the NBFCs was the source of their
survival and growth especially during the midnineties. NBFCs, as a group
comprise companies engaged in diverse activities like loan financing,

67
investment holding, share trading, hire purchase, lease financing, chit funds, etc.
This heterogeneity among the NBFCs suggests that the factors leading to the
growth of different categories of finance companies may not be identical.

In the case of loan companies which are primarily engaged in lending, shortage
of credit arising from controls on the quantum and direction of bank credit may
have been more important, given the fact that bank credit in India has been
subject to both general and selective controls. Restrictions of bank credit in India
have been particularly targeted at trading activities and loan companies fill this
gap by supplying short term credit to wholesale and retail trade. These
companies generally obtain funds in the form of deposits from the public and
give loans to wholesale and retails, small scale industries and self-employed
persons.

These companies attract deposits from the public by offering higher rates of
interest along with various kinds of prizes, gifts, etc. The deposits accepted by
these companies are mainly fixed deposits and they are partly kept in fixed
deposits with banks and the remaining is used to make loan and advances. The
loans are usually unsecured loans and are granted on the basis of companies’
knowledge on the personal creditworthiness of the borrowers.

The growth of the hire purchase and leasing companies has been historically
linked to the transport business. Finance for purchase of commercial vehicles,
which was otherwise not forthcoming from banks during the early nineteen
eighties, is said be the main reason for the growth of these companies. Leading
activity became significant from the mid-1980s especially with the fiscal
benefits arising from the leasing of plant and equipment. While leasing
companies concentrate on equipment and vehicle leasing, hire purchase
companies have had a wider range, including financing of consumer durables.

From the mid-1980s, a few manufacturing companies also set up leasing and
hire-purchase companies as subsidiaries in order to support their own product

68
lines. Thus the rise of leasing and hire-purchase companies is attributed to the
demand for credit for purchase of automobile and consumer durable in the urban
areas and investment financing through leasing by manufacturing companies.
Hire purchase finance, particularly for the purchase of commercial vehicles, is
also provided by the subsidiaries of associate concerns of vehicle manufacturers.
The banks and financial institutions including DFIs like IDBI, ICICI, SFC and
other institutions like Agro Industries Corporation are the other agencies
operating in the field of hire purchase finance. The commercial banks earlier,
used to undertake financing sales or purchases of good by way of installment
credit directly to the buyers or sellers or they refinance hire purchase finance
companies and associate concerns of manufacturers. IDBI participates indirectly
in hire purchase by rediscounting of usancebills / promissory notes arising out of
sales of indigenous machinery on deferred payment basis. Nowadays, even
commercial banks have started giving hire purchase finance.

The reasons for the emergence of investment companies seem to be quite

different from that of the loan, leasing and hire-purchase companies. The
emergence of some of the investment companies has been closely linked to the
logic of corporate control and reducing tax liabilities, apart from their carrying
investment and finance activities as understood in the conventional sense. The
expansion of capacity, especially by companies belonging to large industrial
houses, was subject to strict control through the 1970s and the 1980s. These
companies were required to obtain licenses and clearance under the Monopolies
and Restrictive Trade Practices Act, 1960. Some of the investment companies
served as vehicles for cross-holding of shares to avoid detection of the
interconnection between different group companies.

The relationship between investment and someshare-trading companies and

large industrial house in the private corporate sector seems to have prevailed
even till 1990. It was found that out of 1,267 companies (i.e. manufacturing and
finance companies) belonging to large industrial houses in 1990, about 348 were
NBFCs. These investment companies had total assets of Rs. 948 crores which

69
accounted for approximately 2.5 per cent of the total assets of these large
industrial houses. Most of the investment companies are controlled by large
business or industrial groups and their investments are concentrated in the
companies of industrial group to which acquiring securities and trading in such
securities. These companies are investment holding companies and they provide
finance mainly to companies associated with that business houses. It is to be
noted here that holding companies which hold shares of group companies for
purposes of control are not financial intermediaries in the strict sense. But in
practice, there is a considerable overlap between share-trading companies, which
actively trade in securities and investment holding companies that hold shares of
companies.

In case of loan and investment companies, both their number and deposit
recorded a decline due to the less importance given by the reform measures. The
hire purchase industry after 1998 witnessed a steady growth in terms of its
deposits because of the continuous demand for automobiles. The same situation
did not prevail in the leasing industry due to:

· The banking Regulation Act 1949, was amended in 1983 to permit

commercial bank to undertaking equipment leasing commercial
banks to undertake equipment leasing operation through the
subsidiary route.

·
The entry of financial institutions and subsidiaries of commercial
bank resulted in the lease rate becoming more competitive.

It is evident from the analysis of data presented in Table that

during the period from 1984-85 to 1996-97 NBFCs were under boom phase,
but after this, the number of NBFC came down. Among the different
categories of NBFCs, the hire purchase and leasing together take the lead in
terms of both number and deposits though the growth rates of all the
categories of NBFC declined and the decline is not so steep in case of hire

70
purchase and leasing companies. Hence, it must be noted that liberalization
measures have favored the growth of hire purchase and leasing companies
more than the other NBFCs. Chart 4.4 presents the higher growth of hire
purchase and leasing than any other categories of NBFCs.

71
IMPACT ON THE SOURCING OF FUND

In the beginning of the nineties, the sources of fund for NBFCs were bank and financial
institutions. Over a period of time, their share declined considerably in favour of debentures,
inter corporate deposits and most importantly fixed deposits in recent times.

NBFCs have always had tough time with the banks. In 1994, banks were permitted to extend
bridge loans/interim finance to all companies including NBFCs, against public issues/market
borrowing up to 75 per cent of the amount called up as against 50 per cent earlier. In September
1994, it reversed its decision by advising banks not to extend bridge loans/interim finance
restrictions on borrowing by NBFCs from bank keeping in view of the unduly large increase in
the credit to NBFCs. As a first measure, the government in June 1996 granted them permission to
raise fund through the GDR route. NBFC complying with prudential guidelines can approach the
Euro issue market and international lending agencies in search of low cost long term funds. By
June 1999, RBI had removed the ceiling on bank credit to all registered NBFCs which are
engaged in the principle business of equipment leasing, hire purchase, loan and investment
activities.

Having analyzed the sources of fund for the NBFC, it becomes imperative to discuss the
borrowing pattern of NBFCs and the data relating to the same are presented in Table which
indicates that the main sources of funds, fixed deposits constitute the most important element of
total borrowings. The trend varies at different times, especially after 1996-97 it reduced to single
digit of total borrowings. Another important element of borrowing is bank borrowing. In 1993,
bank credit to leasing and hire purchase companies was increased from 3 times to 4 times of the
net owned funds. In 1995 due to slackness, the leasing and hire purchase companies with not less
than 75 per cent of their assets could borrow only 3 times instead of 4 times, due to which bank
borrowings were reduced to 25 per cent.

A major role is played by the commercial papers, in the year 1998. It includes promissory notes
issued by borrowers to investors. Debentures and bonds are again important sources of
borrowing for NBFCs. It is noteworthy to mention that during the period after 1994-95, it has

72
shown an upward increase, which consisted Non-Convertible Debentures (NCDs) and these were
tapped in a big way in the later half of the nineties.

However, during the year after 1999 the trend in the borrowing profile has changed due to the
regulatory framework. A at the end of March 1999, the total money raised by NBFC through
different borrowings was aboutthree times their NOF, whereas it was about 2 times the NOF as
at the end of March 1998.

IMPACT ON THE DEPLOYMENT OF FUNDS

The year 1991 witnessed a tremendous growth in the hire purchase and leasing business with
about 100 players who performed well with their business, crossing Rs. 100 crore marks in just a
decade.Because of this, therewasan overcrowd and this increased the credit risk
correspondingly.They mobilized funds at high cost.If funds are raised at high cost, the yield on
asset created should be high enough to provide for the cost and spread. As a result, the NBFCs
were compelled torisk more. Apart from this, many NBFCs invested in bought out deals,
sharesand securities, real estate, corporate finance etc.,where they had little experience and
expertise and lent to those sectors where banks and other FIs could not enter, of shield away
because of inherent high risk. As expected, the industry started to view the other side of the coin,
with full of credit risks.

At this time, the Shah Committee suggested to shift the concentration from ‘liabilities’ side to the
assets’ side of the balance sheet, by issuing prudential norms, encompassing income recognition,
accounting standards, assets classification, provision for bad and doubtful asset and credit /
investment concentration. These measures did not pose much of a problem for big NBFCs;
however a lot of smaller companies felt the pinch. These norms were mare mandatory by the RBI
Amendment Act 1997. The objective of these measures is to improve the quality of assets by
norms of recognition of NPAs. However, this had a positive effect on the financial discipline, but
not on the profitability of the NBFCs.

The number of NBFCs presented in Table based on the data made available in the analysis done
by the RBI every on the NBFCs whose accounts have been audited. In Table reflects the fact

73
that lending is more than the investments, because of the restrictions relating to maintenance of
liquid asset and also due to the low growth in the total volume of deposits from 1998-99 to
2001-02.

Till the end of 1998, the loan, advances and investment together showed an increasing trend due
to the capital adequacy requirements. However, due to the new regulatory framework 1998, the
growth of loans, advances and investments has been affected by the frequent changes in the
maintenance of liquid assets. The provisions of the RBI (Amendment) Act, 1997 (Section 45B)
stipulate the requirement of maintenance of assets in the approved securities whose market value
shall not be less than 5 per cent or such higher percentage not exceeding 25 per cent as the RBI
may specify the deposits outstanding at the end of the last working day of the preceding quarter.

This was raised further to 15 per cent effective from April 1, 1998. This rise in the minimum
liquid assets resulted in the reduction of investments held by NBFCs from the year 1998 to
2003. At present, the following stipulations exist with regard to the minimum liquid assets.

§ On and from 1st April 1998 be not less than 12.5 per cent

§ On and from 1st April 1999 be not less than 15 per cent and

§ On and from January 1,2000 be not less than 10 per cent in

Approved securities and the remaining are unencumbered term
deposits in any scheduled commercial bank, the aggregate of which shall not be less than 15
per cent.

IMPACT ON THE FINANCIAL STABILITY AND SOUNDNESS OF NBFCS

The stability and soundness of the NBFCs can be measured in terms of their financial
performance. For this study, data were collected from the analytical study done by the RBI on
financial and investment companies every year. The period covered in the study for 13 years
from 1999 to 2011. The categories of NBFCs as per published data are: (a) Trading in shares and
investment holdings (TS+IH), (b) Hire purchase finance (HP), (c) Loan Finance (LF) and (d)

74
leasing (LC). The selected ratios are profitability ratios, leverage ratios and liquidity ratios a
presented in the Table which are considered for this analysis.

An analysis of Table indicates the following facts:

The compound annual average of borrowing to total assets (1.022), net worth to total assets
(0.975), debt to net worth (1.029), profit after tax to net worth (1.19), profit after tax to total
assets (1.175),profit before interest and taxes to interest obligations (1.02). Even the ratios of
borrowing to total assets and the debt to net worth are also relatively more for NBFCs. The
borrowing capacity of NBFCs grew at a faster rate, especially when RBI started considering
loans to them as priority sector lending.

IMPORTANT ISSUES OF THE REFORMS

The following are some of the important issues of the reforms:

Ownership

Apart from the growth in the number of NBFCs from mid 1980s, what sets apart the recent past
is the change in the composition of the Indian corporate sector. NBFCs as a proportion of the
total number of joint stock companies increased from just 11 per cent in 1981 to 16 per cent in
1994. The change in the proportion of NBFCs has been more marked for public limited finance
companies. They accounted for as much as 30 per cent of the total registered public limited
companies in 1995 as compared to only 12 per cent in 1981.

The relative shift in favor of setting up of NBFCs gives a clue to the pattern of diversification of
the Indian private corporate sector from the mid – 1980s (viewed from the limited perspective of
the number of companies). Though government controlled NBFCs, it may be pointed out that
the increase in the number of NBFCs (both public and private limited) was mainly in the private
sector. It seems likely that coincidency with the process of liberalization of the economy
initiated in the mid-1980s, finance related activities started to occupy an increasing share of
entrepreneurial initiative in the private corporate sector, and this trend got accentuated from
1991 onwards.

75
Registration

Prior to the amendment of the RBI Act in 1997, there were practically no entry norms for
NBFCs. The lack of entry norms resulted in haphazard and mushroom growth of such NBFCs
and their number increased to well over 40,000 by 1996. The limited response and lack of
credible entry were barriers into the financial services industry, coupled with the ease with which
NBFCs could also exit from the industry after raising funds meant that the situation was also ripe
for some fly-by-night operators. Excessive entry into the NBFCs segment had made it difficult
for lay investors to distinguish between reputed companies and fly-by-night operators.

However, the RBI Amendment Act1997 has introduced compulsory registration of NBFCs with
the RBI as abasic entry norm. An examination of the data collected by RBI during the process of
registration of the existing NBFCs has revealed that an important problem in their effective
functioning is the low level of NOF of most NBFCs. Low capitalization reduced their ability to
withstand cyclical fluctuation in business and limits their ability to provide a minimum level of
service to depositors as well as borrowers.

RBI received 37,500 applications for registration as NBFCs of which 28,500 NBFCs did not
have minimum requirement of Rs. 25 Lakhs out of which RBI considered 9,000 NBFCs eligible
for registration in 1997. In 1998, out of about 8,802 applications of NBFCs which were eligible
for registration on the basis of minimum Net Owned Funds (NOF) of Rs. 25 lakhs, registration
was granted to 7,555. NBFCs of which only 584 NBFCs were permitted to accept public
deposits and application of 1030 companies have been rejected. As many as 28,676 companies
with NOF below Rs. 25lakh, as provided in the Act, were given time up to January 8, 2000 to
achieve the minimum NOF.

The RBI recorded registration to 624 NBFCs as deposit taking entities up to August 31 st 1999,
while another 7,231 NBFCs were registered as non-deposit accepting entities subject to their net
owned fund. Finally, during 2002-03, 13,849 NBFCs were accorded registration, the year which
saw the completion of the registration process.

76
PROFITABILITY

Resource crunch, severe competition, huge asset liability mismanagement, over leveraging poor
quality of assetsand bad business practices have severely affected the NBFCs, especially during
the second half of nineties, and because of which the profitability position was unsatisfactory.
Six out of top eight finance companies reported a marked fall in the net profits. If returns on
assets were still superior, then it was because of the higher return on their funds. From March
2000Return on Assets Ratio was 0.3 and fell to 2.7 in 2013. During this period with booming
GDP, IIP and per capita income, wider and better roads and infrastructure, aggressive increase in
purchasing power of the end-customer(inflation), an overall enhanced aspiration of the common
man to increase his standards of living, a government which encourages liberal entrepreneurship
and investment, and many similar attributes typify the factors that add the volume of goods
requiring transportation in an economy without having to say the obvious that a lack of any or
all of these indicate the opposite. The number of companies is also falling because of tight
reform measures by RBI. In spite of these measures this ratio was superior during this period.
DEREGULATION OF INTEREST RATES

The RBI on July 24, 1996 announced that the NBFCs which fully meet the requirements of
registration, rating and prudential norms are free from interest rate ceiling on deposits. This
helped the NBFCs to design their products for mobilization of deposits in accordance with their
requirement. They could offer lower rate of interest for short term deposits and higher at the time
of relaxation in the interest ceiling. It helped the NBFCs to avoid mismatch between sourcing of
funds and deployment of funds.

The directions of the Reserve Bank really changed the working and functioning of NBFCs and
the regulations drastically reduced their deposit acceptance limits forcing them to repay excess
deposits in a span of time not matching with fund inflows. The RBI was fully aware that there
were tenure mismatches between the lending of NBFCs and their borrowing from the public. In
2000-01, taking in to account the market conditions and changes, the maximum rate of interest
was reduced from 16 per cent to 14 per cent and further reduced to 12.5 per cent per annum with
effect from 1st Nov 2001. Changes were also effected in the RBI directions to NBFCs to align

77
with those contained in the Companies Act 1956, an amended by the Companies (Amendment)
Act, 2000. Accordingly, all NBFCs were advised to report any defaults, repayment matured
deposits or payment of interest to small depositors within 60 days of such default.

The ceiling on interest was removed in 1996, but in the long run, this made the greedy players
attract the depositors with high rate of interest, simultaneously investing the funds in the credit
risk businesses. The FD base of top rated NBFCs expanded. Other NBFCs on their own they
started reducing the fixed deposits to risk factors. Some of them had to repay their excess
deposits. This growth of poor quality assets drew the attention of RBI, and immediately as a
remedy, it withdrew the removal of interest rate ceilings. Though capital adequacy ratio and
credit rating were introduced with a different motive, but all these together created pressure
among the NBFCs giving rise to the reduction in the number of NBFCs. In 1996, the number of
NBFCs registered was more than the number of NBFCs registered with the RBI. Due to under
rating, many NBFCs were restricted from accepting deposits from the public. Apart from this,
frequent changes in the flow of bank credit affected the smooth functioning of NBFCs.

During the last seven years, one faces the double whammy of an alarmingly bulging inflation on
the one hand, and a receding growth index on the other. Industry pundits opine that this situation
is more attributable to the fact that our economy is more of an open economy than ever before
and the stunted growth rates of GDP is really a spill-over effect of the European sovereign risk
crisis, the Arab spring and the American debt crisis, all of which have had a cascading effect on
the Indian economy, too. This in layman terms means that while input costs for manufacturers
and financiers are increasing, the consumer is no mood to absorb the consequent cost inflation.
For a trucker, this translates to lesser availability of goods to be transported which leads to idle
time costs at best or low/negative operating margins per tonne /km at worst.

CREDIT RATING

Effective January 31, 1998, the Reserve Bank made credit rating mandatory to all deposit taking
NBFCs with NoF of ₨ 25 lakh and above. Presently, NBFCs-D with NoF of ₨ 2 crore and
above have to necessarily get rated by one of the approved CRAs at least once a year. It is also
mandated that they cannot raise public deposits without the minimum investment grade and the

78
copy of the rating should be submitted to the Reserve Bank. Moreover, any upgradation or
downgrading of the rating also need to be informed to the regulator immediately.

Non-Banking Finance Companies (NBFCs) being heterogeneous in their operations, they are
broadly grouped under four heads (i) asset finance companies, (ii)loan companies, (iii)
investment companies, and (iv) infrastructure finance companies for regulatory compliance by
the Reserve Bank. Credit rating for deposit taking NBFCs was recommended by the Working
Group on Financial Companies in 1992. However, it was in January 1998 that the new regulatory
framework for NBFCs by the Reserve Bank made it mandatory for NBFCs to get rated in order
to protect the interest of the retail depositors.

With the increasing market orientation of the Indian economy, investors value a systematic
assessment of two types of risks, namely “business risk” arising out of the “open economy” and
linkages between money, capital and foreign exchange markets and “payments risk”. With a
view to protect small investors, who are the main targets for unlisted corporate debt in the form
of fixed deposits with companies, credit rating has been made mandatory.

India was perhaps the first amongst developing countries to set up a credit rating agency in
1988. The function of credit rating was institutionalised when RBI made it mandatory for the
issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating
compulsory for certain categories of debentures and debt instruments. In June 1994, RBI made it
mandatory for NBFCs to be rated. Credit rating is optional for Public Sector Undertakings
(PSUs) bonds and privately placed non-convertible debentures up to Rs. 50 million. Fixed
deposits of manufacturing companies also come under the purview of optional credit rating.

Credit ratings establish a link between risk and returns. They thus provide a yardstick against
which to measure the risk inherent in any instrument. An investor uses the ratings to assess the
risk level and compares the offered rate of return with his expected rate of return (for the
particular level of risk) to optimize his risk-return trade-off.

The risk perception of a common investor, in the absence of a credit rating system, largely
depends on his familiarity with the names of the promoters or the collaborators. It is not feasible
for the corporate issuer of a debt instrument to offer every prospective investor the opportunity to

79
undertake a detailed risk evaluation. It is very uncommon for different classes of investors to
arrive at some uniform conclusion as to the relative quality of the instrument. Moreover, they do
not possess the requisite skills of credit evaluation.

Thus, the need for credit rating in today’s world cannot be overemphasized. It is of great
assistance to the investors in making investment decisions. It also helps the issuers of the debt
instruments to price their issues correctly and to reach out to new investors. Regulators like
Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) use credit
rating to determine eligibility criteria for some instruments. For example, the RBI has stipulated
a minimum credit rating by an approved agency for issue of commercial paper. In general, credit
rating is expected to improve quality consciousness in the market and establish over a period of
time, a more meaningful relationship between the quality of debt and the yield from it. Credit
Rating is also a valuable input in establishing business relationships of various types. However,
credit rating by a rating agency is not a recommendation to purchase or sale of a security.

Investors usually follow security ratings while making investments. Ratings are considered to be
an objective evaluation of the probability that a borrower will default on a given security issue,
by the investors. Whenever a security issuer makes late payment, a default occurs. In case of
bonds, non-payment of either principal or interest or both may cause liquidation of a company. In
most of the cases, holders of bonds issued by a bankrupt company receive only a portion of the
amount invested by them or nothing at all.

Thus, credit rating is a professional opinion given after studying all available information at a
particular point of time. Such opinions may alsoprove wrong in the context of subsequent
events. Further, there is no private contract between an investor and a rating agency and the
investor is free to accept or reject the opinion of the agency. Thus, a rating agency cannot be
held responsible for any losses suffered by the investor taking investment decision on the basis
of its rating. Thus, credit rating is an investor service and a rating agency is expected to maintain
the highest possible level of analytical competence and integrity. In the long run, the credibility
of a rating agency has to be built, brick by brick, on the quality of its services provided,
continuous research undertaken and consistent efforts made.

80
 The increasing levels of default resulting from easy availability of finance, has led to the
growing importance of the credit rating. The other factors are:

1. The growth of information technology.

2. Globalisation of financial markets.

3. Increasing role of capital and money markets.

4. Lack of government safety measures.

5. The trend towards privatisation.

6. Securitisation of debt.

Borrowed Funds

Operations of NBFCs in India generally depend on borrowed funds. Borrowed funds are
necessary for different 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 scale
of operations or requirement of funds. In leasing decisions, the normal practice is to assure
borrowing for making comparisons in cash flows, bonds, commercial paper, bank borrowings,
inter-corporate deposits etc. Besides the public deposits there are different sources of borrowed
funds which are required for the efficient functioning of NBFCs. Those sources are:

1. Commercial Banks;

2. Commercial Finance Companies;

3. Loan from Financial Institutions;

4. Debentures;

81
 5. Insurance and Pension Funds;

6. Inter-Corporate Deposits;

7. Money Market.

Borrowed funds constitute an important source of financing for advances. Therefore the
researcher has proposed to studywhether borrowed funds aresignificantly related with the loans
and advances of NBFCs.

Hypothesis

When loans and advances increase, the long term liabilities are also increasebut the credit rating
agencies are restraining the NBFCs from raising public deposits. In such asituation how are the
NBFCs lending during the last 14 years. (To investigate this we apply the tool multiple
regression analysis).

H0 : There is no significant relationship between loans and advances

of NBFCs and long term liabilities of NBFCs.

H1 : There is a significant relationship between loans and advances

of NBFCs and long term liabilities of NBFCs.

Lending and Borrowing Patterns of NBFC after Implementation of Mandatory Rating

from Credit Rating Agencies

(Rs. in Crores)

82
 Loans
Banks
Year and Externa Debenture Public
Govt. and Others
s Advance l s Deposit
Fis.
s
30,117.0 7592.1 4900.6
2004 1773.2 287.22 1993.4 13571
0 4 6
2739.5 7582.8 7672.1
2005 20645.00 624.18 4001.78 9785
9 6 8
7017.2 8,337.9
2006 22742.00 2603.6 601.32 3348.82 8877.4
4 5
3040.5 8239.0 6851.1 6,459.4
2007 21912.00 670.26 3757.98
7 3 6 9
2008 20648.00 3353 670 9464 4180 6332 5,035

2009 32245.00 1570 695 8959 5352 7905 4,317

2010 27048.00 1579 623 6413 5919 6318 3,646

2011 29174.00 972 510 6954 6976 7632 3,926

2012 32196.00 643 613 9779 8442 5465 2,447

2013 38646.00 0 1201 14925 8667 7659 2,077

2014 53396.00 2319 1455 18995 13054 14753 2,042

2015 58011.00 1827 1464 24846 13173 14588 1,971

2016 71119.00 4710 757 31853 14973 11785 2,831

2017 78000.00 5900 0 35320 14300 14300 4,100

2018 84000.00 5500 0 40900 23800 11600 5,700

91,800.0
2019 4,399 0 34300 35800 12,800 7,100
0

83
Sources: Trends and Progress of Banking, RBI of several years (Others include CP -
Commercial Paper and ICD– Inter Corporate Deposits) The total borrowed fund for NBFCs has
increased from Rs. 30,117 crore in 2004 to Rs. 91,800crore in 2019 after the rating was
mademandatory for raising funds from the above different sources and so public deposits fellto
Rs. 7,100crore from Rs. 13,571 crores. The ultimate aim of the apex institution is to protect the
deposit holders from fraudulent financial institutions. But after the rating institutions’ rating,
debentures rosefrom Rs. 1993 crores in 2004 to Rs. 35,800crores in 2019, inter corporate
deposits and commercial paper grew from Rs. 4, 900 in 2004 to Rs. 12,800 crores. The central
bank’s policy is to channelize credit flow to the priority sector from banks through NBFCs from
Rs. 7592 crores to Rs. 40,900 crores. NBFCs are successful in rural and semi urban areas where
banks do not operate.

The formula used here is,

Loans and Advances (Y)=b(constant)+b(Government)+b(External)+ b(Banks and Financial

Institutions)+b(Debentures)+b(Others)+b(Public deposits)

Multiple Regression Result of Loans and Advances and Different Sources of Finance
Model Summaryb

Mod R R Adjust Std. Change Statistics

el Squa ed R Error of R F df df Sig.
re Square the Squar Chan 1 2 F
Estimate e ge Chan
Chan ge
ge
1 . .988 .979 3492.910 .988 111.0 6 8 .000
994 90 57
a

a. Predictors: (Constant), Public deposits, Government, External, Debentures, Banks and FIs,
Others include ICDs and CP.

84
b. Dependent Variable: Loans and Advances

ANOVAb

Model Sum of df Mean F Sig.

Squares Square
1 Regressio 8.130E9 6 1.355E9 111.057 .000a
n 97603412.610 8 12200426.57
6
Residual 14
8.227E9
Total
a. Predictors: (Constant), Public deposits, Government, External, Debentures, Banks and FIs,
Others include ICDs and CP.
b. Dependent Variable: Loans and Advances

Co-efficientsa

Model Unstandardized Standardize t Sig.

Coefficients d
Coefficients

B Std. Beta
Error
1 (Constant) 17189.950 5235.29 3.28 .011

Government 5 .043 3
.610 1.219 .501 .630
External -7.938 4.071 -.142 -1.950 .087
Banks and FIs .830 .342 .401 2.43 .041
2
Debentures .228
.923 .555 1.66 .135
Others .237 2
1.690 .614 2.75 .025
Public -.289
3
deposits -2.123 .417 -5.091 .001

85
a. Dependent Variable: Loans and Advances

At 5 per cent level of significance, t test shows the probabilistic significance as 0.00 which is
less than 0.05 (prescribed). Hence, the null hypothesis (H 0) is rejected and it may be concluded
that there is a significant relationship between loans and advances of NBFCs and the long term
liabilities of NBFCs

BANK CREDIT

Because of the adverse developments in the beginning of the nineties, the bank credit to this
sector has shown an increasing trend, but the pace of increase in the bank’s total exposure to this
sector was slow. NBFCs had to raise funds at relatively higher cost and they had to compete with
banks in the matter of yield and instilling a sense of safety in their depositors.

The contribution of the sector was also acknowledged by a parliamentary standing committee.
NBFCs have been instrumental in the development of various sectors ranging from agriculture,
automobile and transportation to small enterprises. The drastic measures dealt a blow to the
complementary and supplementary relationships that has emerged over a period of time,
courtesy the RBI’s policy to channelize the credit flow to the priority sector from banks through
NBFCs. All rural and semi-urban areas where banks do not operate are likely to suffer.

Priority sector borrowers – artisans, craftsmen, retail traders, farmers and tiny enterprises – will
be hurt. The move will also impact the operations of NBFCs. Fund flow to these entities of
hitherto priority sector loans will dry up. The cost of funds would go up for borrowers (even
those falling within the definition of priority sector borrower) and business volumes will shrink.

These articulated views need to be taken on the decision that affects both the borrowers and the
systemically important intermediary. Competent intermediaries play a very important role in the
financial distribution. To have an efficient credit delivery system, controlling and creating an
enabling situation is the right approach rather than eliminating intermediaries’ altogether. It is
ironical that, on the one hand, they are struggling to reach to the millions of financially excluded
citizens and on the other; we are putting an end to an already existing credit delivery system
developed by NBFCs.

86
ASSET LIABILITY MANAGEMENT (ALM)

The core function of NBFCs is accepting deposits as a liability and converting them into assets
in the form of loans, etc. NBFCs have been providing large loans on the basis of small deposits
collected from the people. Indian financial markets are going through a period of liberalization
over the last few years with growing integration of domestic market with the external market.
With growing needs for credit and for the expansion of financial markets, NBFCs have started
entering into the market to fill the credit gap of both the corporate sector and the retail segment.
The operations of NBFCs have become very complex and are associated with different risks.
They require strategic management expertise to manage these risks.

After April 1, 2003, NBFCs are operating in a fairly deregulated environment andare able to fix
the rate of interest on different deposit schemes subject to ceiling of maximum rate of interest
and maximum period of deposits. The return from the investments of NBFCs in government
securities are directly related to market risk. NBFCs are now facing acute competition with each
other and managements of NBFCs are trying to maintain a good balance between the assets and
liabilities for profitability and long-tern viability. Careless liquidity management of NBFCs can
put their earnings and goodwill at great risk. The hard competition can create pressure on them
for structured and comprehensive liquidity management on a permanent basis.

The managements of NBCSs have to formulate their business decisions on a dynamic

and integrated risk management system because they encounter several risks which they have
face in their normal course of business operations. These risks are stated below:
· Liquidity risk

· Credit risk

· Interest rate risk

· Operation price risk

·
Commodity price risk

Therefore, it is very important for NBFCs to introduce an

87
effective risk management system that can efficiently manage the risks relating particularly to
the interest rate and the liquidity.

According to RBI guidelines, NBFCs are required to manage their risks in a sophisticated way by
adopting more comprehensive AssetLiability Management (ALM) System. Comprehensive and
dynamic framework is necessary for measuring, monitoring and managing the liquidity and
interest risk of major operators in the financial system. It relates to the assessment of various
types of risks and altering the portfolio of asset-liability in a dynamic way in order to manage
risks. Liquidity risk management and interest rate risk management are two important limbs of
the ALM system. The basic objective of ALM system is to assess risks inherent thereon and
suggest measures to manage them in order to implement strategic tools for NBFCs.

ANALYSIS OF IMPACT OF FINANCIAL SECTOR REFORMS AND GLOBAL

FINANCIAL CRISIS ON NBFCs USING MULTIPLE REGRESSION ANALYSIS

Despite the impressive progress made by the NBFCs in the first half of nineties, followed by the
reform measures, certain rigidities like entry norms, prudential norms, deposit acceptance rules,
etc., framed by the RBI made it difficult to bring out the real and position effect of financial
sector reforms on the working of NBFCs. Many committees and experts made recommendations
to improve the growth of NBFCs during the second half of nineties, but all of them failed due to
the new regulatory directions of 1998. Later the NBFC sector came under pressure during the
2008 crisis due to the funding inter linkages among NBFCs, mutual funds and commercial banks.
NBFCs-ND-SI relied significantly on short term funding sources such as debentures (largely
non-convertible short term debentures), and CPs, which constituted around 56.8 percent of the
total borrowings of NBFCs-ND-SI as on September 30, 2008. These funds were used to finance
assets which were reportedly largely a mix of long term assets, including hire purchase and lease
assets, long term investments, investment in real estate by few companies, and loans and
advances. These mismatches were created mainly as a business strategy for gaining from the
higher spreads. However, there were no fall back alternatives in cases of potential liquidity
constraints. The ripple effect of the turmoil in American and European markets led to liquidity
issues and heavy redemption pressure on the mutual funds in India, as several investors,
especially institutional investors, started pulling out their investments in liquid and money

88
market funds. Mutual funds being the major subscribers to CPs and debentures issued by NBFCs,
the redemption pressure on MFs translated into funding issues for NBFCs, as they found raising
fresh liabilities or rolling over of the maturing liabilities very difficult. Drying up of these
sources of funds along with the fact that banks were increasingly becoming risk averse,
heightened their funding problems, exacerbating the liquidity tightness.

The government and the RBI, both in consultation with each other, have been working together
laying down policies towards the improvement of NBFCs in term of their number, mobilization
of deposits, and various other aspects.

Though the policies from time to time laid and implemented by them were considered as a
source of control to many players in the industry, they have brought one positive effect on the
growth of NBFCs which may be critically examined with the help of a Multiple Regression
technique. This technique is used to determine how the NBFCs were influenced by the reform
measures, especially during the post reform period i.e., 1992-93 to 1996-97 since the data
relating to the period after 1996-97 are not strictly comparable with the earlier periods.

Another reason for considering of data till the year 1997 is the new regulatory framework
introduced new procedures with respect to certain issues like changes in the composition of
deposits, compulsory registration giving them time to get registered, which changed entire
scenario of NBFCs. However the post-reform period 1998-99 to 2008-09 and the global
financial crisis 2009-10 to 2012-13 is not considered for the application of Multiple Regression
setting, however, for general study, it has been included. Before presenting the result of Multiple
Regression Analysis, it is considered necessary to understand the technique in theoretical terms
and how significant it is in the analysis of changes in the variables.

Impact of Financial Sector Reforms and Global Financial Crisis

Simple ratio and percentage methods have been employed to examine the trend and pattern of
selected NBFCs in India. Besides, the following multiple linear regression equation is employed
to examine the impact of financial sector reforms on selected indicators of the NBFCs in India.
The Multiple Regression Equation,

89
Y = B1 + B2+ B3D+U

Where, Y = selected indicator

T = time trend

D = dummy variable,

i.e., ‘1’ for pre-reform period 1980-81 to 1997-98

‘2’ for post-reform period 1998-99 to 2008-09

‘3’ for after global crisis 2009-10 to 2018-19

B1, B2 and B3 = parameters to be estimated and

U= random error term

The null hypothesis (H0) of the study is: No difference exists between pre-reform period, post-
reform period and global financial crisis and its impact on number of companies reported and
registered, quantum of deposits mobilized, loans and advances, investments provided by NBFCs.

Alternate hypothesis (Ha) of the study is :Difference exists between pre-reform period, post-
reform period and the global financial crisis and its impact on number of companies reported and
registered, quantum of deposits mobilized, loans and advances, investments provided by NBFCs.
The indicators of NBFCs used to analyse the impact are:

1. The number of NBFCs

2. The quantum of deposits

90
 3. The loans and investments

Trend in Terms of Number of NBFCs in India

NBFCs Registered with Reported %of Reported to

Year Dummy
RoC NBFCs Regd
1980-81 7,063 3,443 1 48.74
1981-82 8,974 2,670 1 29.75
1982-83 11,100 2,799 1 25.21
1983-84 13,519 4,240 1 31.36
1984-85 15,358 4,998 1 32.54
1985-86 17,358 6,061 1 34.91
1986-87 19,618 7,113 1 36.25
1987-88 19,311 7,598 1 39.34
1988-89 21,106 7,615 1 36.07
1989-90 24,009 7,784 1 32.42
1990-91 33,520 7,758 1 23.14
1991-92 35,832 8,923 1 24.9
1992-93 43,835 8,634 1 17.63
1993-94 48,969 9,052 1 18.48
1994-95 55,995 10,845 1 19.36
1995-96 51,929 10,194 1 19.63
1996-97 50,550 10,122 2 20.02
1997-98 7,555 1,420 2 18.79
1998-99 7,231 1,547 2 21.39
1999-00 8,451 1,005 2 11.89
2000-01 13,815 981 2 7.1
2001-02 14,077 745 2 5.29
2002-03 13,849 728 2 5.28
2003-04 13,764 604 2 4.38
2004-05 13,261 507 2 3.82

91
2005-06 13,014 428 2 3.28
2006-07 12,968 401 2 3.09
2007-08 12,809 364 2 2.84
2008-09 12,740 336 3 2.63
2009-10 12,630 308 3 2.43
2010-11 12,409 297 3 2.39
2011-12 12,385 271 3 2.18
2012-13 12,225 254 3 2.07
2013-14 12,123 248 3 2.03
2014-15 11,994 234 3 1.99
2015-16 11,852 229 3 1.56
2016-17 11,223 204 3 1.23
2017-18 10,568 189 3 1.10
2018-19 9,659 170 3 1.00
Source: RBI Bulletin, Various issues

The estimated results of the multiple linear regression analysed to examine the impact of the
financial sector reforms on the number of NBFCs are presented below.

Model R R Square Adjusted R Square Std. Error of the

Estimate
1 0.840a 0.705 0.686 2102.92542

Regression Table –Number of NBFCs

Model Summary

a. Predictors: (Constant), DUMMYVARIABLE, YEAR

ANOVAb

Model Sum of df Mean F Sig.

Squares Square
Regressio 3.175E8 2 1.588E8 35.903 .000a

92
 n 1 Residual 1.327E8 30
Total 4.502E8 32
4422295.323

a. Predictors: (Constant), DUMMYVARIABLE, YEAR

b. Dependent Variable: NO OF REPORTED COS

Co-efficientsa

Model Unstandardized Standardize t Sig

Coefficients d .
Coefficient
s
B Std. Beta
Error
1 (Constant) - 171847.61 - .
444150.99 3 2.585 015
YEAR .593
6
DUMMYVARI 229.886 86.883 2.646 .
-1.329
A 013
- 1131.651 - .
BLE
6716.259 5.935 000

a. Dependent Variable: NO OF REPORTED COS

From the Multiple Regression Model

Total number of NBFCs= -444150.996+229.886(T)-6716.259(D)

Adjusted R2 =0.686R2= 0.705 F= 35.903 SE = 2102.92542

At 5 per cent level of significance, t test shows the probabilistic significance as 0.00 which is
less than 0.05 (prescribed). Hence, thenull hypothesis (H 0) is rejected. Hence, it may be
concluded that a significant difference exists in the number of reported NBFCs between the pre-

93
reform period, post-reform period and global financial crisis in the number of reported NBFCs
which submitted reports to the RBI.

An analysis of the result reveals the following:

There is a downfall in the percentage of the number of reported NBFCs and total NBFCs. From
49 per cent in 1980-81 to 25 per cent in 1991-92 to 20 per cent in 1996-97, it further moved
down to 2.07 per cent in 2012-13. This shows that, in spite of all the reform measures
introduced, though the total number of NBFCs was increasing, the number of NBFCs reporting
to the RBI declined. The total number of NBFCs which submit reports to the RBI, it is not even
half of the total number. v During the midyear of nineties, the growth in the number of NBFCs
registered with RoC did not coincide with the RBI reported NBFCs. However, the trend changed
due to the liberalization measures announced for those reporting NBFCs

IMPACT ON THE DEPOSIT OF NBFCs

Deposit mobilization is one of the most important indicators of an efficient working of NBFCs.
There are two types of deposits: (a) Regulated Deposit (b) Exempted Deposits. The extent of
growth of deposits of NBFCs is thus a measure of how much funds the NBFCs are able to
mobilize for investment in the economy.

DEPOLOYMENT OF CREDIT – INVESTMENTS AND LOANS AND ADVANCES

Investments of NBFC speak of their returns, financial soundness and risk profile. Credit of
NBFCs is an indicator of buoyancy of the Nonbanking system. Following the liberalization
measures, NBFCs enjoyed earning regular income by investing wisely. However, certain
controls over their lending activities restricted their operations. Such restrictions were laid by the
RBI following the recommendations of the Shah Committee which concentrated on the asset

94
profile of NBFCs with certain objective like avoiding funds lockup, reducing the burden of
NPAs and avoiding the situation of mismatching between funds borrowed and funds lent.

CRISIS IN THE NBFC SECTOR

 INFRASTRUCTURE LEASING AND FINANCE COMPANY (ILFS)

It is investment company and it serves as the holding company of the Infrastructure
Leasing and Finance Company. Business operations of this company have been working
in many expertise sectors such as infrastructure, finance, and social and environmental
services.
The company has been working very well till September 2018, the IL&FS had
been defaulted due to it could not be met the debt obligations amounting to Rs.3,800
crores which resulted in the Credit squeezing of the company. The Government-owned
firms have 40% of IL&FS company which is the private entity and Government had to
ensure the solvency of IL&FS in order to maintain.
Due to this default, NBFC sector has been affected adversely and facing issues of
credit degrading, over-leveraging, and misadventures by some large entities. Srinivas, of
the officials said that,” imminent crisis has been brought in the NBFC sector. This sector
is facing issues of Credit degrading, over-leveraging, excessive concentration, largest
mismatch between assets and liabilities, which is correct and perfect recipe for the
disaster in this sector.” In May,2019, IL&FS faced the debt obligation of Rs.94000
crores. This defaults have been significant impact on India’s credit market. It’s
borrowings from banks are around Rs.57000 crore which is made up between 0.5% and
0.7% of banking loan. This defaults have created more trouble for Indian lenders and
already have created huge toxic loan pile.
As Government-owned firms have major stockholding in the IL&FS, IL&FS
group has been controlled by the government whose 358 subsidiaries owe more than
Rs.94000 crores to banks and other financial institutions. Government had appointed six-
members board under Uday Kotak.

 DEEWAN HOUSING FINANCE LIMITED

95
From September 2018, Housing Finance Companies has been facing a lot of financial
problem. This crisis started from the default of the Major player in the housing finance
company i.e. Infrastructure Leasing and Finance Services (IL&FS). IL&FS could not
pay-off its debt obligations which was nearly RS.94000 crores. It was due to IL&FS
could not pay-off its short term period debts obligations like Commercial papers,
Convertible debentures. This crisis affected another major player in Housing Finance
Companies i.e. Deewan Housing Finance Limited (DHFL). Due to this, share of the
DHFL which was trading at Rs.630 it drops directly 6825 BPS that is Rs.200.
Commercial Banks stopped lending loans to Non-Banking Financial Companies and
Housing Finance Companies due to this default in IL&FS. This also brought liquidity
crises around the all Housing Finance Companies.

Major reason for the Deewan Housing Finance crisis is that, promoters of the company
had sold shares of Rs.31000 crores illegally which has been claimed by the Cobra-post.
Losers in this entire DHFL crises were public sectors banks that are State bank of India
and Bank of Baroda.DHFL, this housing finance company is the biggest player, as a
responsible corporate has met its all debt obligations to lenders and paid back to them in
excess of Rs.17000 crores. It has strong corporate governance regime and it has been
received as AAA credit rating from lending credit agencies. All financials is checked by
the global auditors

96
CHAPTER V : CAMEL MODEL ANALYSIS OF
LEADING NBFC COMPANIES OF INDIA

97
 CHAPTER V

CAMEL MODEL ANALYSIS OF LEADING NBFC

COMPANIES IN INDIA

CAMEL is a system of rating for on-site examinations of banks. Officially known as the Uniform
Financial Institutions Rating System (UFIRS), CAMEL is a supervisory rating system adopted by the
Federal Financial Institutions Examination Council (FFIEC) on 1979. CAMEL stipulates the evaluation
of financial institutions on the basis of five critical dimensions which are: Capital adequacy, Asset
quality, Management, Earnings and Liquidity. Sensitivity to market risks, a sixth dimension was added in
1997 and the acronym was changed to CAMELS (Opez, 1999). These components are used to reflect
financial performance, operating soundness and regulatory compliance of financial institutions. They are
defined as follows (FEDERAL REGISTER, 1997): v Capital adequacy is rated upon different factors
inter alia: The level and quality of capital and the overall financial condition of the institution, the ability
of management to address emerging needs for additional capital, the nature, trend, and volume of problem
assets, and the adequacy of allowances for loan and lease losses and other valuation reserves, balance
sheet composition, including the nature and amount of intangible assets, market risk, concentration risk,
and risks associated with nontraditional activities, risk exposure represented by off balance sheet
activities, the quality and strength of earnings, and the reasonableness of dividends…
v The ratings of a financial institutions’ Asset quality is based upon, but not limited to, an
assessment of the following evaluation factors: the adequacy of underwriting
standards,soundness of credit administration practices and appropriateness of risk identification
practices, the level, distribution, severity, and trend of problem, classified, nonaccrual,
restructured, delinquent, and nonperforming assets for both on and off balance sheet
transactions, the adequacy of the allowances for loan and lease losses and other asset valuation

98
 reserves, the credit risk arising from or reduced by off-balance sheet transactions, such as
unfunded commitments, credit derivatives, commercial and standby letters of credit, and lines of
credit, the diversification and quality of the loan and investment portfolios.
v The Management is rated upon different factors inter alia the level and quality of oversight and
support of all institution activities by the board of directors and management, the ability of the
board of directors and management, in their respective roles, to plan for, and respond to, risks
that may arise from changing business conditions or the initiation of new activities or products,
the adequacy of, and conformance with, appropriate internal policies and controls addressing the
operations and risks of significant activities, the accuracy, timeliness, and effectiveness of
management information and risk monitoring systems appropriate for the institution's size,
complexity, and risk profile, the adequacy of audits and internal controls to: promote effective
operations and reliable financial and regulatory reporting; safeguard assets; and regular
compliance with laws, regulations, and internal policies.

v Financial institution's earnings is rated upon different factors inter alia the level of earnings,
including trends and stability, the ability to provide for adequate capital through retained
earnings, the quality and sources of earnings, the level of expenses in relation to operations, the
adequacy of the budgeting systems, forecasting processes, and management information
systems in general. v Liquidity is rated based upon inter alia with these factors: the adequacy of
liquidity sources compared to present and future needs and the ability of the institution to meet
liquidity needs without adversely affecting its operations or condition, the availability of assets
readily convertible to cash without undue loss, access to money markets and other sources of
funding, the level of diversification of funding sources, both on- and off-balance sheet, the
degree of reliance on short-term and volatile sources of funds, including borrowings and
brokered deposits to fund longer term assetsand the trend and stability of deposits.

v Sensitivity to market risk is rated based upon, but not limited to, an assessment of the following
evaluation factors: the sensitivity of the financial institution's earnings or the economic value of
its capital to adverse changes in interest rates, foreign exchange rates, commodity prices, or
equity prices, the ability of management to identify, measure, monitor, and control, exposure to
market risk given the institution's size, complexity, and risk profile and the nature and
complexity of interest rate risk exposure arising from non-trading positions.

99
Each of these six components is rated on a scale of 1 (best) to 5 (worst). A composite rating is considered
as the indicator of an NBFC’s current financial condition and is ranges between 1 (best) and 5 (worst).
Rating 1 indicates that the financial institution is sound, exhibit strong performance and risk management
practices. Rating 2 indicates that the financial institution is fundamentally sound and only moderate
weaknesses are present. Rating 3 indicates that the financial institution exhibit a degree of supervisory
concern in one or more component. Rating 4 indicates that the financial institution is unsafe and has
unsound practices with serious financial problems while rating 5 means that the financial institution is
extremely and critically unsound and inadequate risk management practices. Thus, Banks with ratings of
1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3, 4, or 5
present moderate to extreme degrees of supervisory concern (Padmalatha, 2011). The CAMEL model has
been applied here to evaluate the performance of two leading CNX-NIFTY
JUNIORINDEX companies (National Stock Exchange) – Mahindra and Mahindra Financial Services and
Sri Ram Transport Finance Company over the past five years.
PROFILE OF THE SELECTED TWO COMPANIES

(i) MAHINDRA AND MAHINDRA FINANCIAL SERVICES

Two decades ago, Mahindra and Mahindra Financial Services Limited (MMFSL) commenced its journey
in the rural non-banking finance industry. And with that was born a vision to transform rural and semi-
urban India into a self-reliant, flourishing landscape. Since then, the company has come a long way,
empowering millions of ambitious individuals with personalised finance for a wide range of vehicles,
home development requirements and many other diverse endeavours – all to help them live their dreams
and rise in life.

Mahindra Financeis guided by a firm belief in people, their dreams, and their potential to achieve those
dreams. Hence, our socially inclusive business model facilitates loans to customers based not on their
current financial status, but their future earning capacity. This philosophy has instilled a sense of
confidence in the minds of rural and semi-urban India – a confidence that allows them to believe that no
dream is too big. Today, as one of the leading non-banking finance companies, it is proud to have touched
over 3 million lives.

During the course of its journey, apart from emerging as the top tractor financer in India, it has constantly
strived towards developing skill sets of the local population. Which is why, it provides employment to
over 16,000 people in over 700 branches across India. This not only ensures equal growth opportunities

100
for all, but also enables the company to serve the customers better through local understanding and
expertise.

So be it a humble farmer or a budding entrepreneur –It is committed to empower every individual with
resources to help their dreams see the light of day.

What followed was a series of events that helped it grow from strength to strength.

The history of Mahindra Finance has been one of continuous ascent where their effort to empower their
customer has been a constant element. A strong set of values, an evolved lineage and a group of highly
motivated individuals are whatit started with.

Mahindra Finance is led by an ensemble of highly motivated visionaries who bring years of experience
and expertise to the table. They guide, inspire and propel the company to push the boundaries and move
towards a collective vision of empowering every life with resources to put their ambitions on the map.

The Mahindra group focuses on enabling people to rise through solutions that power mobility, drive rural
prosperity, enhance urban lifestyles and increase business efficiency.

A USD 16.7 billion multinational group based in Mumbai, India, Mahindra employs more than 180,000
people in over 100 countries. Mahindra operates in the key industries that drive economic growth,
enjoying a leadership position in tractors, utility vehicles, after-market, and information technology and
vacation ownership. In addition, Mahindra enjoys a strong presence in the agribusiness, aerospace,
components, consulting services, defence, energy, financial services, industrial equipment, logistics, real
estate, retail, steel, commercial vehicles and two wheeler industries.

In 2012, Mahindra featured on the Forbes Global 2000 list, a listing of the biggest and most powerful
listed companies in the world. In 2013, the Mahindra group received the FINANCIAL TIMES 'Boldness
in Business' Award in the 'Emerging Markets' category.

Two decades ago, it started with a mission to empower every individual who has an ambition and is
determined to achieve it. On the way, the company met many such inspired souls who did not have much
to show, but had a clear vision of their path ahead. Today, the company feels immensely proud to have
touched over three million such lives by helping them reach closer to their dreams.

And it’s truly humbling to hear back from them, to be appreciated, and to know that the company could
be part of their success story.

101
The company vision has always been to make a positive difference to as many lives as possible. It is what
inspires the company to expand like family and deliver more value to the customers through superior
services and expertise. Here’s a bit about two such successful ventures – Mahindra Insurance Brokers Ltd
and Mahindra Rural Housing Finance Ltd., whom it proud to have as a part of our ever-growing family.

As a socially responsible citizen, the company has undertaken Corporate Social Responsibility (CSR)
activities since 2006. Through the activities the company constantly touch the lives of the underprivileged
communities across the country, in and around the areas of operation. The company believes in
contributing to the society and all employees across all the regions participate in the organisation's
Corporate Social Responsibility (CSR) activities with full rigour and passion. The Board of Directors at
its Meeting held on 19th March, 2014 has approved the revised CSR Policy to align it in accordance with
the provisions of Companies Act, 2013 and the Rules framed there under.

At Mahindra Finance, it feels a strong sense of responsibility towards the environment in which the
company thrive. Hence, the very essence of our business model is based on a vision to enable and
augment Sustainable Development. With an active sustainability council comprising the senior
management, they work with great dedication to ensure that the principles of sustainability are deeply
embedded in the company's working and planning systems. The companyalso aim to reduce the
ecological impact of the operations and to re-strategise businesses in order to achieve sustainable growth.

Being a Triple Bottom Line company, it greatly focuses on the below three essential pillars

People : Ensuring fair and beneficial business practices with respect to

labour, the community and the region in which we conduct our operations.

Planet : Sustainable environmental practices to maintain the natural

balance and harmony of elements and resources.

Profit : It is the economic yield shared by all the stakeholders involved Sustainability

The company commitment is encapsulated in two simple words: ‘Transforming lives’. This is what the
company strive towards achieving every day for a wide cross-section of customers across semi-urban and
rural India. They are acting as a powerful agent of change in their lives.

Since inception, Mahindra Finance has singularly focused on elevating the quality of lives of people with
a deep sensitivity towards local cultures and people’s desire for a better live.The company forward focus

102
to transform lives continues to gather momentum, despite an evolving socioeconomic landscape.The
company sustainability goal is a wide framework for consistent business growth, while taking into
consideration the aspirations of all stakeholders.

(ii) Shriram Transport Finance Company

The company is a part of the "SHRIRAM" conglomerate which has significant presence in financial
services viz., commercial vehicle financing business, consumer finance, life and general insurance, stock
broking, chit funds and distribution of financial products such as life and general insurance products and
units of mutual funds. Apart from these financial services, the group is also present in non-financial
services business such as property development, engineering projects and information technology.

The Company was incorporated in the year 1979 and is registered as a deposit taking NBFC with Reserve
Bank of India under section 45IA of the Reserve Bank of India Act, 1934.

STFC decided to finance the much neglected Small Truck Owner. Shriram understood the power of
'Aspiration' much before marketing based on 'Aspiration' became fashionable. Shriram started lending to
the small truck owner to buy new trucks. But the company found a mismatch between the aspiration and
ability. The truck operator was honest but the Equity at his command was not sufficient to support the
credit levels required to buy a new truck.

The company did not have the heart to send the truck operator back empty handed; the company decided
to fund pre-owned trucks. This was the most momentous decision that they made. What followed was
sheer magic.

From driver to owner, even if only of a pre-owned truck and from pre-owned truck to the new truck, the
company have been with him in his journey of prosperity as he has been partner in our road to success
and leadership.

At Shriram, credit-worthiness of the Small Truck Owner has always been an article of faith. This faith has
guided the journey from our pioneering days in financing Small Truck Owners to the present day
leadership. Today the company are not only the leader in Truck Finance; the company also India's largest
Asset Based Non-Banking Finance Company.

103
The inability of the economists to capture data relating to the economic activity of the informal sector has
resulted in its neglect at the policy-making levels in the government.

The distribution of Truck Ownership being scattered among a large number of individuals has resulted in
this very important group being missed by the institutional radar.

It is estimated that 80% of trucks in the country are in the hands of individuals.

STFC was set up with the objective of offering the common man a host of products and services that
would be helpful to him on his path to prosperity. Over the decades, the company has achieved significant
success in reaching this objective, and has created a tremendous sense of loyalty amongst its customers.

Company journey has seen it making several innovations while the company stood at the very edge of
organized finance. The banks and institutions were guided by the economists' vision; the small truck
owner who always fell on their blind side was given the miss.

With a track record of about 30 years in this business, they were among the leading organized finance
provider for the commercial vehicle industry with a focus to provide various credit facilities to STOs.
Company has also added passenger commercial vehicles, multi-utility vehicles, three wheelers, tractors
and construction equipment to their portfolio, making a diversified, end to end provider of finance
solutions to the domestic road logistics industry. Besides financing commercial vehicles (both new and
preowned) company also extend finance for tyres, engine replacement and working capital. Company also
provides ancillary services such as freight bill discounting besides offerings co-branded credit cards.

Company pan-India presence through their widespread network of branches has helped in our overall
growth over the years. As on Sep’30, 2012 company had 528 branches and tie up over 500 private
financiers across the country. As on Sep 30, 2012 companies total employee strength was 14159,
including more than 8212 product executives and credit executives who are colloquially referred to as our
field force.

The company has demonstrated consistent growth in their business and profitability. Company assets
under management have grown by a Compounded Annual Growth Rate (CAGR) of 19.77% from Rs.
195.40 crores in FY 2008 to Rs. 40220 crores in FY 2012. Company total income and profit after tax
increased from Rs. 2507 crores and Rs. 389 crores in FY 2008 to Rs. 5893 crores and Rs. 1257 crores in
FY 2012 at a CAGR of 23.82% and 34.02%, respectively.

104
Today the company has approximately 20-25% market share in pre-owned and approximately 7-8%
market share in new truck financing, with more than 850000 customers.

STFC wins Best NBFC in the "Asset Backed Lending" category at the CNBC TV18 Best Bank and
Financial Institution Awards for FY12 on 17/10/2012.

STFC wins ICAI Awards for Financial Reporting 19/1/2012.

ANALYSIS OFTWO COMPANYS

Various ratios measuring under capital adequacy, asset quality, management efficiency, earnings quality
and liquidity tested under the following hypothesis.

H0 : There is no significant difference between Mahindra and Mahindra Financial Services (MMFS) and
Shriram Transport Finance Company (STFC) in CAMEL Model parameters.

H1 : There is a significant difference between Mahindra and Mahindra Financial Services (MMFS) and
Shriram Transport Finance Company (STFC) CAMEL Model parameters.

Capital Adequacy

It is important for an NBFC to maintain depositors’ confidence and preventing the NBFC from going
bankrupt. It reflects the overall financial condition of NBFCs and also the ability of management to meet
the need of additional capital. The following ratios measure capital adequacy

Capital Adequacy Ratio (CAR)

The capital adequacy ratio is developed to ensure that NBFCs can absorb a reasonable level of losses
occurred due to operational losses and determine the capacity of the NBFC in meeting the losses. The
higher the ratio, the more will be the protection of investors. The NBFCs are required to maintain the
capital adequacy ratio (CAR)as specified by RBI from time to time. As per the latest RBI norms, the
NBFCs should have a CAR of 15 per cent.

Capital Adequacy Ratio of Two Companies

CAR 2015 2016 2017 2018 2019

105
MMFS 18.5 20.3 18 19.7 18

STFC 22.9 24.9 22.3 20.74 23.39

Capital Adequacy Ratios of Two Companies

50 24.9
22.9 22.3 20.74 23.39

40

30

20.3 19.7
18.5 18 18
20

10

0
2015 2016 2017 2018 2019

Year STFC MMFS

Debt-Equity Ratio (D/E)

This ratio indicates the degree of leverage of an NBFC. It indicates how much of the NBFC business is
financed through debt and how much through equity. It is the proportion of total outside liability to net
worth. Higher ratio indicates less protection for the creditors and depositors in the financial system.

Debt Equity Ratios of Two Companies

D/E RATIO 2015 2016 2017 2018 2019

MMFS 3.74 3.89 3.64 3.21 3.56

106
STFC 4.81 4.05 2.96 3.22 3.11

Debt Equity Ratios of Two Companies

5
4.81
4.05
4 3.64
3.74 3.22 3.56
3.89
3 3.11
3.21
2.96

0
2015 2016 2017 2018 2019
MMFS STFC
Year

Advance to Assets Ratio (Adv/Ast)

This is the ratio that indicates an NBFC’s aggressiveness in lending which ultimately results in better
profitability. Higher ratio of advances/ deposits including receivables (assets) is preferred to a lower one.

Advance to Assets Ratio of Two Companies

ADV/AS 2015 2016 2017 2018 2019

107
 MMFS 94.09 91.79 94.6 95.99 95.68

STFC 76.01 76.83 73.92 77.81 79.86

Advance to Assets Ratios of Two Companies

120
94.09 94.6 95.99 95.68
100 91.79

80

76.83 77.81 79.86

76.01 73.92
60

40

20

0
2015 2016 2017 2018 2019

Year MMFS STFC

Government Securities to Total Investments (Gsec/Inv)

It is an important indicator showing the risk taking ability of the NBFC. It is an NBFC’s strategy
to have high profits, high risk or low profits, low risk. It also gives a view as to the availability of
alternative investment opportunities. Various ratios measuring capital adequacy depicted in
Table, and discussed below:

Government Securities to Total Investment of Two Companies

GS/TI 2015 2016 2017 2018 2019

108
 MMFS 20.60% 13.87% 29.30% 43% 43.59%
STFC 11% 4.60% 5.50% 6.61% 18.35%

Government Securities to Total Investment of Two Companies

50.00% 43% 43.59%

40.00%
29.30%
30.00%
20.60%
20.00% 13.87%
18.35%
10.00%
11%
0.00% 5.50% 6.61%
4.60%
2015 2016 2017 2018 2019
Year MMFS STFC

Test for Capital Adequacy Ratios of Two Companies

NBFC Mean Sig.
Ratio Mean S.D. t-value
Name Diff. value
MMFS 18.9 1.04642

CAR -3.946 -5.252 0.006

STFC 22.84 1.52078
MMFS 3.6 0.2543

D/E -0.022 -0.073 0.946

STFC 3.63 0.78361
MMFS 86.44 9.81017

Adv/Assets 9.556 1.837 0.14

STFC 76.88 2.19466

109
 MMFS 31.15 12.48622

GS /TI 21.944 4.723 0.009

STFC 9.21 5.66833
It is clear from Table that STFC is highly successful in CAR position with an average CAR of 22.84
when comparing with MMFS. The mean difference between MMFS and STFC is -3.95, the t-value for
between the NBFCs is-5.252 with p-value 0.006. Therefore the null hypothesis is rejected i.e. the mean
difference is not significant and we conclude that STFC outperformed MMFS in the position of CAR
during the study period.

The mean debt equity ratio of MMFS and STFC are 3.6, 3.63 respectively. The mean difference is -0.02;
with ‘t’ value -0.073 and ‘p’-value 0.946 therefore the null hypothesis is accepted i.e. the mean difference
is significant. So it is concluded that MMFS has outperformed over the STFC in the study period. In
terms of advances / assets, MMFS has generated more advances out of its available resources when
compared to STFC. The mean difference is9.56 with ‘t’ value two NBFCs is 1.837 and ‘p’ value is 0.14
i.e. and there is significant difference between the two sample NBFCs, and with respect to government
securities to investments, MMFS has performed better than that of STFC.

Assets Quality

The quality of assets is an important parameter to gauge the strength of NBFC. The prime motto behind
measuring the assets quality is to ascertain the component of non-performing assets as a percentage of the
total assets. This indicates what types of advances the NBFC has made to generate interest income. The
ratios necessary to assess the assets quality are:

Net NPAs to Total Assets (NNPAs/TA)

This ratio discloses the efficiency of the NBFC in assessing the credit risk and, to an extent, recovering
the debts. It is arrived at by dividing the net non-performing assets by total assets.

Net Non-Performing Assets to Total Assets Ratios of Two Companies

NNPA/TA 2010 2011 2012 2013 2014

MMFS 0.9 0.6 0.65 1.01 1.81

110
 STFC 0.7 0.4 0.4 0.8 0.8

Net Non-Performing Assets to Total Assets Ratios

of Two Companies

2 1.81

1.6

1.2 1.01
0.9

0.8 0.6 0.65

0.8 0.8
0.7
0.4
0.4 0.4
0
2015 2016 2017 2018 2019

Year MMFS STFC

Net NPAs to Net Advances (NNPAs/NA)

It is the most standard measure of assets quality measuring the net non-performing assets as a percentage
to net advances. Net nonperforming assets are gross non-performing assets minus net of provisions on
non-performing assets and interest in suspense account.

Net Non-Performing Assets to Net Advances Ratios of Two Companies

NNPA/NA 2015 2016 2017 2018 2019

MMFS 0.90 0.60 0.70 1.00 1.00

STFC 0.61 0.31 0.37 0.70 0.77

111
 Net Non-Performing Assets to Net Advances Ratios of Two Companies

1.2
1 1
1 0.9

0.8 0.7
0.6
0.77
0.6 0.7
0.61
0.4

0.37
0.2 0.31

0
2015 2016 2017 2018 2019
Year MMFS STFC

Total Investments to Total Assets (TI/TA)

It indicates the extent of deployment of assets in investment as against advances. This ratio is used as a
tool to measure the percentage of total assets locked up in investments, which, by conventional definition,
does not form a part of the core income of a NBFC.

Various ratios measuring asset quality depicted in Table, and discussed below;

Total Investments to Total Assets Ratios of Two Companies

TI/TA 2015 2016 2017 2018 2019

MMFS 2.375935 4.907938 2.707679 2.200638 2.744849

STFC 6.887697 11.56043 11.07957 7.960414 5.536256

112
 Total Investments to Total Assets Ratios of Two Companies

14
11.56043
12 11.07957

10
7.960414
8 6.887697
5.536256
6

4
4.907938
2
2.375935 2.707679 2.744849
2.200638
0
2015 2016 2017 2018 2019
MMFS STFC
Year
t Test for Asset Quality Ratios of Two Companies
NBFC
Ratio Mean S.D Mean Diff t-value Sig. value
Name
MMFS 4.482 1.6448

GNPA/NA 1.696 2.086 0.105

STFC 2.786 0.57587
MMFS 1.034 0.52104

NNPA/NA 0.482 2.921 0.043

STFC 0.552 0.20278
MMFS 2.984 1.09523

TI/TA -5.616 -5.926 0.004

STFC 8.6 2.62942
MMFS 0.982 0.49967
STFC 0.62 0.20494
NNPA/TA 0.362 2.221 0.09

113
In case of GNPAs to Net Advances and Total Investments to Total Assets, STFC performed better than
MMFS. The average NPAs to Net Advances of STFC and MMFS are 0.552 and 1.034 with mean
difference

0.482, the ‘t’ value between the NBFCs is 2.921with ‘p’ value 0.043 i.e. STFC outperformed MMFS.
With respect to NNPAs to Total Assets the average of STFC is 0.62 where as it is 0.982 for MMFS with
mean difference 0.362. The ‘t’ value between two NBFCs is 2.221 with ‘p’ value 0.09 therefore null
hypothesis is rejected i.e. STFC performed better than MMFS.

Management Efficiency

Management efficiency is another important element of the CAMEL Model. The ratio in this segment
involves subjective analysis to measure the efficiency and effectiveness of management. The management
of NBFCs takes crucial decisions depending on its risk perception. The ratios used to evaluate
management efficiency are described as:

Total Advances to Total Deposits (TA/TD)

This ratio measures the efficiency and ability of the NBFC’s management in converting the deposits
available with the NBFC excluding other funds like equity capital, etc. into high earning advances. Total
deposits included term deposits, recurring deposits and total advances that include the receivables.

Total Advances to Total Deposits of Two Companies

TAD/TD 2015 2016 2017 2018 2019

MMFS 9.280367 6.83722 8.065917 7.398547 6.599121
STFC 21.78222 21.48375 26.2712 51.13593 20.4323

114
 Total Advances to Total Deposits of Two Companies

60

50 51.13593

40

30
21.78222 21.48375 26.2712
20 20.4323

10
9.280367
6.83722 8.065917 7.398547 6.599121
0
2015 2016 2017 2018 2019
MMFS STFC
Year
Business Per Employee (BPE)

Business per employee shows the productivity of human force of NBFCs. It is used as a tool to measure
the efficiency of employees of an NBFC in generating business for the NBFCs. It is calculated by
dividing the total business by total number of employees. Higher the ratio, the better it is for the NBFCs

Business per Employee Ratios of Two Companies

TB/TE 2015 2016 2017 2018 2019

MMFS 2,239.20 2,322.10 2,974.10 3,633.50 3,864.70

STFC 3,196.10 3,224.00 4,103.60 4,335.80 4,352.86

115
 Business per Employee of Two Companies

5,000.00
4,335.80 4,352.86
4,103.60
4,000.00
3,864.70
3,196.10 3,224.00 3,633.50

3,000.00 2,974.10

2,239.20 2,322.10
2,000.00

1,000.00

0.00
2015 2016 2017 2018 2019
Year MMFS STFC

Profit Per Employee (PPE)

This shows the surplus earned per employee. It is known by dividing the profit after tax earned by the
NBFC by the total number of employees.

Profit per Employee of Two Companies

PAT/TE 2015 2016 2017 2018 2019

MMFS 367.3 510.3 564.9 662.4 822.6

STFC 632 727 835 841 698

116
 Profit per Employee of Two Companies

900 835 841 822.6

800 727
698
662.4
700 632
564.9
600
510.3
500
367.3
400

300

200

100

0
2015 2016 2017 2018 2019
Year MMFS STFC

Management Efficiency Ratios of Two Companies

NBFC
RATIO Mean S.D Mean Diff t-value sig. value
NAME
MMFS 7.63 1.08243

TA/TD -20.588 -3.511 0.025

STFC 28.218 13.00246

MMFS 2311.06 1214.297

TB/TE -1531.412 -2.5 0.067

STFC 3842.472 585.739

MMFS 585.5 170.1622

PAT/TE -161.1 -2.196 0.093

STFC 746.6 90.28455

117
The average total advances to total deposits of STFC and MMFS are 7.63, 28.218 respectively. The mean
difference is -20.588 with ‘t’ value 3.511 and ‘p’ value 0.025. Therefore the null hypothesis is rejected i.e.
the performance of STFC is better than MMFS. In terms of business per employee and profit per
employee, the performance of the two NBFCs does not differ significantly.

Earning Quality

The quality of earnings is a very important criterion that determines the ability of a NBFC to earn
consistently. It basically determines the profitability of an NBFCs and explains its sustainability and
growth in earnings in future. The following ratios explain the quality of income generation.

Operating Profit to Average Working Funds (OP/AWF)

This ratio indicates how much a company can earn profit from its operations for every rupee spent in the
form of working fund. This is arrived at by dividing the operating profit by average working fund.

Operating Profit to Average Working Funds of Two Companies

OPR/AWF 2015 2016 2017 2018 2019

MMFS 0.12 0.12 0.13 0.13 0.12

STFC 0.13 0.13 0.13 0.12 0.12

118
 Operating Profit to Average Working Funds of Two Companies

0.132
0.13 0.13 0.13
0.13
0.13 0.13
0.128

0.126

0.124

0.122
0.12 0.12
0.12
0.12 0.12 0.12
0.118

0.116

0.114
2015 2016 2017 2018 2019
Year MMFS STFC

Spread to Total Assets (SP/TA)

Spread is the difference between the interest earned and the interest expended and this is another good
indicator of value of the NBFCs. For greater spread, the NBFC should keep their interest low on deposits
and high on advances to increase their earning capacities.

Ratio of Spread to Total Assets

SPR/TA 2015 2016 2017 2018 2019

MMFS 0.10 0.07 0.07 0.07 0.07

STFC 0.050785 0.038926 0.026951 0.032496 0.038711

119
 Spread to Total Assets of Two Companies

0.12
0.1
0.1

0.08 0.07 0.07 0.07 0.07

0.06

0.04 0.050785
0.038926 0.038711
0.02 0.032496
0.026951

0
2015 2016 2017 2018 2019
Year MMFS STFC

Net Profit to Assets (NP/Assets)

This ratio measures the returns on assets employed or the efficiency in utilization of assets.

Net Profit to Assets of Two Companies

ROA 2015 2016 2017 2018 2019

MMFS 178.39 239.23 283.74 78.32 89.57

STFC 168.4 215.22 259.82 317.14 364.65

120
 Net Profit to Assets of Two Companies

400

364.65
350
317.14
300
283.74
250 259.82
239.23
215.22
200 178.39

150 168.4

100
89.57
78.32
50

0
2015 2016 2017 2018 2019
Year MMFS STFC

Interest Income to Total Income (II/TI)

This ratio measures the income from lending operations as a percentage of the total income generated by
the NBFCs in a year.

Interest Income to Total Income of Two Companies

II/TI 2015 2016 2017 2018 2019

MMFS 0.893224 0.83777 0.858971 0.866823 0.891999

STFC 0.803496 0.644781 0.583854 0.659282 0.740102

121
 Interest Income to Total Income of Two Companies

1
0.893224 0.891999
0.858971 0.866823
0.9 0.83777

0.8
0.803496
0.7
0.740102
0.6 0.659282
0.644781
0.5 0.583854

0.4

0.3

0.2

0.1

0
2015 2016 2017 2018 2019

Year MMFS STFC

Non Interest Income/Total Income

This measures the income from operations other than lendings as a percentage of the total income.

Non-Interest Income to Total Income of Two Companies

NII/TI 2015 2016 2017 2018 2019

MMFS 0.11 0.16 0.14 0.13 0.11

STFC 0.20 0.36 0.42 0.34 0.26

122
 Net Interest Income to Total Income
0.45 0.42
0.4 0.36
0.34
0.35

0.3 0.26
0.25
0.2
0.2

0.15
0.16
0.1 0.14 0.13
0.11 0.11
0.05

0
2015 2016 2017 2018 2019
Year MMFS STFC

Various ratios measuring management efficiency depicted in Table, and discussed below;

Earnings Quality Ratios of Two Companies

Earnings Quality Ratios

NBFC Mean t- Sig.
RATIO Mean S.D
NAME Diff value Value

OPR / MMFS 0.124 0.00548

-0.002 -0.535 0.621
AWF STFC 0.126 0.00548

MMFS 0.076 0.01342

SPR/TA 0.044 17.963 0.000

STFC 0.032 0.01095

MMFS 173.85 90.27744 -

ROA -1.34 0.251
STFC 264.946 78.2473 91.096

II/TI MMFS 0.864 0.02608 0.182 6.053 0.004

123
 STFC 0.682 0.08729

MMFS 0.13 0.02121

NII/TI -0.186 -5.864 0.004

STFC 0.316 0.08649

The average operating profit to average working funds of MMFS and STFC are 0.124, 0.126
respectively. The mean difference is 0.002 with ‘t’ value -0.535 and ‘p’ value0.621. Therefore the
performance of the sample NBFCs does not differed significantly. Spread (interest earned and interest
expended) to Total Assets of MMFS and STFC are 0.076and 0.032 respectively. The mean difference is
0.044 with t-value 17.963 and ‘p’ value is significantly differed. In the case of Interest Income to Total
Income MMFS is more than STFC in mean score. The mean difference is 0.182 with t-value of 6.053 and
’p’ value is 0.004. Therefore the null hypothesis is rejected. In the Net interest income to total income the
STFC is more than MMFS in the mean score. With the mean difference of -0.186 and t-value is - 5.864
and ‘p’ value is 0.004 and here the null hypothesis is rejected.

Liquidity

Risk of liquidity is a curse to the image of the NBFC. NBFC has to take a proper care to hedge the
liquidity risk; at the same time ensuring good percentage of funds are invested in high return generating
securities, so that it is in a position to generate profit with provision liquidity to the depositors.

The following ratios are used to measure the liquidity under the CAMEL Model. They are:

Liquid Assets to Total Assets (LA/TA)

It measures the overall liquidity position of the NBFC. The liquid asset includes cash in hand, balance
with institutions and money at call and short notice. The total assets include the revaluation of all the
assets.

124
 Liquidity Assets to Total Assets Ratio of Two Companies

LA/TA 2015 2016 2017 2018 2019

MMFS 4.409559 6.033079 2.798741 2.201854 0.028301

STFC 1.696782 2.161734 2.439428 2.07344 1.853382

Liquid Assets to Total Assets Ratio of Two Companies

7
6.033079
6

5 4.409559

2.798741
3
2.201854
1.853382
2 2.439428
2.161734 2.07344
1.696782
1
0.028301
0
2015 2016 2017 2018 2019

Year MMFS STFC

!G-Sec to Total Assets (G-Sec/TA)

It measures the risk involved in the assets. This ratio measures the investments in government securities
as proportionate to total assets.

G-Securities to Total Assets Ratios of Two Companies

GS/TA 2015 2016 2017 2018 2019

125
 MMFS 0.617943 0.680949 0.793428 0.94809 1.196729

STFC 0.645009 0.51176 0.913209 0.532262 0.67219

G-Securities to Total Assets of Two Companies

GOVT SECURITIES TO TOTAL ASSETS

1.6
1.196729
1.2 0.94809
0.793428
0.617943 0.680949
0.8
0.913209

0.4 0.645009 0.67219

0.51176 0.532262

0
2015 2016 2017 2018 2019

Year MMFS STFC

!Liquid Assets to Total Deposits (LA/TD)

This ratio measures the ability of NBFCs to meet the demand from depositors in a particular year. To
offer higher liquidity for them, a finance company has to invest these funds in highly liquid forms.

Liquid Assets to Total Deposits (LA/TD)

This ratio measures the liquidity available in relation to the total deposits of the NBFCs.

Liquid Assets to Total Deposit Ratio of Two Companies

LA/TD 2015 2016 2017 2018 2019

MMFS 0.836115 0.752079 0.329213 0.241107 0.250666

STFC 0.485661 0.604413 0.866865 1.362636 0.474165

Chart 5.18

126
 Liquid Assets to Total Deposit Ratio of Two Companies

1.6
1.362636
1.4

1.2

1 0.836115 0.866865
0.752079
0.8

0.6 0.485661 0.474165

0.604413 0.329213
0.4 0.241107 0.250666
0.2

0
2015 2016 2017 2018 2019

Year MMFS STFC

Various ratios measuring liquidity are depicted in Table, and discussed below.

Liquidity Ratios of Two Companies

NBFC
RATIO Mean S.D Mean Diff t-value sig. value
NAME
MMFS 3.65 1.56056

LA/TA 1.61 2.225 0.09

STFC 2.04 0.28548

MMFS 0.844 0.23212

GS/TA 0.192 1.551 0.196

STFC 0.652 0.15975

MMFS 0.478 0.28787

LA/TD -0.276 -1.059 0.349

STFC 0.754 0.37347

127
The average liquidity assets to total assets of MMFS and STFC are 3.65 and 2.04 respectively. The mean
difference between thetwo sample NBFCs is 1.61 with‘t’ value 2.225 and ‘p’ value 0.09. Hence the
performance of thetwo sample NBFCs does not differ significantly. Similarly, the performance of thetwo
sample NBFCs with respect to government securities to total assets does not differ significantly. Finally,
the average liquid assets to total deposits of the twoNBFCs are 0.478 and 0.754 respectively. The mean
difference of these NBFCs is -0.276 with ‘t’ value -1.059 and ‘p’ value 0.349.
Therefore, the null hypothesis is rejected.

128
 CHAPTER VI : SUMMARY OF
FINDINGS,SUGGESTIONS AND CONCLUSION

CHAPTER VI

SUMMARY OF FINDINGS, SUGGESTIONS AND

CONCLUSION

In this chapter, a summary of the major findings of the study on various issues are presented and based
on the analysis, conclusions are drawn. Finally, a few suggestions for further improvement in the working
of NBFCs are made.

129
SUMMARY OF FINDINGS

The growth of the Indian financial system was unique even before the reform process with the
development of banks due to nationalisation and the other financial institutions. The vast network of
termfinancing, investment and insurance institutions was promoted at the all-India, regional and state
levels. The banking and the financial system planted confidence, stability and certainty in the savers ’
minds.
Therefore, India developed and promoted a financial system of a high order which increased the
household saving as financial assets, extended vast investment and inventory credit to medium and large
scale industries in private and public sectors, promoted new entrepreneurship and attained extensive credit
reach to a great number of people. Increase in the number of institutions and instruments and
diversification were the highlights in the money and capital markets during the post-nationalisation
period. The eighties were a period of gradual transition. Financial intermediaries performed the important
task of transferring the funds and claims from one sector to the other. This is very much reflected in the
financial system of the country. In 1991, the finance ratio, intermediation ratio and inter-relation ratio
reached a peak level of 0.497, 2.922 and 0.806 respectively. During the same year i.e. 1991, the
Narasimham Committee made recommendations, which reduced the controlling measures for the banking
sector as well as the other sub-sectors of the financial sector.

Hence, beginning from 1991, Indian economy was going through a period of finacialisation. The share of
finance sector in the total GDP increased considerably from 9.66 per cent in 1990-91 to 17.2 per cent in
2012-13 and same was the case with the financial sector GDP to the service sector GDP which was
increased from 23.82 per cent in 1990-91 to 45.19 per cent in 2012-13. Historically, the Indian financial
system grown rapidly and experienced considerable stability over a period of time.

The number of companies registered with Register of Companies increased from 7,063 in 1981 to 24009
in 1990 and further to more than 62,000 in 1999, later decreased to 12,225 in 2013. The number of
companies reported to regulator in 1981 was 3,443 and a percentage of Reported to Registered showed
was 48.74 percentages. In 1990 it showed 32.42 percentages further in 1998 it was decreased to 18.80
percentages. After 1998 it falls to single digit to just 2.11 percentages in 2012-13. The growth rate in
percentage of number of registered companies also falls from 19.11 percentages in 1981-82 to -3.43
percentage in 2012-13. The gap between the number of NBFCs registered with RBI and reported NBFCs
was widening, as the RBI was not in a position to track the status of those companies which defaulted in
submission of the annual returns and could not get any information pertaining to companies which had

130
would up or changed their business activities. v The aggregate deposits of NBFCs which stood at Rs.
1,475.70 crores from 1980-81 to Rs. 1,33,279.90 crores in 1996-97 and within one year immediately it
falls to Rs. 23,820 crores in 1997-98 further falls to Rs. 9,557 crores in 2012-13. Whereas in the case of
scheduled commercial banks it was Rs. 37,988 crores in 1980-81 and went to Rs. 5,05,599 crores in
1996-97 and gradually increased to Rs. 59,09,082 crores in 2012-13. For NBFCs, the new concept called
public deposits was introduced with some tight regulations for raising public deposits in 1998. v The
aggregate deposits which stood at Rs. 3,161 crores as on March 31st 1984 increased to a high level of Rs.
20,438 crores as on 31st March 1992. The aggregate deposits of NBFCs registered a sharp increase from
Rs. 20,438 crore in 1991 – 92 to Rs. 40,668.60 crores in 1992-93. This increase was due to the inclusion
of certain items like borrowings from foreign governments, borrowings from banks and other financial
institutions and money raised by issue of secured or convertible debenture in the deposits. Consequent
upon the inclusion of certain additional items viz., borrowings from banks and other financial institutions
in the coverage of aggregated deposit from 1992 by the NBFC from external sources, the aggregated
deposits of Rs. 20,438.50 crores in 1991-92 to Rs. 44,956 crores in 1992-93 and further to Rs. 56,559in
1993-94. However, revenue in the form of FDs grew at a higher rate as RBI relaxed the ceiling on
deposits in terms of NOFs. The aggregate deposit of NBFCS declined from 1998 to 1999, despite the
increase in growth rate continues to fall due to the tightened regulatory framework of 1998. After 1998-99
the deposits fell from Rs. 23,820 crores in 1997-98to Rs. 9,557 crores in 2012-13 due to the new concept
of public deposits meaning deposits received from public including shareholders in the case of public
limited companies and unsecured debenture/ bonds other than those issued to companies, banks and
financial institution was introduced for the purpose of focused supervision of NBFCs accepting such
deposits. v In the wake of liberalization, diversification of the financial system – institutions and
instruments during the mid-nineties significantly enlarged the scope and activities of NBFCs. The need
for large role for the NBFCs as financial intermediaries involved in efficient allocation of monetary
resources slowly became evident. The increasing emphasis on global integration of the economy has
created the need for structuring international services offered by the NBFCs to our traditional markets.
Hence, the product profile changed with the NBFCs shifting their focus from the traditional fund based
activities to non-fund (fee – based) activities. The new ventures by the NBFC were the source of their
survival and growth especially during the midnineties. After 2007-08 there are different categories of
institutions Loan Company, Investment Company, Asset Finance Company and Residuary NBFC are
there, then they were reduced to two categories like NBFC Loan Company and Asset Finance Company.
v Having analyzed the sources of fund for the NBFC, it becomes imperative to discuss the borrowing
pattern of NBFCs and the data relating to the same are presented in Table which indicates that the main

131
sources of funds, fixed deposits constitute the most important element of total borrowings. The trend
varies at different times, especially after 1996-97 it reduced to single digit of total borrowings. Another
important element of borrowing is bank borrowing. In 1993, bank credit to leasing and hire purchase
companies was increased from 3 times to 4 times of the net owned funds. In 1995 due to slackness, the
leasing and hire purchase companies with not less than 75 per cent of their assets could borrow only 3
times instead of 4 times, due to which bank borrowings were reduced to 25 per cent. v A major role is
played by the commercial papers, the CAGR of which was 45.97 in 1998.It includes promissory notes
issued by borrowers to investor. Debentures and bonds are again important sources of borrowing for
NBFCs. It is noteworthy to mention that during the period after 1994-95, it has shown an upward
increase, which consisted Non-Convertible Debentures (NCDs) and these were tapped in a big way in
later half of nineties. v The stability and soundness of the NBFCs can be measured in terms of their
financial performance. For this study, data were collected from the analytical study done by the RBI on
Financial and Investment companies every year. The period covered in the study for 15 years from 1999
to 2013. The compound annual average of borrowing to total assets (1.022), net worth to total assets
(0.975), debt to net worth (1.029), Profit after tax to Net worth (1.19), Profit after tax to Total assets
(1.175) and Profit before Interest and taxes to Interest (1.02). Even the ratios of borrowing to total assets
and the debt to net worth are also relatively more for NBFCs. The borrowing capacity of NBFCs grew at
a faster rate, especially when RBI started considering loans to them as priority sector lending. In terms of
profitability, annual average rations of PAT to net worth and PAT to total assets are 1.61 per cent to 15.53
percent and 0.36 per cent to 2.72 per cent from 1999 to 2013. v The compound annual average of
borrowing to total assets from 1999 to 2013(1.022), net worth to total assets (0.975), debt to net worth
(1.029), Profit after tax to Net worth (1.19), Profit after tax to Total assets (1.175) and Profit before
Interest and taxes to Interest (1.02). Even the ratios of borrowing to total assets and the debt to net worth
are also relatively more for
NBFCs. The borrowing capacity of NBFCs grew at a faster rate, especially when RBI started considering
loans to them as priority sector lending. v The Net Profit to Total Assets ratio increased from 0.3 per cent
in the year 2000 to 2.7 per cent in the year 2013. Therefore return on total assets employed is significant
and the number of reported companies is falling from 679 in the year 2000 to 251 in the year 2013 due to
tight regulations by the apex institution. The profitability ratio increased due to constant monitoring by
the regulator. v The total borrowed fund for NBFCs increased from Rs. 30,117 crore in 1998 to Rs.
91,800crore in 2013 after the rating is mandatory for raising funds from the above different sources
except public deposits which falls to Rs. 7,100crore from Rs. 13,571 crores. The ultimate aim of the apex
institution is to protect the deposit holders from fraudulent financial institutions. The result of this

132
regression shows that the coefficient of government source is negative. It implies that it affects loans and
advances negatively and the p value is also lesser than 5% level. The external sources of financing is also
negative coefficient but the p value is more than 5% level therefore the hypothesis is accepted. The banks
and financial institutions role is positive coefficient but the p value is lesser than 5% level. The role of
debentures, other forms of sources like inter corporate deposits and commercial paper also influenced the
coefficients positively and the p value is more than 5% level it is also accepted. Whereas the coefficient
of public deposits is negative, the p value is more than 5% level therefore this hypothesis is accepted. v
The bank credit to total assets of NBFCs is increased from 0.20 per cent in 1991-92 to 27.46 per cent in
2012-13 because the banks concentrate on priority sector advances through NBFCs. v Presently, almost
97 per cent of NBFCs reported a Capital to Risk-Weighted Assets Ratio (CRAR) of at least the stipulated
minimum of 12 per cent. It is noteworthy that 206 out of the 254 reporting NBFCs (82 per cent) had
CRAR above 30 per cent, 4 had CRAR of less than 12 per cent. The health of the NBFCs continues to
show a distinct improvement in recent years facilitated by CRAR. v NBFCs invest in mandatory (SLR)
and Non-Mandatory (NonSLR) based investments as seen in their balance sheets every year.

v The NPAs of NBFCs, in both gross and net term, as a percentage of credit exposure, have
been declining in recent years. NPAs came down to 2.4 per cent in March 2013 from 12
per cent in March 1998. So the NPA of NBFCs is reduced. v The purposes of regulatory
measures were to streamline the functioning of NBFCs that could place them in the right
perspective. The different committees made few recommendations based on the
objectives, however, it was felt by the committee that the task of regulating NBFCs was a
daunting one with a hope of contributing to some extent in the evolution of a more
efficient and robust NBFCs. v From the analysis made to assess the impact of financial
sector reforms and global crisis on NBFCs using multiple regression model, it is observed
that the reforms measures and crisis have brought about changes in the number of
reporting NBFCs, increased growth of different forms of funds mobilized after the
introduction of credit rating mechanism, but have a muted growth in the volume of
deposits, investments, loans and advances during the post-reform period and after crisis. v
There is a significant difference exists between the pre-reform, post-reform period and
global financial crisis in the number of reported NBFCs which submitted report to the
RBI.

v There is a significant difference existing in the deposits held by the reported NBFCs
during the pre-reform, post-reform period and global financial crisis. v There is no

133
 significant difference exists between the investments of NBFCs during the pre-reform,
post-reforms periods and
global financial crisis. v There is no significant difference in the loans and advances of
NBFCs between the pre-reform, post-reforms periods and global financial crisis.

v In the specific study made on the select units using CAMEL model, namely Shriram
Transport Finance Ltd., and Mahindra and Mahindra Finance Ltd., it is found that Shriram
Transport Finance Ltd., has shifted to the pan India player in vehicle financing due to
heavy competition from hire purchasing space. The high provisioning norms as lay down
by the regulatory framework and downward trend in vehicle financing after crisis due to
high oil prices and inflationary situation in the country has affected the business
opportunities, as a result of which it started diversifying its business activities into
consumer finance activities for electronic goods and gadgets. The another leading player
in the hire purchase finance space Mahindra and Mahindra Finance has showed
tremendous
growth in terms of its business and efficient working during the post crisis period. The
high provisioning norms as laid down by the regulatory framework affected the
profitability of this giant resulting in a declining business. The post reform period has
been witnessing an overall growth in the automobile sector but after crisis it is falling. But
after crisis the small light commercial vehicles, tractors and multi utility vehicles has been
influencing the business of the company and has helped to achieve the health growth in
the disbursements of hire purchase and hypothecation loans of the company. The
company maintained a healthy market share in the tractor and small light commercial
vehicles segment, despite intense competition from NBFCs and banks. The improved
performance of the commercial vehicle sector during the post reform period, especially
late nineties, is due to the significant investments in the infrastructure sector especially
roads. v The performance of hire purchase companies directly depends upon the demand
for automobiles. The hire purchase business flourished during the first half of nineties as
there was heavy demand for trucks. Later, during the second half, the demand for cars and
small utility vehicles for cargo was higher than the demand for trucks. Hence, hire
purchase companies could survive and sustain with their present level of demand for car
and automobiles. The companies like TVS, Ashok Leyland, Mahindra and Mahindra,
Bajaj Auto and TATA carry on with manufacturing of automobiles along with vehicle
loan finance for their vehicles. Hence, hire purchase business has greater scope for this

134
 steady and continuous demand for automobiles and consumer goods. v CAMEL provides
a measurement of NBFCs current overall financial, managerial, operational and
compliance performance. Thus the current study has been conducted to examine the
overall performance of Mahindra and Mahindra Financial
Services and Shriram Transport Finance Company.
v The study revealed that Shriram Transport Finance Company excelled over M&M
Financial Services in protecting the interest of the creditors.

v Shriram Transport Finance Company proved to be good in Asset Quality perspective. v

Shriram Transport Finance Company performed better than M&M Financial services in
case of TA/TD and proved to be good in Profit per employee perspective.

v Shriram Transport Finance outperformed M&M Financial Services in front of quality of

earnings.

v The two sample NBFCs do not differ significantly in liquidity position during the study
period.

v The study also revealed that Shriram Transport Finance Corporation was rated top on the
basis of overall performance.

CHALLENGES FACED BY NBFCs IN INDIA

Here are some of the challenges faced by NBFCs and their impact on business model and profitability of
NBFCs.

Dependence on Banks for Resources and Impact on Profitability

A shallow bond market has forced NBFCs to rely on banks for their funding needs to a large extent. The
analysis shows that over one third of total liabilities of NBFCs were loans provided by banks. This ratio
will be even higher for smaller NBFCs. It is ironical to an extent because, on one hand, the NBFCs
heavily rely on banks for the funds; while on the other hand, they compete with same banks on originating
assets. Till late 1990s, publicdeposits formed a substantial portion (27 per cent) of NBFCs’ liabilities.
However, some unfortunate events like series of defaults and misdemeanors by a few NBFCs have led

135
RBI to prescribe fairly restrictive guidelines on acceptance of public-deposits by NBFCs. The resource
crunch on one hand and entry of banks in retail lending segment in a big way has had a deep impact on
the profitability of NBFCs. Growing competition from the banking sector has impacted the core
profitability of non-banking finance companies (NBFCs). A number of NBFCs operate in businesses
where banks have a presence; also, of late, banks have acquired dominant positions in these businesses,
resulting in a contraction in business opportunities as well as interest spreads for most NBFCs.

Banks are able to offer better returns to their shareholders than NBFCs can; this is because banks have
lower costs of funds, higher leverage levels, and dominant market positions. However, the analysis
reveals that notwithstanding serious business handicaps, some NBFCs reported healthy profitability by
refocusing on business segments where banks are yet to acquire a major presence.

No Access to Refinance

NBFCs face a high cost of funds compared to the banks partly because of the fact that NBFCs do not
have any access to refinance like banks and Housing Finance Companies (HFCs) have. Banks have access
to refinance limits from several state-run agencies like RBI, EXIM Bank, NABARD and SIDBI.
Similarly, HFCs regularly obtain refinance from National Housing Bank (NHB), who is also the regulator
for HFCs. The refinance facilities help the banks and HFCs iron out any mismatch between assets and
liabilities.

NBFCS on the other hand, have to depend on their competitors, banks, or the capital markets for raising
resources at all points of time. This situation is fraught with risks for the health of NBFC sector and can
prove detrimental to the sustainability of their growth as in the case of any distress, flow of funds for them
from above sources could dry up without much notice.

A really dependable remedy for such situations can only be a state-run agency providing refinancing
facility to NBFCs. As a starting point, the refinance assistance can be provided to the NBFCs engaged in
providing credit to the sectors which are important for the economic growth viz. infrastructure, transport,
etc. Once the system stabilizes, it can also be extended to other lending products.

It is pertinent to mention in this context that the Standing Committee of the Parliament which was given
the task of reviewing the Financial Companies Regulation Bill, 2000 had strongly recommended to the

136
government to set up a separate refinancing institution for NBFCs on the lines provided to housing
finance companies.

Access to ECB Funding for NBFC-AFCs

Both the banks and NBFCs had free access to External Commercial Borrowing(ECB) earlier. However,
currently there are restrictions in accessing ECB for banks and NBFCs in that:
· Prior RBI approval is required

· RBI approval is given for ECB on a case to case basis only for importing equipments for use in
infrastructure projects. In other words, such funding is not available for indigenously manufactured
equipments, which is a clear discrimination. Such funding has to be for a minimum period of 5 years.
ECBs typically come for longer term and generally match the length of the infrastructure projects(s) to
fund which these are raised. Keeping in view the non-availability of long term funds in adequate measure
in India and the requirements of infrastructure projects (estimated at US$475Bn), there is clearly a very
strong case for the Government to allow NBFC-AFCs in the infrastructure project financing, vehicle
financing and equipment financing segments, to access External Commercial Borrowings (ECBs) in the
same manner as banks can. This would enable such NBFCAFCs to access longterm funds at competitive
rates from the global financial market and to channelise those funds into financing of infrastructure
projects and productive assets, which in turn has a multiplier effect on employment generation.
No Access to SARFAESI for Recovery from Bad Loans

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI) empowered Banks / Financial Institutions to recover their non-performing assets
without the intervention of the Court. A CRISIL analysis on asset quality of banking system indicates that
the gross and net NPAs have continuously declined over the last seven years in percentage as well as
absolute terms. Gross NPAs have declined to 2.5 per cent as on March 31, 2007 compared to GNPA of
8.8 per cent and slippages of 3.4 per cent as at March 31,2003. Banks have actively utilized SARFAESI
since its enactment in 2002-03 for improving their recoveries; recoveries through this route have
increased from 1.7 per cent of gross NPAs in 2003-04 to 6.6 per cent of gross NPAs in 2005-06.

On the other hand, NBFCs have traditionally been able to achieve superior results than banks in
maintaining a better asset quality despite not having any access to effective recovery tools like

137
SARFAESI; this has been because NBFCs are primarily driven by better credit appraisal and underwriting
standards. As discussed in previous chapters, as NBFCs primarily provide credit to economically weaker
sections of the society, which will be the first to be affected in case of any economic downturn, there is a
compelling case for extending the benefits of potent recovery tools like SARFAESI uniformly to NBFCs
as well.

This is all the more necessary considering the spate of court pronouncements, of late, against the
repossession of assets by banks and NBFCs.

Debt Recovery Tribunals (DRTs)

Further, the Asset Finance Corporations (AFCs) need to be granted access to DRTs to enable speedier
realization of their dues. Government may consider increasing the number of DRTs if the existing setup is
found inadequate. This would be necessary to strengthen the recovery mechanism for NBFCs which are
already resource strapped.

No Insurance for Public Deposits Held by NBFCs

Deposits kept in banks are insured by a state-run agency, Deposit Insurance and Credit Guarantee
Corporation (DICGC). DICGC insures the depositor upto a maximum of Rs 1,00,000 and it will be liable
to pay if either the bank is liquidated or it is reconstructed or amalgamated / merged with another bank.
Deposit-taking NBFCs (NBFCs-D) do not enjoy any such advantage. Non-banking finance institutions in
the US are treated at par with the banks on this aspect as deposits of both are insured by insurance
agencies. Given the fact that NBFCs in India are lending to sectors which are important for overall
economic growth, there is a strong case for comparable institutional support being extended to the NBFCs
as well in order to protect their competitiveness and to provide support and sustenance in times of
distress.
Limited Capital Enhancing Options

RBI has provided banks with various capital-enhancing options in recent past. In February 2006, banks
were allowed to issue several forms of hybrid capital – both as Tier I and Tier II capital. More recently,
banks have been allowed to issue preference shares to further augment their capital base. As entities
which are competing with banks for originating the same assets,

138
NBFCs have not been provided level-playing field for raising capital. The only way in which NBFCs can
raise core capital is through equity capital or Tier II bonds.

The global players having NBFC subsidiaries in India have regularly pumped in capital as RoE offered
by these subsidiaries are comparable to that of any of their other businesses worldwide. Also, some of the
larger NBFCs which do not enjoy parent support have regularly tapped global capital markets though
American Depository Receipt (ADR) and Global Depository Receipt (GDR) issues or have roped in
private equity / venture capital partners. It needs to be noted that all the above capital raising options have
high cost attached to them and put immense pressure on NBFCs to take risks and deliver supernormal
returns to the shareholders. On the other hand, the banks have been provided capital enhancing options
which are comparatively less costly and let the banks focus on the core business activities rather than
taking excessive risks.

Registration of NBFCs under State Money Lender Laws by some of the State Governments
is Retrograde

Despite being subject to the comprehensive and a constantly evolving, regulatory and supervisory
scheme of Reserve Bank of India, in some of these states, NBFCs are now being asked to register under
their money lenders act apart from registration with RBI. This is acting as a hindrance for efficient
functioning of the NBFC’s and is resulting in our member NBFCs suffering from complexities, and
contradictions, of multiple regulations and having to comply with differing legislations of each of these
states.

Legislations for controlling the activities of money lending by private moneylenders were enacted by
states of India as part of their legislative domain with a view to preventing their exploitative money
lending practices and to thus protect farmers and other vulnerable sections of society, particularly in rural
areas. To equate the role of NBFCs with private moneylenders is not appropriate in view of significant
role played by NBFCs in financial inclusion and economic development.

NBFCs offer credit and financing for development purposes rather than merely lending money to earn
interest income unlike the private moneylenders. Their products are based on risk and credit parameters
and each product therefore also does not carry the same rate of interest. The pricing of each product is
based on an assessment of the 25 associated costs, market segment and returns. Thus there is a need for
setting a different interest rate in each state, for each product or lending.

139
NBFC’s need to take into account their individual actual cost of funds, borrowings, capital, credit, risk,
operating expenses, and a minimum margin to cover regulatory requirement of provisioning /capital
charge and profit margin. It is therefore not possible to stipulate a ceiling on interest, or fix a standard rate
of interest, for all NBFCs and/or for all types of facilities and credit that NBFCs provide. Appreciating
this, the Reserve Bank of India, just as in the case of banks, has deemed it appropriate to not regulate the
interest rates of NBFCs but has advised NBFCs to ensure transparency and appropriate internal principles
and norms.

Incompatible and Differential Treatment on Matters Relating to Taxation

a. Sec.36 (1) (viia) / 43D Of the Income Tax Act, 1961 - Benefits allowed to the banks and
housing finance companies, but NBFC- AFCs left out

Under the existing provisions u/s 36(1)(viia) of the Income-Tax Act, a provision for bad and doubtful
debts made by banks and financial institutions is allowed as a deduction to the extent of 7.5% from the
gross total income. Alternatively, such banks and FIs have been given an option to claim a deduction in
respect of any provision made for assets classified by the RBI as doubtful assets or loss assets to the
extent of 10% (increased from 5%) of such assets.

NBFC-AFCs are also compulsorily required to make provisions for Non-Performing Assets (NPAs).
However, provisions made by NBFCAFCs in line with such prudential norms fixed by RBI are
disallowed by tax authorities when assessing their income tax liabilities. These provisions made against
NPAs are in the nature of business expenses incurred wholly and exclusively for business operations by
an NBFC-AFC as mandated by the regulator. Banks / HFCs / FIs enjoy tax benefit on income deferred
as per RBI directives on NPA. NBFC-AFCs are also required to follow these prudential norms as per RBI
directives, but they are the only segment of the financial sector denied this tax benefit.
b. Exemption to NBFC-AFCs from TDS Requirements U/s 194A (3) (iii) of The I.T. Act -
Benefit allowed to banks, but NBFC-AFCs left out

As per Section 194A of the Income Tax Act 1961, tax has to be deducted out of the interest payments
made by specified borrowers to the lender at the rates in force. The rates vary depending on the
constitution of the payee (lender). For the category of domestic companies in which NBFCAFCs fall, the
rate of TDS is presently 22.44% including surcharge of 10% and education cess of 2%.

Banking companies, Cooperative societies engaged in banking business, public financial institutions,
LIC, UTI, Insurance companies and some other notified institutions are exempted from the purview of

140
this section, implying that if the payment of interest is made to these entities, the borrower is not required
to deduct TDS out of the interest payment. This is not available to NBFC-AFCs even though they are in
similar lending activities. Consequently, their margins and cash flow are severely affected.

c. TDS on Financial Lease Rental Payments Under Section 194 -I of Income Tax Act –
Gross Lease Rental Subjected to TDS and not the Interest Portion Alone

Section 194-I of the Income Tax Act, deals with TDS on rent payments. The present TDS rate is 22.44%
(20% TDS + 10% surcharge + 2% education cess). In this section, the definition of ‘rent ’ has been
enlarged to include lease, sub-lease, tenancy or any other agreement or arrangement for use of machinery,
plant, equipment etc. besides land and buildings.

NBFC-AFCs operate on very thin margins. On that, if a 20% TDS is applied on gross lease rentals, this
will result in negative cash flows. It must be pointed out that unlike renting, leasing is a mode of financing
and major portion of lease rentals includes repayment of principal just like a loan repayment. If TDS is
deducted on entire lease rental, it means not only will the TDS be deducted on the interest, but also on the
principal amount. This can spell disaster for the NBFC-AFC sector in India leading to its extinction.

Indirect Tax Issues

a. Service Tax on Hire Purchase/ Lease Transactions - 90% of Finance Charges/ Interest
Exempt From Service Tax

Service tax on the interest component of Lease/HP transactions though has been removed to the extent of
90%, 10% of the interest component in a Lease/Hire-Purchase transaction still continues to be subject to
levy of service tax whereas the basic objective was to bring parity between a simple loan transaction and a
Lease/Hire-Purchase transaction. Levy of service tax @ 12.24%, even on the 10% of interest component
makes Lease/Hire-Purchase costlier to the borrower and so economically unfavourable as compared to a
loan transaction where 100% of the interest component is exempted from the levy of service tax.

b. Treatment of Hire Purchase & Lease Transactions – Multiplicity of Taxes

· As per the 46th Amendment to the Constitution of India, Hire Purchase & Lease Transactions are
defined as deemed ‘sale’ activities. As such, they were subject to sales tax @ 4 to 14% in different
states and are now subject to Value Added Tax (VAT) in

141
 all the states.

Finance Act, 2001 defined Hire Purchase & Lease Transactions as “service” and as such, the interest
component in these transactions is subject to service tax @ 12.24%.

·
The Lease Rentals /Hire Purchase transactions are also subject to Tax Deduction at Source (TDS).

The Income Tax Department looks at all lease transactions with suspicion. As such, depreciation
benefits to the lessor (who is the owner of the asset) are often denied.

At various instances, the same transaction is being treated as

Sale Transaction, Finance and Service simultaneously. This anomaly and confusion has created enough
regulatory problems, which will compound further in future and will be severely detrimental to the
interest of every player in the economy.

As a result of multiple taxation, hire purchase/ leasing, which has a critical role to play in the Indian
economy, is being killed by making such transactions economically unviable. This can only nullify the
government’s efforts to increase tax revenues from this segment.
The challenges for NBFCs are thus quite a few. It is however noteworthy that many of these can be
addressed by just providing them a level playing field with the other players in the game. In most cases no
new law, concessions, arrangements or institutions need be created specially for the NBFCs and all that
needs to be done is that the existing arrangements for and the support structure provided to the other
participants in the same system be extended to them as well without any differentiation.

Roadblocks

However, for NBFCs to contribute effectively in future, the regulatory framework needs to address the
roadblocks to growth of the NBFC sector. These are highlighted below:

 Absence of any refinancing agency for the sector, combined with

142
 restrictive caps on banks’ lending to the NBFC sector.

 Limited access to ECB funding, which would help address funding

cost and tenure issues

 Restrictions on issuing hybrid financial instruments for meeting

regulatory capital needs

 No access to SARFAESI and Debt Recovery Tribunals for

recovery of bad loans

 Multiplicity of taxes combined with differential and

discriminatory
tax treatment of the sector

SUGGESTIONS

Looking ahead, the objectives of financial inclusion and balanced economic growth pose significant
challenges for the financial sector given the size and uniqueness of the Indian economy. The relative
underdevelopment of rural and semi-urban segments; low investment in agriculture; the need to develop
self-employment opportunities; the need to create equal opportunities and economic empowerment for
women and backward groups are amongst the many challenges that require quick and innovative
solutions.

As a huge emerging economy, India offers unprecedented challenges as well as exciting opportunities for
players in the financial sector. Addressing customer needs and providing credit and financial services to
large segments of the un-banked and underserved population will require unique and innovative solutions,
which NBFCs are well placed to provide. There is a space in the market and there is a market in such
space. The act of discovery does not lie in looking for new lands alone, but also looking with new eyes.
Ancient Indian wisdom says, ‘when you shut one eye, you don’t hear everything’.

Some of the specific suggestions that will form an increasingly large part of NBFC activities in future
will be

143
· Acting as a Distribution Backbone for Insurance Companies

With low insurance penetration in India, customised products are needed for low-income groups in the
semi-urban and rural market who typically, are NBFC customers. As with 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 provide feedback on product performance and customer needs.

· Distribution of Mutual Fund Products

Given the rapid growth in the mutual fund industry, MF products will percolate into the semi-urban
markets initially and seep into rural markets at a later point in time to tap investible surpluses. These
markets are challenging and will require innovation in product offerings; NBFCs are well placed to work
as partners with mutual funds in developing these markets.

· Providing Collection Services for Portfolios Originated by Banks and Other NBFCs

Typically, NBFCs have robust collection mechanisms while banks generally depend on third party
service providers for support in collection. As both set of players are regulated by the RBI, it is healthy
for the financial sector (given the problems in enforcing operating guidelines for multifarious agencies
operating in this area) that NBFCs and banks develop a collaborative relationship in collections, to the
extent limited or partial recourse guarantees are provided by the collecting party. This also helps the
originating party in rating its assets and in securitisation.

· Buyout and Servicing of Retail NPA’s

This is at a nascent stage in India. The asset buyout and restructuring business is focused almost entirely
on corporate assets; however, the rapid growth in retail asset portfolios creates a similar need for entities
that will acquire and generate a yield from stressed asset portfolios. As low-cost operators, NBFCs are
better suited to play this role, which is critical in maintaining the health of the retail financial sector. This
activity plays a vital role in freeing up capital for lending institutions, which can be used productively.
However, as a pre-requisite, the current restrictions placed on NBFCs in accessing the legal and judicial
framework for recoveries need to be removed.

144
· Providing a Single-Window for Meeting the Borrowing and Investment Needs of
Individuals and SME Enterprises

With 50% of the population not having bank accounts and lacking access to organised credit, the ability
of NBFCs to address the needs of low-income groups and small businesses supplements the role of banks.
By expanding their own product offerings as well as acting as distributors for larger financial institutions,
NBFCs have been able to serve customer needs while generating a fee-based income stream for
themselves, which also helps in de-risking their operating models. Typically the relationship between the
NBFCs and banks would be that of ‘Retailer-Wholesaler’, where the retailer would provide last mile
delivery in a more effective manner than banks, particularly in semi-urban and rural markets.

· Leasing

Flawed policies relating to 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 growth of
SME enterprises. Typically, smaller enterprises that lack capital use operating leases as a tool to
overcome the investment barrier to growth. NBFCs have a large role in this segment, as they better
understand the needs of smaller enterprises.

· Improving Corporate Governance Standards

To become real game changers, business transparency is inevitable for any financial entity. In the case of
NBFCs, there is an imperative for adopting good corporate governance practices. RBI has already
prescribed a governance code for NBFCs as part of their best practices; these include constitution of risk
management, audit and nomination committees, disclosure and transparency. When due diligence was
undertaken on significant shareholders and directors at the time of registration it was observed there are
no prescriptions for qualifications for directors, change in directors, etc.

· Customer Protection Issues

Protection of customers against unfair, deceptive or fraudulent practices has become top priority
internationally after the crisis. Incidentally, the Bank has received and is receiving number of complaints
against charging of exorbitant interest rates, raising of surrogate deposits under the garb of nonconvertible
debentures, various types of preference shares, Tier II Bonds, etc. Aggressive practices in re-possessing of

145
automobiles in the case of auto loans and improper/opaque practices in selling the underlying gold
jewellery in the case of gold loans are the two categories in which relatively more complaints are received
and are being received by the Reserve Bank. NBFCs are often found not to practice Fair Practices Code
(FPC) in letter and spirit. Developing a responsive and proper grievance redressal mechanism is the more
important agenda in the context of this action point.

· Greater Innovation

Although NBFCs have been designing innovative products to suit the client and market conditions, the
sophistication of financial services has been gradually increasing in the recent past. There is an imperative
need for NBFCs to aggressively involve in designing innovative products to become real game changers
in the economy.

In this context, a cue may be taken from the description of daily financial lives of poor people given in
detail in “Portfolios of the Poor,” a prominent investigation into the everyday problems which they face
(Collins, Kulkarni and Gavron, 2009). It is stated therein that typical low income families used some 10
different financial instruments, several channels of transport for money and multiple ways of keeping
money safe. Their fundamental protection against financial risk is diversification, knowledge about
counterparties and the judicious exploitation of relationships that are expected to last. NBFCs should
closely study such behaviour of poor people taking advantage of the last mile connectivity which they do
possess, to craft innovative products.

White Label ATMs

As NBFCs already have significant business presence in semi-urban and rural centres, there is a case for
them to explore business potential by establishing white label ATMs in such areas.

Need for a Supportive Legal Infrastructure

Supporting laws such as those governing accounting rules, property rights and contract enforcement will
be of prime importance to the future growth of NBFCs. A study done by the World Bank (Levine, Loayza
and Beck -1999:28) on the relationship between legal infrastructure and financial development finds that
“Countries with

146
 · Laws that give a high priority to secured creditors,
· Legal system that rigorously enforce contracts, and
· Accounting standards that produce comprehensive and comparable corporate
financial statements tend to have better-developed financial intermediaries.”

Fast track recovery mechanism, like repossession of assets in case of default will hold the key. With huge
backlog of pending cases before various courts across the country leading to long delays, a system of
repossession using “private” means within the country’s legal framework will ensure a healthy recovery
trend.

CONCLUSION

NBFCs are already game changers, as can be seen from the analysis earlier in areas of financial inclusion,
especially micro finance, affordable housing, second hand vehicle finance, gold loans and infrastructure
finance. NBFCs can play a vital role going forward, in closing the loop as regards financial inclusion for
individuals and MSMEs. As regards individuals, NBFCs can after various financial products offered by
the securities industry, viz., shares, mutual funds, depository services etc., as also insurance products both
life and non-life together with their current product offerings. As regards MSMEs, NBFCs can become
game changers by providing factoring and bill payment service which are of critical importance at the
present juncture.

The way forward is to ensure that both the NBFI sector and all the concerned regulators play an active
part in attending on the imperatives mentioned at above. The complimentary role of the financial sector
and all the regulators hardly needs overemphasis in the context of NBFCs morphing as game changers for
providing the last mile connectivity and closing the loop as regards financial inclusion. In this context,
NBFCs have a special responsibility against the background of the need to improve the customer service
by conducting their operations as per the best practices of corporate governance.

In the ultimate analysis, adhering to best corporate governance and ethical practices is the only way for
gaining the confidence of their customers in particular, and the society in general. Consequently, the
NBFC sector would be able to garner greater trust of both its customers and the society. That would
provide the springboard for increasing their business levels in the process of fulfilling their role as game
changers in the areas mentioned above. NBFCs becoming true game changers would be a sweetener for
financial inclusion efforts in our country.

147
 BIBLIOGRAPHY
BOOKS

Agarwal M.R. and Naveen Kumar “Economic Reforms - Retrospect and Prospect’ Himalaya
Publishers, New Delhi, 2003.

An Overview of the Indian NBFC Sector Performance in 2010, Prospects in 2011 by Nitin
Bothra ACS and Kamil Sayeed, B.A LLB legal updates Vinod Kothari & Co, Kolkata.

Anand MR. (ed.) “Indian Capital Market Trends and Dimension”, Tata McGraw Publishing
Ltd., New Delhi, 2000 pp. 180-190.

148
 Anand Sinha, Deputy Governor, Reserve Bank of India (2013) “Regulation of Shadow
Banking – Issues and Challenges.” www.rbi.org.

Anand. M.R., et. al., “Indian Capital Market Trends and Dimension’, Tata McGraw Publishing
Ltd., New Delhi, 2000, pp. 175-180.

Anand. MR., “Reforms on NBFCs” (ed.), “Indian Capital Market Trends and Dimension”,
Tata McGraw Publishing Ltd., New Delhi, 2000.

Ananda Bhoumik and Arshad Khan “Non-Banking Financial Institutions in India: Performance Trends
and Outlook, Fitch Friday Presentation, FITCH RATINGS, Dec 2008.

Arora, “Financial Sector Reforms and Service Sector” (ed.), ‘Economic Reforms _ Retrospect and
Prospect’Prospect’ Himalaya Publishers, New Delhi, 2003.

Arora, M. (2003), Credit Rating in India- Institutions, Methods and Evaluation, New Century
Publications, Delhi.

Baid, Rachana “Management of NBFCs-A Study of Select Units”, Doctoral Thesis, Business
Management, Osmania University, Hyderabad pp.140-150.

Baid, Rachna, ‘Management of NBFCs-A Study on Select Units’ Doctoral Thesis, Osmania
University, 1998.

Baid, Rachna, Economic Liberalization: Prospects and Concerns for NBFCs,

Working Paper, 1998

Baid, Rachna, Economic Liberalization: Prospects and Concerns for NBFCs,

Working Paper, 1998

Bhattacharya, “Financial Reforms and Financial Development in India”,

Institute of Management Technology, Excel Books, New Delhi, 1998.

Bhole, L.M “Management of Financial Institutions and Financial Markets”, Tata McGraw Hill
Publishing Limited, New Delhi. 1998 pp. 20-25.

Business Statistics by Dr. S.P Gupta and M.P Gupta, Sultan chand and Sons, New Delhi 2008

149
Business Statistics by G.C Beri, TATA McGrawhill Publishing Company ltd, New Delhi – 6th
Edition, 2008.

Chandle Lester. V, “The Economics of Money and Banking”, Third Edition, Harper and
Brother, New York, 1959, p. 325.

Chari, P.S.V (1997), “Banking system and NBFCs” Banking Reforms in India, - Managing
Change, TATA McGraw Hill Publications ISBN 0-07-463448-8.

Desai V. Ashok. “A Decade of Economic Reforms in India, the Past the Present, the Future”,
Kapila, Raj and Kapila, Uma, (ed). Academic Foundation, 2002.

Finance Industry Development Council (FIDC) Newsletter Quarterly (A SelfRegulatory

Organization registered with RBI)

Financial Management by Ravi M. Kishore 7th Edition, Taxmann Publication Ltd, New Delhi
2008

Goacher and Others, “British Non-Banking Financial Institutions”, Unwin Hyman Hd, UK,
1987.

Goel, “Financial Institutions and Economic Growth of India”, Light and Life Publications,
New Delhi, 1996.

150