1.

EXECUTIVE SUMMARY

For a large and diverse country like India, ensuring financial access to penetrate growth and
entrepreneurship is a critical priority. Banking penetration continues to be low, and even as the
coverage is sought to be aggressively increased through programs like the Pradhan Mantri Jan Dhan
Yojana, the quality of coverage and ability to access comprehensive financial services for households
as well as small businesses is still far from satisfactory.

In this scenario, the non-banking finance companies (NBFCs) sector has scripted a story that is
remarkable. It speaks to the truly diverse and entrepreneurial spirit of India. NBFCS form an integral
part of the Indian Financial system. From large infrastructure financing to small microfinance, the
sector has innovated over time and found ways to address the debt requirements of every segment of
the economy. It has been intermediating a growing share of the resource flows to the commercial
sector. NBFCs supplement the role of the banking sector in meeting the increasing financial needs of
the corporate sector. The Reserve Bank’s regulatory perimeter is applicable to companies conducting
non-banking financial activity. To its credit, the industry has also responded positively to regulatory
efforts to better understand risks and to address such risks through regulations. Over time, the sector
has evolved from being fragmented and informally governed to being well regulated and in many
instances, adopted best practices in technology, innovation and risk management as well as
governance.

The contribution made by these NBFCs in the economic growth as well as in meeting the credit needs
of the economy is needed to be appreciated and there is also a need to keep an eye on their
functioning as some of these NBFCs have looted people's money who were innocent investors to
them.

In the light of this, the present study Non-Banking Financial Companies in India– A Boon or A
Curse?” have given focus on areas like defining the term NBFCs, evolution, growth and development
of NBFCs, regulatory authorities and supervision of NBFCs. This research study is an attempt to
analyse whether in the current scenario with rising rate of banking sector scams, NBFCs prove to be a
boon or curse to the economy.

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 2: INTRODUCTION

2.1 Definition

Non-banking financial companies (NBFCs) constitute an important segment of the financial system
in India. NBFCs are financial intermediaries engaged primarily in the business of accepting deposits
and delivering credit. They play an important role in channelizing the scarce financial resources to
capital formation. NBFCs supplement the role of the banking sector in meeting the increasing
financial needs of the corporate sector, delivering credit to the unorganized sector and to small local
borrowers. As compared to banks, they can take quick decisions, assume greater risks, tailormake
their services and charges according to the needs of the clients. Their flexible structure helps in
broadening the market by providing the saver and investor a bundle of services on a competitive
basis.

A non-banking financial company has been defined vide clause (b) of Section 45-1 of Chapter IIIB of
the Reserve Bank of India Act, 1934, 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 or arrangement or in any other manner or lending in any manner; (iii) such
other non-banking institutions 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.

NBFC has been defined under Clause (xi) of Paragraph 2(1) of Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 1998, as: ‘non-banking financial
company’ means only the non-banking institution which is a loan company or an investment
company or a hire purchase finance company or an equipment leasing company or a mutual benefit
finance company. “The company will be treated as a non-banking financial company (NBFC) if its
financial assets are more than 50% of its total assets (netted off by intangible assets) and income from
financial assets is more than 50% of the gross income. Both these tests are required to be satisfied as
the determinant factor for principal business of a company.” In the year 1998, a new concept of
public deposits meaning deposits received from public, including shareholders in the case of public
limited companies and unsecured debentures/bonds other than those issued to companies, banks, and

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financial institutions, was introduced for the purpose of focused supervision of NBFCs accepting
such deposits.

2.2 Evolution of NBFCs in India

NBFCs started humbly in India in the 1960s as an alternative for savers and investors whose financial
needs were not sufficiently met by the existing banking system. The NBFCs initially operated on a
limited scale without making much impact on the financial industry. They invited fixed deposits from
investors and worked out leasing deals for big industrial firms.

In the first stages of development, the Companies Act regulated financing. However, the unique and
complex nature of operations and with financial companies acting as financial intermediaries, there
was a call for a separate regulatory mechanism. Hence, Chapter III B was included in the Reserve
Bank of India Act, 1934, which assigned the Bank with limited authorities to regulate deposit-taking
companies. The RBI accepted and implemented that hire purchase and leasing companies could
accept deposits to the extent of their net owned funds, as per the key recommendations of James S.
Raj Study Group formed in 1975. Between the 1980s and 1990s, NBFCs, with their customer-
friendly reputation, began to attract a huge number of investors. The number of NBFCs rose swiftly
from a mere 7000 in 1981 to around 30000 in 1992, which made the RBI feel the need to regulate the
industry. In 1992, the RBI formed a Committee headed by the former Chairman of Bank of Baroda,
Mr. A. C. Shah, to suggest measures for effective regulation of industry. Shah Committee's
recommendations included most things from compulsory registration to prudential norms.

In January 1997 there were huge changes in the RBI Act, 1934, especially the Chapters III-B, III-C,
and V of the Act seeking to put in place a complete regulatory and supervisory structure, which
would protect the interests and also ensure the smooth functioning of NBFCs.
After the amendment of the Act in 1997, the NBFCs have grown significantly in terms of operations,
range of instruments and market products, technological advancement, among others.
In the last 20 years, the NBFCs have gained prominence and added depth to the financial sector.

In August 2016, the union cabinet gave the go-ahead for foreign direct investment (FDI) under the
automatic route in regulated [Link] have been performing an important role in the process of

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intermediation, especially in areas where established financial entities are not easily accessible to
borrowers. They have inspired small savers to invest money in them, and then they were courageous
enough to lend to the borrowers.

2.3 Role of NBFCs in the Indian Economy:

With the ongoing stress in the public sector banks due to mounting bad debt, their appetite to lend
(especially in rural areas) is only going to deteriorate, thereby providing NBFCs with the opportunity
to increase their presence. The success of NBFCs can be clearly attributed to their better product
lines, lower cost, wider and effective reach, strong risk management capabilities to check and control
bad debts, and better understanding of their customer segments.

Not only have they shown success in their traditional bastions (passenger and commercial vehicle
finance) but they have also managed to build substantial assets under management (AUM) in the
personal loan and housing finance sector which have been the bread and butter for retail banks.
Additionally, improving macroeconomic conditions, higher credit penetration, increased consumption
and disruptive digital trends will allow NBFC’s credit to grow at a healthy rate of 7–10% (real growth
rate) 3 over the next five years. Clearly, NBFCs are here to stay. NBFCs are more profitable than the
banking sector because of lower costs. This helps them offer cheaper loans to customers. As a result,
NBFCs' credit growth - the increase in the amount of money being lent to customers – is higher than
that of the banking sector with more customers opting for NBFCs. They contribute largely to the
economy by lending to infrastructure projects, which are very important to a developing country like
India. Since they require large amount of funds to earn profits only over a longer time-frame, these
are riskier projects and deters banks from lending.

NBFCs cater to a wide variety of customers - both in urban and rural areas. They finance projects of
small-scale companies, which is important for the growth in rural areas. They also provide small-
ticket loans for affordable housing projects. All these help promote inclusive growth in the country.

 Mobilization of resources – It converts savings into investments

 Capital Formation – Aids to increase capital stock of a company
 NBFCs provide Long Term Credit & Short Term Credit
 Aids in employment generation

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  Helps in development of financial markets
 Helps in attracting foreign grants
 Helps in breaking the vicious circle of poverty by serving as government’s instruments

2.4 Types of NBFC Registered with RBI

Categorization of NBFC

NBFCs are categorized:

(A) In terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,

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(B) Non deposit taking NBFCs by their size into systemically important and other non-deposit
holding companies (NBFC-NDSI and NBFC-ND)

(C) By the kind of activity they conduct.

Below table gives few types of companies and its respective regulatory body of that type company :

Company Type Regulating Body

Chit Funds State Government

Venture Capital Fund Securities and Exchange Board of India (SEBI)

Stock Brokering Securities and Exchange Board of India (SEBI)

Merchant Banking Securities and Exchange Board of India (SEBI)

Housing Finance National Housing Bank (NHB)

Nidhi Company Ministry of Corporate Affairs

Within this broad categorization the different types of NBFCs are as follows:

I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying
on as its principal business the financing of physical assets supporting productive/economic activity,
such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling
equipments, moving on own power and general purpose industrial machines. Principal business for
this purpose is defined as aggregate of financing real/physical assets supporting economic activity
and income arising therefrom is not less than 60% of its total assets and total income respectively.

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

III. Loan Company (LC): LC means any company which is a financial institution carrying on as its
principal business the providing of finance whether by making loans or advances or otherwise for any
activity other than its own but does not include an Asset Finance Company.

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

V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC

carrying on the business of acquisition of shares and securities which satisfies the following
conditions:

 It holds not less than 90% of its Total Assets in the form of investment in equity shares,
preference shares, debt or loans in group companies;
 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 Total Assets;
 It does not trade in its investments in shares, debt or loans in group companies except through
block sale for the purpose of dilution or disinvestment;
 It does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the
RBI act, 1934 except investment in bank deposits, money market instruments, government
securities, loans to and investments in debt issuances of group companies or guarantees issued
on behalf of group companies.
 Its asset size is ₹ 100 crore or above and
 It accepts public funds

VI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a
company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-
NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year
maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

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VII. Non-Banking Financial Company: Micro Finance Institution (NBFC-MFI): NBFC-MFI is a
non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets
which satisfy the following criteria:

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

VIII. Non-Banking Financial Company: Factors (NBFC-Factors): NBFC-Factor is a non-deposit

taking NBFC engaged in the principal business of factoring. The financial assets in the factoring
business should constitute at least 50 percent of its total assets and its income derived from factoring
business should not be less than 50 percent of its gross income.

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

X. Residuary Non-Banking Company (RNBC) : Residuary Non-Banking Company is a type of

NBFC having a principal business of the receiving of deposits, under any scheme or arrangement or
in any other manner and not being an investment, asset financing, and loan company. These types of
companies are required to maintain investments as per directions of RBI, in addition to liquid assets.

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2.5 Activities undertaken by NBFCs

1. Hire Purchase Services by NBFC

Now suppose a small business wants to buy machinery for which it cannot make a payment in a lump
sum, but can afford to pay a certain percentage of its value as a deposit, it can make a hire purchase.
So, under this system, the seller delivers the goods to the buyer without transferring the ownership of
goods. The payment for the goods will be made by the buyer in installments. If the buyer pays all the
installments, the ownership of the goods will be transferred, on payment of the last installment. E.g.
Hero Honda Motor Finance Co., Bajaj Auto Finance Company, etc.

2. Rural Financing by NBFC

Agricultural inputs like tractors, seeds, and machines comprise a significant portion of Rural
Financing. Agricultural inputs like tractors, seeds, and machines comprise a significant portion of
rural financing. This includes providing finance for farm loans, small commercial vehicles, etc.

3. Retail Financing by NBFC

Providing short term funds for Loan against shares, gold, property, basically for consumption
purposes.

4. Trade finance by NBFC

Dealer/distributor finance for meeting working capital requirements, vendor finance, and other
business loans.

5. Infrastructural Funding by NBFC

This segment alone makes up a major portion of funds lent, amongst the different segments. This
mostly includes Real Estate, railways (mostly metros), flyovers, ports, airports, etc.

6. Asset Management Company

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Many people who are lured by the handsome gains, invest in equity in spite of having sufficient the
information or knowledge. How? Simple. They don’t do it themselves. Their fund managers do it for
them on their behalf. Thus, the asset management company consists of these fund managers who
invest the funds pooled by small investors and actively manage it.

7. Leasing Services by NBFC

Many small businesses or sometimes even larger ones cannot afford to purchase an asset like a land
or a building. So, they lease them from the owner of the asset (called lessor), the same we rent a
property. But lease contracts are made for a fixed period of time.

8. Venture Capital Services by NBFC

Higher the risk, higher the profit is an age-old saying in the business realm. Venture capitalists invest
in those companies (ventures/startups) that are in their early stages, considered risky and have success
potential and could promise sufficient return to justify such gamble.

9. Micro Small Medium Enterprise (MSME) Financing

MSME forms a crucial part of the economy with millions depending on it for their livelihood.

Other services provided by NBFCs:

 Underwriting
 Stock Broking
 Merchant Banking
 Portfolio Management Service
 Foreign exchange-related business
 Giving Credit Rating to other companies

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2.6 Difference between Banks and NBFCs

 Banks are the government authorized financial intermediary that aims at providing banking
services to the general people. Whereas NBFCs provides banking services to people without
carrying a bank license.

 An NBFC is incorporated under the Companies Act whereas a bank is registered under the
Banking Regulation Act, 1949.

 NBFCs are not allowed to accept deposits which are repayable on demand whereas banks
which accept demand deposits.

 In NBFC, foreign Investments up to 100% is allowed. Whereas in the case of private sector
banks they are eligible for foreign investment, but which would be not more than 74%.

 Banks are an integral part of the payment and settlement cycle while NBFC is not a part of
this system.

 It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas in the case of
NBFC it is not required to maintain reserve ratios.

 Deposit insurance facility is allowed to the depositors by Deposit Insurance and Credit
Guarantee Corporation (DICGC). In the case of NBFC, this type of facility shall not be
available.

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  Banks can create credit whereas in case of NBFC they are not involved in the creation of
credit.

 Banks can provide transaction services to its customers such as providing overdraft facility,
issue of traveler’s cheque, transfer of funds, etc. Whereas these type of services cannot be
provided by NBFC.

2.7 Shift from banks to NBFCs

Traditionally, the financial sector in India was dependent and solely dominated by the private
financial institutions. There used to be a time when banks and other financial institutions hesitated in
lending to small businesses, considering it as a risky proportion. The nation’s current financial
scenario is being balanced out equally between both the private and public sector financial
institutions. This has paved the way for meeting the credit needs of the unorganized sector and filling
up the long-left financial gap between the formal and medium enterprises on the one hand and the
unorganized ones on the other. The small business finance market that was continually getting
rejected from the banks have now turned out to be a great opportunity for the Non-banking finance
companies (NBFCs) with localized presence and domain knowledge.

An Era of Progressive Shift

Undoubtedly, the NBFCs have scripted a great success story that will reap some of the most fruitful
benefits in the near future. NBFCs have registered a robust growth, i.e., a compound annual growth
rate (CAGR) of 19% over the past few years. Their contribution to the Indian economy has risen all
the way from 8.4% in 2006 to more than 14% in March 2015. The NBFCs stand supported by several
factors such as superior product lines, low cost, broader and effective reach, robust risk management
capabilities to control bad debts & proper comprehension of their customer segments.

Proven Performance

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While the banking industry struggled to get rid of the rising pile of bad loans, their counterparts,
better known as the non-banking financial companies, improved their performance on most of the
metrics in the fiscal year 2015. It is mentioned in the financial stability report (FSR) of June 2016 the
NBFC loans expanded 16.6% annually which was twice as fast as the 8.8% credit growth across the
banking sector on an aggregate level. The aggregate balance sheet of the NBFC sector expanded
15.5% in fiscal 2016 compared with 15.7% in the year 2015. In August 2016, the regulated NBFCs
got the union cabinet’s permit to enjoy the benefits of Foreign Direct Investment (FDI) but only from
the automatic routes. According to a 2016 report by consulting firm PwC India, it is stated that by
2020, the credit lending ability of Indian NBFCs is estimated to account for anywhere between 18.2%
and 20.9% of the total credit off-take in the country.

2.8 Registration of NBFC in India

According to section 45-I (c) of the RBI Act, a Non – Banking Company carrying on the business of
a financial institution will be an NBFC. It is governed by the Ministry of Corporate Affairs as well as
the Reserve Bank of India. As per RBI guidelines, an NBFC cannot carry on non-banking financial
business if, a) it does not have a certificate of registration from the bank (except for the NBFC’s who
are not regulated by the RBI), b) it does not have Net Owned Funds of Rs. 2 crores.

An NBFC incorporated under the Companies Act, 1956 or Companies Act, 2013 willing to
commence a business of non-banking finance should comply with the following RBI guidelines:

1. It must be registered under Section 3 of the Companies Act, 2013 or the Companies Act, 1956
2. It should meet the requirement of minimum of Rs. 2 crores of Net Owned Funds (except for
NBFC-MFIs, NBFC-Factors and CIC)

Net Owned Funds can be calculated from the last audited balance sheet of the firm. Paid-up Equity
Capital, Free Reserves, Share Premium Account Balance, and Capital Reserve will constitute Total
Owned Funds. To calculate, Net Owned Funds, deduct Revaluation Reserves, Balance of
Accumulated Loss, and the book value of Intangible Assets from Total Owned Funds. If any
investment in shares of other NBFC’s or in debentures and shares of subsidiaries and group
companies is in excess of 10% of the owned funds will be subtracted from the Net Owned Funds.

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The following NBFC’s are not required to obtain any registration with the Reserve Bank of India:

1. Core Investment Companies – (assets are less than 100 crore or public funds not taken)
2. Merchant Banking Companies
3. Companies which are engaged in the business of stock-broking
4. Housing Finance Companies
5. Companies engaged in the business of Venture Capital.
6. Insurance companies holding a certificate of registration issued by IRDA.
7. Chit Fund Companies as defined in the Sec 2 clause (b) of the Chit Fund Act, 1982
8. Nidhi Companies

The procedure to incorporate an NBFC is:

1. A company should first be registered under the Companies Act 2013 or under Companies Act
1956.
2. The minimum net owned funds of the Company should be Rs. 2 Crore.
3. There should be a minimum of 1 Director from the same background or a Senior Banker as a
full-time director in the Company.
4. The CIBIL records of the Company should be clean
5. After all of the above conditions have been satisfied the online application on the website of
RBI should be filled and submitted along with the requisite documents.
6. A CARN Number will be generated.
7. A Hard copy of the application also has to be sent to the regional branch of the Reserve Bank
of India.
8. After the application is properly scrutinized, the License will be given to the Company.

What are the guidelines that an NBFC must follow?

The Company once it gets it license has to adhere to the following guidelines:

 They cannot receive deposits which are payable on demand.

 The public Deposits which the company can take should be for a minimum time period of 12
months and a maximum time period of 60 months.
 The interest charged by the Company cannot be more than the ceiling prescribed by RBI
 The repayment of any amount so taken by the Company will not be guaranteed by RBI

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  All the information about the company as well as any change in the composition of the
Company has to be furnished to the Reserve Bank of India.
 The deposits taken by the Public will be unsecured.
 The Company has to submit its audited balance sheet every year.
 A statutory return on the deposits taken by the company has to be furnished in the form NBS
– 1 every year.
 A certificate from the auditors had to be taken stating that the company is in a position to pay
back all the deposits or money taken from the Public.
 A half-yearly ALM return has to be given by the company which has a Public Deposit of Rs.
20 Crore and above or has assets worth Rs. 100 Crore and above.
 A minimum level of 15% of the PD has to be maintained by the Company in Liquid Assets.

If the NBFC defaults in the payment of any amount taken, the consumer can go to the National
Company Law Tribunal or the Consumer Forum to file a suit against the Company.

Registration Charges
The professional fee charged by RBI for registration of a new Micro Finance Institution is ₹4 to ₹4.5
lakh since this is a tedious, time consuming and a complicated process. The total registration charges
will be up to ₹8.5 lakh. It is to be noted that the registration process is complicated, time-consuming
and costly but on the other side it is also worth it and has a great scope.

Penalties for Deposit-Taking without Authorization

If any unincorporated entity (Proprietorship / Partnership) or an NBFC without authorisation to take
deposit is found accepting public deposits, it is liable for criminal action. Also, if NBFCs associate
themselves with proprietorship/partnership firms accepting deposits in contravention of RBI Act, they
are also liable to be prosecuted under criminal law or under the Protection of Interest of Depositors
(in Financial Establishments) Act, if passed by the State Governments.

Credit Rating of NBFCs

NBFCs and RNBFCs were required to get themselves rated at least once every year for fixed deposits
every year by one of the 3 credit rating agencies viz., CRISIL, ICRA and CARE and secure minimum
credit rating. Credit rating was made compulsory in June 1994 for all registered NBFCs for accepting
deposits so that the deposit ceiling for rated companies could be raised to higher levels whereas the

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unrated companies could be restricted from accessing deposits from public. While companies with
NOF of Rs. 2 crore and above must get rating by March 1995 and those having NOF of below Rs. 2
crore have the option to get the rating by March 31 1996.

Credit Rating Symbols

Name of Agency Rating
CRISIL FA
ICRA MA
CARE BBB (FD)

2.9 Factors That Led to the Growth of NBFCs in India

The transformation of Non-Banking Financial Companies (NBFC) in India in the past few years
plays an important role in growth of Indian Financial system. NBFC’s have emerged successful as
compared to Banks as their customized product offerings help individuals with their financial needs.

NBFC Credit Market growth is as shown below:

Financial Year Growth Rate

2016 13%

2017 16%

2018 20%

NBFC’s grow at an average rate of 4%-6% every year. Following are the major factors that led to the
growth of NBFC’s in India.

Understanding the Customer

NBFC’s have strongly focused on unorganized & Under-served segments of the economy, which led
the companies to create a niche for themselves through frequent interactions with their Customer
segments & deeply understanding needs. They are ensuring last-mile delivery & enhanced customer
experience of products & services.

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Customized Product Offering
Several NBFCs have focused on a limited line (or often a mono-line set of products) to serve the
target customer segment. Armed with a thorough comprehension of their target segment, NBFCs
have customized product offerings to address unique characteristics of the customer segment and
focus on meeting the right needs.

Leveraging Technology for Improved Efficiency and Enhanced Experience:

The use of technology is helping nbfc Companies customize credit assessment models and optimize
business processes, thereby reducing the time to market and helping improve customer experience.
NBFCs are investing in data analytics and artificial intelligence to build robust relationships with
their target customer segments.
Wider and Effective Reach:
NBFCs are now reaching out to Tier-2, Tier-3 and Tier-4 markets, distributing loans across several
customer touch-points, building a connected channel experience, that provides an omnichannel
seamless experience with 24/7 sales and service, as the consumers of today evolving and accessing
digital media like never before, NBFCs have embarked on new and better ways to engage with the
customer.

Risk Management
Given their focus on lending to the sub-prime customer segment, and regulatory disadvantage
(SARFEASI, DRT, and capital adequacy requirements) in comparison to commercial bank lenders,
NBFCs are ensuring enhanced governance through a proactive, robust and agile risk management
model.

Other factors contributing to the growth of NBFCs:

 Stress on public sector units (PSUs)
 Latent credit demand
 Digital disruption, especially for micro, small and medium enterprises (MSMEs) and small
and medium enterprises (SMEs)
 Increased consumption
 Distribution reach and sectors where traditional banks do not lend

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The growth of NBFC in the Indian economy is lower than many other developing countries like
Thailand and Malaysia where NBFC’S credit penetration is 25%whereas in Indian economy NBFC’s
company’s credit penetration is only 15% only. NBFC have gained momentum in the Indian
economy recently where there has been a significant increase in incorporation of companies since the
1990’s. Government Initiatives like Pradhan Mantri Jan Dhan Yojna has introduced banking system
to that part of India which was not aware of it but still 15% of the adults don’t use the banking
facilities which are available to them and therefore government has introduced 21 NBFC to curb this
difference as NBFC's have far-reaching effect than what commercial banks have.

2.10 Issues and Challenges in the NBFC Sector

Even though the NBFC has been capturing market shares and making rapid progress than from
commercial banks, a few prominent players have largely dominated the NBFC market. Small NBFCs
are struggling to ramp-up their operations and lend sustainably. There are several factors due to
which NBFCs struggle. Some of the major challenges and issues in the way of starting an NBFC in
India are as follows:

a) Funding issue due to the absence of refinancing option

Banks in India have several options for refinancing such as RBI, NABARD, EXIM Bank, and SIDBI.
Likewise, Housing Financing Companies (HFCs) also have the refinancing alternative, and it
refinances from NHB (National Housing Bank), the regulator of HFCs. However, NBFCs have to
hinge on banks, competitors, or the capital markets for raising resources every time.

b) Complication in obtaining NBFC License

The process of procuring an NBFC license is quite difficult. The reasons for the same are the
complicated documentation and approval required from the Reserve Bank of India. RBI governs the
process of NBFC registration and has set several standards for obtaining the same.

c) Difficult compliances for NBFC in India

Once you have incorporated your NBFC, you need to follow its compliances strictly. There are a
number of NBFC compliances for different types of NBFCs which they have to file quarterly, half-
yearly, and annually.

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d) Absence of flexibility in the classification of loan NPAs
For large corporates, the NPA (Non-Performing Assets) norms are quite relevant. However,
businesses with irregular cash flow have a cascading impact regarding all the delays in payments.
Although, in the revised categorization, assets are re-categorized; therefore, classification under NPA
and greater flexibility, w.r.t scheduling is much required.

e) Lack of statutory recovery tool

After the asset classification norms are revised, something which still lacks is the recovery tool at par
with banks. However, NBFCs today lack statutory recovery tool available.
f) Limited leverage ratio for NBFCs-ND with assets sizes less than Rs. 500 crores
Small NBFCs are exempted from the maintenance of the Capital Adequacy Ratio (CRAR). But they
can’t exceed the leverage ratio beyond 7 which is quite restrictive. Furthermore, such NBFCs borrow
largely from financial institutions and banks which in turn carry out due diligence on the NBFCs that
borrow.

g) Several representative bodies

In the interest of developing its various segments in a harmony, setting a single representative body
could be a better alternative. However, one must always ensure that every segment is represented
adequately in such an apex body that promotes the balanced growth of the NBFC sector without any
inner conflicts. In the present situation, there are a number of representative bodies. For instance, the
Finance Industry Development Council for AFCs, Association of Gold Loan Companies for Gold
Loan NBFCs, etc.

h) Disparate tax treatment

It’s a well-known fact that there exists a big inequality in the tax structures for Banks vs. NBFCs. For
example, TDS, Dual taxation on lease/hire purchase, and income recognition on NPAs. The current
legal framework for NBFCs doesn’t allow a tax deduction for the non-performing assets.

i) Scarcity of defaulter database

NBFC doesn’t get defaulter lists from Banks. In turn, this leaves NBFCs susceptible to credit risk on
account of the lack of crucial information. There is a requirement for bringing the essential legislative

19
amendments so that these companies can leverage the utility payments database in the credit
assessment process.

j) Minimum mandatory credit rating for deposit-taking NBFC

As per the revised regulatory framework, it is obligatory for NBFCs accepting deposits to get
investment-grade credit. This will make them eligible for accepting public deposits from any of these
six rating agencies- CARE, CRISIL, FITCH Ratings India Pvt. Ltd, ICRA, SMERA, and Brickwork
Ratings India Pvt. Ltd.

In case the rating of any NBFC is downgraded to below the minimum investment grade rating, then it
can’t accept public deposits. It must report the RBI regarding its position within 15 working days.

2.11 Digital Trends In NBFCs

Both new and established NBFC’s are harnessing the power of technology to create tailored lending
solutions and expanding their business on a Pan-India basis. The JAM Trinity (Jan-Dhan-Adhaar-
Mobile), increasing internet penetration in the Indian hinterlands, and the rising prevalence of digital
avenues for disbursal of loans, have made India one of the hottest markets for the growth of Fintech.
Seeing this, NBFC’s are investing heavily in digital transformation.

1) AI – Driven Predictive Financing

With consumer data that is rich, accessible and financially viable to deploy, financial institutions of
all sizes can not only know their customers, but also provide advice for the future. By moving from a
rear-view-mirror perspective of customer communication to services deployed by robo-advisors and
AI-driven chatbots, financial institutions will provide consumers with value through ‘next-best
actions’ as opposed to blind selling of products.

2) Voice & Vernacular - The Next frontier

The upcoming trends would see applications of voice in digital payments, which will be further
enabled by vernacular (Indian languages). Vernacular continues to be a gap in payments and other
financial services till now. So, voice search and recognition are a natural progression. Voice will
make experiences more interactive and reach the masses soon.

20
3) Video KYC – a great enabler
Video KYC would require an investor to upload identity proofs such as photograph, address proof,
PAN card and signatures on the mobile application or website. On uploading all documents, you are
required to start real-time video recording using the front camera and simply display a hard copy of
all the documents for 10 seconds each. Now, it’s time to work towards presence-less finance.

4) Blockchain – The Game changer

By introducing blockchain solutions to handle the KYC process, data can be available on a
decentralised network and therefore be accessed by third parties directly after permission has been
granted. This KYC system will also offer better data security by ensuring that data access is only
made after confirmation or permission is received from the relevant authority, eliminating the chance
of unauthorised access.
5) Cloud Integration – bringing in Ease and Efficiency
Cloud computing would help in creating a flexible business model that ensures growing business
needs. Some of the key benefits of cloud services are lower costs, quick implementation, and near-
universal availability.

6) Automation – Actualizing Speedy Outcomes

A typical automation process is characterized by a series of predetermined decision rules that
facilitates faster and more accurate processing of loan applications. This way, Anti Money
Laundering (AML) or other frauds that might be happening in real time can be identified.

7) Chatbots & Robo-Advisors

Most of the NBFCs would soon be employing chatbots and robo-advisors for interactions with
prospects and customers for self-onboarding of the customer, customer servicing and employee-
related services.

8) Social Profiling Score

To assess customers’ creditworthiness, apart for making use of info provided by the borrower, the
latest trend is to match the data with whatever is available in public domain, e.g. on the Ministry of
Corporate Affairs (MCA) and GST portal, then cross-verify this using the social media profiling of
the borrower. This gives us a holistic picture of the customer in question.

21
 3: OBJECTIVES OF THE STUDY

NBFC’s help unorganised sector get finance where the commercial banks are unable to provide to
such sectors and promote self-employment. Hence, this research has been untaken for the following
objectives:

1. To study the role of NBFCs in economic development

2: To comprehend the sustainability of NBFCs in India

3. The Rate of interest is higher as the risk is high which makes it unviable on both lending and
borrowing parts.

4: To comprehend the growth potential of NBFCs in India.

5. To examine the fact that NBFC’s have public money and risk that money while financing an
unorganised sector.

22
6. To analyse whether the functioning of NBFCs proves to be a Stepping stone to sinking sand
situation in the current market scenario.

4: HYPOTHESIS OF THE STUDY

Hypothesis is a testable prediction which is expected to occur. It can be a false or a true statement that
is tested in the research to check its authenticity. The hypothesis should be clear and precise. It should
be limited in scope and must be specific.

There are two types of hypotheses, they are:

• Null Hypothesis (Ho) • Alternate Hypothesis (Ha)

1:
Ho: In the long run, under stable economic conditions there will be a positive shift in the investment
patterns of NBFCs
Ha: In the long run, under stable economic conditions there will be a negative shift in the investment
patterns of NBFC

2:
Ho: Loan Seekers give preference to NBFCs over Banks
Ha: Loan Seekers give preference to Banks over NBFCs

3:
Ho: NBFCs give sufficient returns compared to market

23
Ha: NBFCs do not give sufficient returns compared to market

4:
Ho: Competitive rate of interest and faster processing system attracts people towards NBFCs
Ha: Competitive rate of interest and faster processing system does not attract people towards NBFCs

5:
Ho: Loan Seekers from NBFC are aware about different types of financial products offered by
NBFCs
Ha: Loan Seekers from NBFC are not aware about different types of financial products offered by
NBFCs

5: SCOPE OF THE STUDY

The scope of the research extends to identifying the impact and growth prospects of NBFCs in the
Indian economy through published financial details by RBI and Bajaj Finance Limited. It deals with
an in-depth study of the various functions of NBFCs, their growth, evolution, future scope and
different financial statements issued by the company.

6: LIMITATIONS OF THE RESEARCH

 The sample size was limited to 106 respondents.

 The sample was taken from the population residing in India only.

 The paucity of time and resources was a major constraint.

 Respondents can link his/her personal liking / disliking towards his preferences while filling
up the questionnaire

24
  The limited knowledge of the respondents regarding the topic may hamper the true conclusion
of the study.

 As questionnaire has limited questions there may be some factors which may get missed out

 Being an opinion survey, a lot of subjectivity is involved in the study.

7: RESEARCH METHODOLOGY

Nature of the Research

The nature of this research is conclusive research. Conclusive research means research is conducted
in a well-structured and systematic manner with a formal and definitive methodology that needs to be
followed and tested. The major purpose of such researches is to test the formulated hypotheses.
Therefore, the findings are significant as they have a theoretical or applied implication.

Data Collection Methodology

 Primary data is collected with the help of Survey Method where in the questionnaire was
circulated to diverse audience

 Secondary Data is collected from the internet websites, text books, research papers, journals,
dissertations etc. The data is also collected through case studies of IL&FS crisis and
performance of Bajaj Finance limited published on the internet.

Research Design

25
  The research design comprised a method of primary data collection using a survey given to
106 respondents.
 The design also included secondary data expressed through a review of past literature in the
concerned area, indicating that a certain segment of the study was exploratory in nature.
 The design used descriptive tools such as pie chart and bar graphs to highlight the data
analysis.

 Survey started: January 2020

 Survey ended: February 2020

Sample Size

Size of the sample refers to the number of items to be chosen from the universe to form a sample. An
optimum sample may be defined as the one that satisfies the requirements of the representativeness,
flexibility, efficiency, reliability. While deciding the size of sample, a researcher should determine the
desired precision and the acceptable confidence level for the estimate.
 The sample size for Survey Questionnaire is 106 respondents

Sampling Design

A Sample Design is a definite plan for obtaining a sample from a given population. Sample
constitutes a certain portion of the population or universe. The sample design should be such that the
systematic bias can be controlled; and the sample must be such that the results of the sample study
would be applicable, in general, to the universe at a reasonable level of confidence.

 The method used is Non-Probability Sampling

 Under Non-probability sampling, Snowball method was used. Here, surveys were sent to our
friends, relatives, colleagues, contacts and further they promoted the survey by sending it

26
 more of their contacts, thus resulting in more and more participation, which in turn increased
the set of targeted number of audiences.

Statistical Technique

 The study employed the use of bar graphs and pie charts to interpret and express the data in
the form of percentages.
 Graphs allow for descriptive secondary analysis of data.
 Each graph was accompanied by a key that contained the response options for the specific
question and the colour corresponding to each response in the chart.
 The graphs allowed for interpretation of the responses from the point of view of which
response option had been chosen by the majority of the respondents versus a minority.

8: REVIEW OF LITERATURE

Literature Review is an integral part of every research. All studies and researches have been in
initiated by a review of existing system whereby efforts are made to understand the system and
identifying the strengthening opportunities. The existing literatures available coupled with regulations
on the area of study, when researched provides a comprehensive understanding of the variables that
require attention, along with their implications.

Also, the existing theories that are prevailing on the subject as a whole including the external
environment as well as the variables that are having an impact on the functioning of the sector as a
whole, thereby, providing the researcher an opportunity to appreciate the current industry settings and
also equips the researcher to explore further. In this section, various articles published including
regulatory reviews as well as relevant research papers have been considered to establish the broad
parameters which are critical and absolutely imperative to consider for understanding the NBFC
sector. Research papers and articles focusing on recent developments and diverse school of thought
have been reviewed primarily to form a visionary approach to the study and also for laying a very
solid foundation to the study.

27
For the purpose of proposed research entitled Non Banking Financial Companies in India – A boon or
Curse, I’ve reviewed numerous books, articles, journals, newspapers, dissertations and various
published reports from time to time. Some of them reviewed are as following: -

It has been revealed by some research studies that economic development and growth of NBFCs are
positively related. In this regard the World Development Report has observed that in the developing
counties banks hold a major share of financial assets than they do in the industrially developed
countries. It can be easily seen that in a remarkable period of time the NBFCs have gained more and
more stature in the Indian Economy in general and our Financial System more particular.

According to a research article by S. Venkitaramanan'

on "Needed, a fair deal for NBFCs", it mentions that the time has come for the RBI to make peace
with NBFCs as a class. According to him, NBFCs are proven instruments of efficient and customer-
friendly outreach in the credit space, not only for consumer durables, but also housing and transport,
besides infrastructure. The regulators' role being not only to regulate but to spur economic growth, it
is hoped that the NBFCs will be nurtured, not restricted, and that they will be allowed to continue to
accept public deposits. Commercial banks by their very nature cannot take on all the features of
NBFCs, but they can collaborate with NBFCs by extending credit and participation in the
securitization. All this would of course require a change of mindset on the part of both our regulators
and [Link] are working well and they deserve to be encouraged further.

According to research by Suresh Krishnamurthy,

"Non-banking finance companies: Retail Push", it mentions that for most people, the mention of non-
banking finance companies (NBFCs) conjures up images of default and failure. Consistent growth is
not something that is associated with NBFCs. Even big names are under pressure and the return on
their assets is in fear of declining far more than their cost of funds. NBFCs are planning to turn into
banks suggesting that such a course may be inevitable for NBFCs that hope to survive. The top-rated
NBFCs, which have emerged stronger after a period of churning in the industry, look set to carve out
a niche for themselves in the retail finance market.

Sagir Ahmad Ansari Writes on “Financial Reforms in India”.

The book examines constituents of the Indian financial system in detail. It highlights strengths and
weaknesses of Indian financial system before 1991, making a strong case of understanding a

28
comprehensive financial sector reforms in India to achieve high and sustained economic growth. It
describes in detail the different types of reforms measures under taken after 1991, in financial sector,
analyses the impact of reforms on commercial banks, cooperative banks, DFIs and NBFCs,

Jafor Ali Akhan (2010) writes on “Non-Banking Financial Companies (NBFCs) in India”.
The book discussed the financial system in India. It covers the financial intermediaries including
commercial banks, regional rural banks, cooperative banks and Non-Banking Financial Companies in
India. The book is good source in getting information on businesses, classification, management of
assets, risk coverage, etc of the NBFCs in India.

K. Martina Rani (2008) [14] in her paper entitled “Impact of Financial Sector Reforms on Non-
Banking Financial Companies” published in AIMS International Journal of Management, The
number of reporting NBFCs and the growth rate of deposits continued to rise till the year 1997, but
declined after 1998 as the regulatory framework 1998 which came as a source of excessive control to
the real and genuine players in the market. The main source of NBFCs has always been the fixed
deposits. The gross NPAs to the total advances were 11.4 per cent in March 1998 and it declined to
9.7 per cent in September 2002.

Pawan Kumar Pandey in his research report conclude that, since the financial reforms of 1991,
there have been significant favourable changes in India‟s highly regulated sector. The financial
reforms have had a moderately positive impact on reducing the concentration of financial sector (at
the lower end) and improving performance. His empirical estimation shoed that regulation lowered
the profitability and cost efficiency of public-sector banks at the initial stages of the reforms, but such
negative impact disappeared once they adjusted to the new environment. Moreover, allowing banks to
engage in non-traditional activities has contributed to improved profitability and cost and earnings
efficiency of the whole financial sector, including public-sector. The response of the institutions to
the reforms has been impressive. The financial institutions have been adjusting very well to the new
environment.

Shailendra Bhushan Sharma and Lokesh Goel (2012) [8] write on “Functioning and Reforms in
Non-Banking Financial Companies in India”.
Non-Banking Financial Companies do offer all sorts of banking services, such as loans and credit
facilities, retirement planning, money markets, underwriting and merger activities. These companies

29
play an important role in providing credit to the unorganized sector and to the small borrowers at the
local level. Hire purchase finance is by far the largest activity of NBFCs. The rapid growth of NBFCs
has led to a gradual blurring of dividing lines between banks and NBFCs, with the exception of the
exclusive privilege that commercial banks exercise in the issuance of cheques. This paper provides an
exhaustive account of the functioning of and recent reforms pertaining to NBFCs in India.

Subina Syal and Menka Goswami (2012) [11] writes on “Financial Evaluation of Non-Banking
Financial Institutions: An Insight in Indian Journal of Applied Research.
The Indian financial system consists of the various financial institutions, financial instruments and
the financial markets that facilitate and ensure effective channelization of payment and credit of funds
from the potential investors of the economy. Nonbanking financial institutions in India are one of the
major stakeholders of financial system and cater to the diversified needs by providing specialized
financial services like investment advisory, leasing, asset management, etc. Non-banking financial
sector in India has been a considerable growth in the recent years. The aim of the present study is to
analyze the financial performance and growth of non-banking financial institutions in India in the last
5 years. The study is helpful for the potential investors to get the knowledge about the financial
performance of the non-banking financial institutions and be helpful in taking effective long-term
investment decisions.
Taxmann’s (2013) [12] published “Statutory Guide for Nonbanking Financial Companies”
is published by Taxmann‟s Publications, New Delhi. The book listed the laws relating to Non-
Banking Financial Companies. The rules and laws governing the kinds of businesses undertaken by
different types of NBFCs are also discussed.

Amit Kumar and Anshika Agarwal (2014) [2] published a paper entitled Latest Trends in Non-
banking Financial Institutions in Academicia: An International Multidisciplinary Research Journal. In
Indian Economy, there are two major Financial Institutions, one is banking and other is Nonbanking.
The Non-Banking Financial Institutions plays an important role in our economy as they provide
financial services on wide range, they also work to offer enhanced equity and risk-based products,
along with this they also provide short to long term finance to different sectors of the economy, and
many other functions. This paper examines the latest trends in Non-Banking Financial Institutions.
This paper analyzes the growth and enhanced prosperity of financial institutions in India.

30
Naresh Makhijani (2014) [6] writes on “Non-Banking Finance Companies: Time to Introspect” in
Analytique.
Over the last few years, the Non-Banking Finance Companies (NBFC) sector has gained significant
advantages over the banking system in supplying credit under-served and unbanked areas given their
reach and niche business model. However, off late the Reserve Bank of India has introduced and
suggested various changes in the existing regulatory norms governing NBFCs with a view to bring
NBFCs regulations at par with the banks. The ongoing and proposed regulatory changes for the
NBFCs in terms of increased capital adequacy, tougher provision norms, removal from priority sector
status and changes in securitization guidelines could bring down the profitability and growth of the
NBFC sector. NBFCs will need to introspect and rethink their business models as they will now not
only have to combat stringent regulatory norms but also have to face the challenge of rising cost of
funds, scare capital and direct competition from banks.

Shail Shakya (2014) [9] published a working paper entitled “Regulation of Non-banking Financial
Companies in India: Some Visions & Revisions”.
Non-Banking Financial Companies are pioneer in their cash deployment, accessibility to the markets
and others to count. NBFCs are known for their higher risk taking capacity than the banks. However,
the recent financial crisis has highlighted the importance of widening the focus of NBFC regulations
to take particular account of risks arising from the regulatory gaps, from arbitrage opportunities and
from inter-connectedness of various activities and entities associated with the financial system. The
steady increase in bank credit to NBFCs over the recent year’s means that the possibility of risks
being transferred from more lightly regulated NBFC sector to the banking sector in India can’t be
ruled out.

Conclusion

31
The NBFCs are playing noteworthy role in meeting financial needs of the medium sized and small
sized industries and growth of Indian economy in a roundabout way. On the other side of the paper
the policies of NBFCs are also providing investment safety measures for the investors. It tinted that
due to the regulations of the RBI, still the NBFCs are not extending more credit. It is suggested to the
NBFC credit policy to reduce rate of interests, which helps to small institutions to get loans for their
different capital needs. The review made above shows that the research in NBFCs is not so
accelerating & progressive towards economic development as many of the published research papers
shows only fundamentals and basics of the NBFCs and still it is crucial to study the impact of
financial sector reforms on the performance of NBFCs in India and also the role in development of
Indian Economy.

9: DATA ANALYSIS, INTERPRETATION AND SUGGESTIONS

Primary Data

It is the first-hand information the person uses to carry out the research for the topic. This data is
totally original and provides reliable, valuable & updated information. In this research, the collection
of data is done in two ways which are questionnaire method and observation method.

 Survey Method

Survey is a set of questions to be asked to sample size to get the required information. Form of
questionnaire will be a structured questionnaire. Under this method, a list of questions pertaining to
survey which is known as “Questionnaire” is prepared and sent to the various informants by online
means. The questionnaire contains questions and provisions for answers. A request is made to the

32
informants through a covering message to fill up the questionnaire and send it back within a specific
time frame

 Observation Method

An observation is a visual representation of various facts and figures in the surrounding by the
researcher while conducting the research.

Secondary Data

The secondary data is the data collected from all the facts, findings, and previously published articles,
books and other means through which as person can borrow and use the information in the research.
This method is cost saving and helps to generate quality data efficiently.

9.1 PRIMARY DATA

Survey Method

1: Age Group

33
Graph 1: Respondents belong to which age group

Inference: 68.9% of the respondents were in the age group 20-29, 17.9% were in the age group 30-
39, 10.4% were 60 & above and 2.8% belonged to 40-49. Hence, the same was circulate to diverse
respondents. No respondents were in the age groups 50-59 and 60 and above.

Age Group No. of Respondents

15-19 11
20-29 73
30-39 19
40-49 3

2: Gender

34
Graph 2: Respondents belong to which gender

Inference: 41.5% of the respondents were male and 57.5 % were female. 1 respondent chose the non-
binary option. Hence, the survey was conducted y a mixed range of audience.

Gender No. of Respondents

Male 61
Female 44
Non-Binary 1

3: Occupation

35
Graph 3: Respondents belong to which occupation

Inference: 36.8% respondents were students, 21.7% respondents were professionals who were
pursuing part time courses, 19.8% respondents were self employed, 14.2% were students who were
working, 1 respondent was retired. This study shows that the survey has been examined by a diverse
range of respondents. The option ‘Other’ was added in the question and the respondents have entered
Service and Just Working as their answers.

Occupation No. of Respondents

Student 39
Students & Working 15
Professional & Pursuing Part Time Courses 28
Self Employed 21
Home-maker -
Retired 1

36
4: Annual Income

Graph 4: Respondents belong to which annual income group

Inference: 34.9% of the respondents earned below Rs 1,50,000. 30.2% of the respondents earned
between Rs 1,50,000 – 5,00,000. 16% respondents earned between Rs 5,00,000 – 10,00,000, 8.5%
between Rs 10,00,000 – 20,00,000 and 10.4% earned above Rs 20,00,000. Hence, we infer that the
survey was examined by respondents from diverse income groups, which will help us to understand
the investment patterns.

Anuual Income (Rs) No. of Respondents

< 1,50,000 37
1,50,000 – 5,00,000 32
5,00,000 – 10,00,000 17
10,00,000 – 20,00,000 9
Above 20,00,000 11

5: Source

37
Graph 5: Source of knowledge of NBFCs

Inference: This was multiple choice question in which more than one option can be selected. 60.4%
of the respondents know about NBFCs through their friends & family, 54.7% through newspapers &
magazines and 58.5% through television and online platforms. Rest of the respondents are aware
about the NBFCs from diverse means. Hence, we come to know that friends and family play an
important role in educating each other about the role of NBFCs in the economy followed by
newspapers & magazines and then online platforms.

Source of Knowledge No. of respondents

Friends and Family 64
Newspapers and Magazines 58
Television and Online Platforms 62
Other 4

6: Services Availed

38
Graph 6: NBFC services availed by respondents

Inference: This was a multiple choice question in which more than one option can be selected nd the
options other was added for any additional service if availed. 59.4% of the respondents have
approached the NBFCs for loans & advances as well as savings and investment plans. 50.9% of the
respondents availed the insurance service, 37.7% acquired shares, stocks, bonds etc and 23.6% took
the benefit of money transfer services by the NBFCs. This shows that maximum people approach the
NBFCs for investments, insurance and loans.

Services Availed No. of respondents

Loans & advances 63
Savings & Investment Plans 63
Acquisition of shares, stock, bonds etc 40
Insurance 54
Money Transfer Services 25
Other 4

7: Investments

39
Graph 7: Investments by the respondents in NBFC

Inference: 43.4% of the respondents have invested n the NBFCs, 47.4% haven’t invested as yet and
9.4% were unaware about their investments. This infers that the examined respondents are still yet to
avail the investment facility provided by the NBFCs. Hence, awareness needs to be raised for best
benefits.

Investment No. of Respondents

Yes 46
No 50
Maybe 10

8: Investment Returns

40
Graph 8: Respondents opinion on investment returns of NBFCs

Inference: Out of those respondents who invested, 38.7% think the returns are sufficient compared to
the market but 10.4% think the returns are insufficient. 24.5% of the respondents have selected the
maybe option and this question was not applicable to 26.4% as they haven’t invested in any of the
NBFCS as yet.

Investment Returns No. of Respondents

Yes 41
No 11
Maybe 26
Not Applicable 28

41
9: Trust in the services provided by NBFCs

Graph 9: Trust of Respondents in the services provided by NBFCs

Inference: There is a diverse response from the respondents about their trust in the services provided
y the NBFCs in the 0-10 scale. 26.4% respondents have voted for 7, followed by 15.1% respondents
on 8 and 6 each. None of the respondents have full trust in the services and 9.4% do not trust the
services at all.

Trust in the services ( 0-10) No. of Respondents

0 10
1 2
2 2
3 3
4 12
5 14
6 16
7 28
8 16
9 3
10 0
10: Factors influencing the preference of NBFCs over Banks

42
Graph 10: Respondents opinion on factors influencing the preference of NBFCs over banks

Inference: This was a ranking type of question. Maximum respondents feel that competitive rate of
interest, quick disbursal of funds and faster processing system are very important compared to access
to loans with poor credit history.

Factors Very Important Neutral Not Important

Competitive rate of 60 41 5
interest
Quick disbursal of 53 48 5
funds
Faster processing 56 47 3
system
Access to loans with 45 53 8
poor credit history

11: Most preferred NBFC

43
Graph 11: Most preferred NBFCs by the respondents

Inference: 52.8% of respondents have chosen Bajaj Finance Limited as the most preferred and safest
NBFC to invest in. 21.7% respondents have voted for Mahindra & Mahindra Financial Services,
followed by 8.5% for Muthoot Finance Ltd, 10.4% for Cholamandalam Finance and 6.6 for Power
Finance Corporation Limited. Hence, further in the research project there is a case study regarding the
performance of Bajaj Finance for the FY 2018-19.

NBFC No. of Respondents

Bajaj Finance Limited 56
Mahindra & Mahindra Financial Services 23
Limited
Muthoot Finance Ltd 9
Cholamandalam Finance 11
Power Finance Corporation Limited 7

12: Loans from NBFCs

44
Graph 12: Respondents opinion on availing loans from NBFCs

Inference: 56.6% respondents recommend taking loans from NBFCs whereas 14.2% do not
recommend the same. 29.2% are neutral in their opinion. Hence, we infer that maximum respondents
are in the favour of availing loans from NBFCs.

Loans from NBFC No. of Respondents

Yes 60
No 15
Maybe 31

13: IL&FS crisis

45
Graph 13: Respondents opinion on IF&FS crisis

Inference: 56.6% respondents are of the opinion that IL&FS crisis has majorly affected the NBFC
sector whereas only 3.8% feel that it has not. 39.6% of the respondents are neutral in their opinion.
Hence, we infer that yes the NBFC crisis has majorly affected the performance of NBFC sector.

IL&FS Crisis No. of Respondents

Yes 60
No 4
Maybe 42

14: Is investing in NBFC a good idea?

46
Graph 14: Respondents opinion on investing in NBFCs

Inference: 50.9% of the respondents are of the opinion that yes investing in NBFCs is a good idea u
14.2% think that no it is not a good idea with reference to the current market scenario. 34.9% of the
respondents are neutral in their opinion.

Is Investing in NBFC a good idea? No. of Respondents

Yes 54
No 15
Maybe 37

15: Positive shift in the investment patterns in NBFCs?

47
Graph 15: Respondents’ opinion on positive shift in the investment patterns of NBFCs

Inference: Likert Scale was used in the question. 27.4% of the respondents strongly agree that there
will be a positive shift in the investment patterns of NBFCs and 33% of the respondents agree to the
same too. 35.8% respondents are neutral in their opinion 1.9% of the respondents disagree to that
there will be a positive shift in the investment pattern.

Positive shift in the investment patterns of NBFCs No. of Respondents

Strongly Agree 29
Agree 35
Neutral 38
Disagree 2
Strongly Disagree 2

9.2 SECONDARY ANALYSIS

48
It is well recognised that NBFCs play a prominent role in the Indian financial system by catering to
financial needs of a wide variety of customers and niche sectors, providing complementarity and
competition to banks. The NBFC sector largely depends on market and bank borrowings, thereby
creating a web of inter-linkages with banks and financial markets. As Housing Finance Companies
(HFCs) now fall under the regulatory purview of the Reserve Bank, we are undertaking a review of
extant regulations and are in the process of harmonising these regulations for HFCs with applicable
regulations for NBFCs.

In the aftermath of the Infrastructure Leasing and Financial Services Limited (IL&FS) crisis and
subsequent defaults by a few companies, asset quality concerns have emerged, which imposes
liquidity constraints on NBFCs. The Reserve Bank has been proactive in taking several measures to
address these concerns and strengthen the regulatory and supervisory architecture of the NBFC
sector, thereby ensuring that the sector remains stable and robust.

NBFCs can be classified on the basis of a) their asset/liability structures; b) their systemic
importance; and c) the activities they undertake. In terms of liability structures, NBFCs are
subdivided into deposit-taking NBFCs (NBFCs-D) - which accept and hold public deposits - and non-
deposit taking NBFCs (NBFCs-ND) - which rely on markets and banks to raise money. Among
NBFCs-ND, those with an asset size of ₹500 crore or more are classified as non-deposit taking
systemically important NBFCs (NBFCs-ND-SI). At the end of September 2019, there were 82
NBFCs-D and 274 NBFCs- ND-SI as compared to 88 and 263, respectively at the end of March

49
Since NBFCs cater to niche areas, they are also categorised on the basis of activities they undertake.
Till February 21, 2019, NBFCs were divided into 12 categories. Thereafter, these categories were
harmonised in order to provide NBFCs with greater operational flexibility. As a result, asset finance
companies (AFCs), loan companies (LCs) and investment companies (ICs) were merged into a new
category called Investment and Credit Company (NBFC-ICC). At present, there are 11 categories of
NBFCs in the activity- based classification.

As per the regulatory guidelines, only those NBFCs with a minimum net owned fund (NOF) of ₹2
crore are allowed to operate. As a result, 2018-19 saw a record number of cancellations of registration
(Chart VI.2). The number of NBFCs registered with the Reserve Bank declined from 9,856 at the end
of March 2019 to 9,642 at the end of September 2019.

9.2.1 Ownership Pattern

The NBFC sector is dominated by NBFCs- ND-SI, which constitute 86.3 per cent of the total asset
size of the sector. Within this segment, government owned NBFCs (particularly the two largest
NBFCs i.e., Power Finance Corporation Limited and REC Limited) hold around two-fifth of the total
assets.

50
The strategy adopted by the Reserve Bank of limiting the operations and growth of NBFCs-D is
driven by the need to secure depositors’ interest, given that deposits of NBFCs-D are not covered by
the Deposit Insurance and Credit Guarantee Corporation (DICGC). The Reserve Bank has mandated
that only investment grade NBFCs-D shall accept fixed deposits from the public, up to a limit of 1.5
times of their NOF and for a tenure of 12 to 60 months only, with interest rates capped at 12.5 per
cent.

As a consequence, NBFCs-D accounted for only 13.7 per cent of the total assets of the NBFC sector
at the end of March 2019, with 89.7 per cent of all NBFCs-D assets held by non-government
companies. Public non-government companies are the dominant sub-group among the deposit taking
NBFCs.

9.2.2 Sectoral Credit of NBFCs

Credit extended by NBFCs continued to grow in 2018-19. Industry is the largest recipient of credit
provided by the NBFC sector, followed by retail loans and services (Chart VI.3). Credit to industry
and services was subdued in relation to the previous year. However, growth in retail loans continued
its momentum

Over 40 per cent of the retail portfolio of NBFCs are vehicle and auto loans. The slowdown in auto
loans in 2018-19 could be attributed to a slump in aggregate demand, exacerbated by postponement
of vehicle purchases in anticipation of the implementation of BS-VI norms, the sharp increase in

51
insurance costs in case of passenger vehicles and two wheelers, and sizeable enhancement in
permissible axle load for commercial vehicles. In the consumer durables segment, a decline in credit
extended was observed, reflecting muted consumer demand. NBFCs’ credit to commercial real estate
decelerated in 2018-19, reflecting their risk aversion in light of the slowdown in real estate sector
despite expansion of bank credit to the sector. On the other hand, credit to agriculture and allied
activities saw a significant increase in 2018-19, partly attributable to the policy measure of September
2018 enabling co-origination of loans for lending to priority sector by banks and NBFCs.

9.2.3 Borrowings

A slew of measures have been taken by the Government of India and the Reserve Bank to alleviate
the liquidity stress and strengthen confidence in the sector. Amidst generalised risk aversion affecting
various categories of investors, banks had emerged as a stable funding alternative for NBFCs in
2018-19. In 2019-20 (up to September), bank lending to NBFCs decelerated in light of defaults by
and rating downgrades of a prominent HFC and a NBFC. However, share of bank borrowings in total
borrowings of NBFCs-ND-SI increased to 26.9 per cent at end-September 2019 from 24.7 per cent a
year ago (Chart VI.5).

While banks lend to NBFCs directly, they also subscribe to the debentures and CPs issued by NBFCs.
However, given the prevailing risk-aversion, bank subscription to debentures and CPs issued by

52
NBFCs-ND-SI has fallen in 2018-19 (Chart VI.6). In 2019-20 (up to September), direct lending by
banks grew at 21.9 per cent.

9.2.4 NBFCs-D: Deposits

Deposit mobilisation by NBFCs progressed at a robust pace of 31.6 per cent in 2018-19 even though
the number of companies authorised to accept deposits came down from 168 in 2017-18 to 88 in
2018-19 and 82 at end- September 2019 (Chart VI.7).

9.2.5 Profitability

53
The profitability indicators of NBFCs– return on assets (RoA), return on equity (RoE) and net interest
margin (NIM) decreased in 2018-19, reflecting the stress in the sector (Chart VI.8). The overall
decrease in profitability was driven by NBFCs- ND-SI for almost all categories. For NBFCs-MFI,
profitability improved considerably (Chart VI.9). However, NBFCs-ND-SI posted an improvement in
profitability indicators in the current financial year till September 2019, on the back of decline in
other expenses.

In the case of NBFCs-D, there was improvement in RoA and RoE in 2018-19 on account of robust
growth in business. Their NIM also improved, reflecting faster expansion in interest income than that
of expenses (Chart VI.10). In 2019-20 so far (up to September), profitability indicators of NBFCs-D
showed overall improvements.

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9.2.6 Asset Quality

In 2018-19, NBFCs registered a deterioration of asset quality. While the gross non-performing assets
(GNPAs) ratio increased, net non-performing assets (NNPAs) ratio edged up marginally, reflecting
sufficient provisioning (Chart VI.11). In 2019-20 (up to September), asset quality of the sector
showed deterioration with a slight increase in GNPA ratio.

55
In terms of asset composition, the proportion of standard assets declined, part of it being downgraded
to the substandard category in 2018-19. In H1:2019-20, while the proportion of sub-standard assets
remained unchanged, an increase in proportion of doubtful assets was observed in the period under
review (Chart VI.12).

In 2018-19, GNPA ratio of NBFCs-ND-SI deteriorated across all categories, except NBFCs-MFI,
which reported significant improvement in the GNPA ratio. The improvement in the GNPA ratio of
the NBFCs- MFI may be attributed to write offs of aging loans (Chart VI.13a).

The NNPA ratio for NBFCs-ND-SI edged up marginally, reflecting the maintenance of adequate
buffers, especially by MFIs and IFCs. On the other hand, there was a small increase in the NNPA
ratio of ICCs (Chart VI.13b). In 2019-20 (up to September), the GNPA ratio of NBFCs-ND-SI
exhibited an increase, while, the NNPA ratio registered no change.

56
The risk aversion among NBFCs-ND -SI coupled with their inability to mobilise adequate resources
was reflected in the decrease in credit growth in spite of a fall in stressed assets ratio.
However, for the services sector, stressed assets rose, reflecting the built-up stress in the real estate
segment, where NBFC exposures are significant. (Chart VI.14).

57
In the case of NBFCs-D, decline in the GNPA was aided by buoyant growth in assets. On the other
hand, the NNPA ratio showed a deterioration, pointing to inadequate provisioning (Chart VI.15).

9.2.7 Capital Adequacy

NBFCs are generally well capitalised, with the system level capital to risk-weighted assets ratio
(CRAR) remaining well above the stipulated norm of 15 per cent, including in 2018-19 when they
experienced an increase in non-performing assets (Chart VI.16). At the end of September 2019, the
sector maintained the capital position although there was a deterioration in asset quality.

58
The CRAR for all categories of NBFCs-ND-SI except NBFCs-MFI and IDF-NBFCs, decreased from
2017-18 levels, but it remained above the regulatory norm. For NBFCs-MFI, the CRAR improved
with rising profitability.

The CRAR for NBFCs-D registered a marginal improvement as growth in own funds outpaced
expansion in loans and advances (Chart VI.17a and b). At end-September 2019, CRAR of NBFCs-
ND-SI and NBFCs-D remained above the stipulated norm despite divergent trends.

59
9.2.8 Exposure to Sensitive Sectors

VI.28 Capital market, real estate and commodities have been categorised as sensitive sectors by the
Reserve Bank as prices of these assets are prone to fluctuations that may pose a risk to financial
stability. By the end of March 2019, the capital market exposure of NBFCs had decreased compared
to March 2018, even as real estate exposure edged down. As a result, an overall decrease in sensitive
sector exposure was registered (Chart VI.18).

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9.2.9 Residuary Non-Banking Companies (RNBCs)

RNBCs are primarily engaged in collecting deposits and deploying them in specific securities, as
directed by the Reserve Bank. At present, there is only one RNBC, which is not accepting any new
deposits and is solely engaged in repaying old deposits.

9.2.10 Conclusion:

In sum, growth in the balance sheet of the NBFC sector decelerated in 2018-19, attributable to muted
credit growth in a risk- averse climate. On the liabilities side, while market borrowings slowed down,
bank borrowings continued to support the NBFC sector. Deposit mobilisation by NBFCs-D also
showed an uptick. NBFCs continued to remain well-capitalised above the regulatory norm. Asset
quality deteriorated across all NBFCs-ND-SI categories except that of NBFCs-MFI. Profitability of
NBFCs-ND-SI waned while that of NBFCs-D registered an improvement.

Although the balance sheet size of the NBFCs constitutes 18.6 per cent of SCBs, it has emerged as an
important pillar of the Indian financial system. The sector, which had witnessed a robust expansion in
2017-18, experienced headwinds in 2018-19 and 2019- 20 (up to September) as market sentiments
turned negative post-IL&FS event and recent defaults by some companies. The Reserve Bank and the
government have taken several measures to restore stability in the NBFC space. The Reserve Bank
took measures to augment systemic liquidity, buttress standards of asset-liability management
framework, ease flow of funds by relaxing ECB guidelines and strengthen governance and risk-
management structures. The government provided additional support through the partial credit
guarantee scheme, encouraging PSBs to acquire high-rated pooled assets of NBFCs. Furthermore, the
Finance Bill 2019 through amendments in the RBI Act, 1934 conferred powers on the Reserve Bank
to bolster governance of NBFCs. These measures are geared toward allaying investors’ apprehensions
and aiding NBFCs in performing their role better. Going forward, the Reserve bank will continue to
maintain constant vigil over NBFCs and take necessary steps to ensure overall financial stability.

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 9.3 CASE STUDY 1
(A) Performance of Bajaj Finance in the FY 2018-19

9.3.A.1 Macro Economic Overview

Financial year 2018-19 (FY2019) began with an expectation of higher growth as the economy
seemed to have overcome the teething troubles of the nation-wide roll out of the Goods and Service
Tax (GST). However, a rise in the current account deficit (CAD), concerns relating to rising non-
performing assets (NPAs) and decline in liquidity coupled with hardening interest rates contributed to
uncertainties around a higher GDP growth [Link] second advance estimates of national income for
FY2019 released by the Central Statistics Office (CSO) on 28 February 2019 showed that the
economy could not continue the expected growth momentum. GDP growth in the third quarter of
FY2019 reduced to 6.6% after clocking 8.0% and 7.0% growth in the first and second quarter of
FY2019 respectively. The CSO estimates GDP growth in FY2019 at 7.0% compared to 7.2% in
[Link] fixed capital formation (GFCF) provided a pleasant surprise, with the share of GFCF
to GDP growing to 32.3% in FY2019 (second advance estimates) versus 31.4% in FY2018 (first
revised estimates). However, it is perhaps too early to expect this recent uptick in the share of GFCF
to GDP to provide a definite impetus to growth.

Table 1 gives the data on real GDP and gross value added (GVA) growth over the last four financial
years.

The good news was inflation. During the second half of FY2019, the consumer price index (CPI)
which steadfastly remained below the RBI’s medium-term target of 4%, reaching a 19-month low of
1.9% in January 2019. It picked up marginally in February to 2.6%, albeit supported by a weak base

62
and uptick in prices of some food categories. The RBI has projected headline inflation to remain soft
in the near term: 2.4% in Q4 FY2019, 2.9% to 3% in H1 FY2020, and 3.5% to 3.8% in H2 FY2020.

Systemic liquidity swung between surplus and deficit during FY2019, with the RBI needing to
intervene to smoothen liquidity flows. This liquidity stress was compounded thanks to major debt
defaults of a systemically important NBFC. The default resulted in a virtual drying up of the money
markets; and access to funds for borrowers such as NBFCs and HFCs were deeply impacted. The
consequent increase in interest rates for fresh borrowings in Q3 FY2019 resulted in business
disruptions. While H2 FY2019 has been an extremely challenging period for both NBFCs and HFCs,
these disruptions have not yet completely settled.

Banking credit continued to post double-digit growth, registering 14.1% increase on-year as of 15
March 2019. However, this growth was still not broad-based. Industrial credit growth continued to
remain anaemic, while the service sector and the retail segment saw fairly strong growth in bank
credit. However, the healthy credit growth from banks to non-banks was largely nullified by money
markets refraining from lending to NBFCs and HFCs during Q3 [Link] this challenging
environment for NBFCs, BFL signed off FY2019 with a 41% growth in consolidated assets under
management (AUM) and a 60% growth in consolidated profits. BFL’s cost of fund increased only by
about 5 bps in FY2019 over FY2018.

9.3.A.2 Industry Overview

NBFCs continued to grow their share in the financial services industry. Data published by the RBI in
its Financial Stability Report dated 31 December 2018 show that NBFCs have outperformed
scheduled commercial banks (SCBs) on growth in advances, asset quality and profitability. This
growth momentum of NBFCs should result in their share in financial services sector increasing in the
near future. Table 2 gives the data.

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Bajaj Finance Ltd. (‘BFL’, ‘Bajaj Finance’, or ‘the Company’) is a deposit-taking Non-Banking
Financial Company (NBFC-D) registered with the Reserve Bank of India (RBI). It is a subsidiary of
Bajaj Finserv Ltd. and is engaged in the business of [Link] has a diversified lending portfolio
across retail, SME and commercial customers with a significant presence in urban and rural India. It
accepts public and corporate deposits and offers variety of financial services products to its
customers. It has two 100% subsidiaries: (i) Bajaj Housing Finance Ltd. (‘BHFL’ or ‘Bajaj
Housing’), which is registered with National Housing Bank as a Housing Finance Company (HFC);
and (ii) Bajaj Financial Securities Limited (‘Bfinsec’), which is registered with the Securities and
Exchange Board of India (SEBI). BHFL started its business in the financial year 2017-18 (FY2018).
Bfinsec is yet to start its operations.

9.3.A.3 The Company

BFL enjoyed yet another strong year of performance aided by a diversified product mix, robust
volume growth, prudent operating costs and effective risk management. With a consolidated AUM of
₹ 115,888 crore and a standalone AUM of ₹ 98,671 crore, BFL has emerged as one of the leading
diversified NBFCs in the country today. BFL has adopted the Indian Accounting Standards (Ind AS)
for FY2019. This involves giving Ind AS compliant comparatives for FY2018 and as at 1 April 2017

64
— the last being the date of transition. Accordingly, figures for previous years / periods, have been
recast and audited by statutory auditors as per the new accounting standards.

Highlights of FY2019 are as follows:

Consolidated Performance Highlights, FY2019

 New loans booked increased by 53% to 23.50 million.

 Customer franchise grew by 32% to 34.48 million.
 Assets under management (AUM) grew by 41% to ₹ 115,888 crore.
 Total income grew by 45% to ₹ 18,502 crore.
 Net interest income grew by 46% to ₹ 11,878 crore.
 Total operating cost rose by 28% to ₹ 4,198 crore.
 Total operating cost to net interest income improved to 35% from 40% in FY2018.
 Impairment on financial instruments was ₹ 1,501 crore. At 0.63%, BFL’s consolidated net
NPA was amongst the lowest in the NBFC industry.
 Profit before tax increased by 61% to ₹ 6,179 crore.
 Profit after tax grew by 60% to ₹ 3,995 crore.
 As on 31 March 2019, standalone capital adequacy was 20.66%, which is well above the
RBI norms. Tier I adequacy was 16.27%

BFL focuses on six broad categories: (i) consumer lending, (ii) SME lending, (iii) commercial
lending, (iv) rural lending, (v) deposits and (vi) partnerships and services. BFL is present in 1,830
locations across the country, including 903 locations in rural/smaller towns and [Link]’s loan
book continued to remain strong as a result of its deeply embedded risk culture and robust risk
management practices. The Company’s consolidated net NPA at 0.63% is amongst the lowest in the
NBFC [Link] continued to prudently manage its ALM position permissible under the current
RBI regulations. (ALM) with a strategy of raising long term debts and maintaining a judicious mix of
borrowings between banks, money markets and deposits. BFL continues to closely monitor liquidity
in the market; and as a part of its ALCO strategy maintains a liquidity buffer to prudently manage
liquidity [Link] fact, this enabled BFL to deftly overcome the severe liquidity crisis and volatile
interest rates in Q3 FY2019 because ofamajor debt repayment default by a systemically important

65
NBFC. Consequently, the increase in cost of funds for FY2019 over FY2018 was only 5 [Link] on
31 March 2019, consolidated borrowings stood at ₹ 101,588 crore.
9.3.A.4 Assets under Management

Chart A depicts BFL’s standalone AUM over the last five years.
Chart B depicts the consolidated AUM.

FY2019 AUM is as per Ind AS, FY2018 AUM has been recast as per Ind AS and FY2015 to FY2017
numbers are as per IGAAP.

66
FY2019 AUM is as per Ind AS, FY2018 AUM has been recast as per Ind AS while FY2015 to
FY2017 numbers are as per IGAAP

Table 3 breaks down the AUM across the major business verticals.

9.3.A.5 Consumer Lending

BFL continued to be the dominant consumer durables, furniture and digital products lender in India in
FY2019.
 BFL financed 12.7 million consumer durable and digital products purchases in FY2019
against 9.9 million in the previous year, a growth of 29%.
 BFL's unique Existing Member Identification (EMI) card, with over 18.5 million cards in
operation, enables customers to avail instant finance after the first purchase. In FY2019,
EMI card enabled BFL to finance over 11.5 million purchases, across all sales finance

67
 categories viz. consumer durables, digital products, lifestyle products, lifecare, e-
commerce and other retail spends versus 6.75 million in FY2018, a growth of 70%.
BFL was the largest financier of Bajaj Auto motorcycles and three-wheelers in FY2019.

 BFL crossed a milestone of financing 1 million number of motorcycles in FY2019.

 Gross deployments in FY2019 were ₹ 8,271 crore — a growth of 55% over the previous
year.
 Financed over 40% of Bajaj motorcycles and some 36% of Bajaj three-wheelers in
FY2019.

BFL’s lifestyle finance business financed approximately 481,000 transactions, which represented a
growth of 52% over FY2018. As part of its product expansion strategy, the Company extended its
offerings in the health care segment for elective and non-elective procedures in FY2018. This
initiative has resulted in health care offerings contributing over 19% of lifestyle finance business. To
further the health care financing business and facilitate hassle free processing of loans to customers,
BFL has recently introduced a ‘Healthcare EMI Card’.

E-commerce consumer finance addresses the EMI financing needs of BFL customers shopping online
with major e-commerce players. During FY2019, BFL also expanded this offering to online travel
segment which is growing rapidly. BFL executed over 2,105,000 transactions in FY2019 compared to
702,000 in FY2018 — representing a threefold increase in [Link] retail spends financing
business offers easy instalment options to customer for small ticket purchases like fashion, travel,
insurance and small appliances. The business is operational in 50 locations with a footprint of over
17,000 partner stores across India. BFL financed more than 1,460,000 purchases in FY2019
compared to 712,000 in FY2018 — representing a twofold increase in volume.

Personal loans cross-sell (PLCS) and salaried personal loans (SPL) AUM grew by 56% and 36%,
respectively, over FY2018; to ₹ 13,868 crore and ₹ 8,683 crore.

 PLCS business was fuelled by growing customer franchise, investment in the effective use of
advanced analytical capabilities, robust risk management and customer-centric loan
processing capabilities.

68
  Initiatives to grow these businesses revolved around creating online facilities for customers
and mobile based applications for sales officers to transform leads into approval.

9.3.A.5 SME Lending

SME lending offers secured and unsecured loans to its customers. Unsecured lending is done through
two product offerings: (i) business loans to small and medium enterprises and to the self-employed,
and (ii) professional loans.

 Business loans AUM grew by 21% over FY2018 to ₹ 10,094 [Link] service offering is
present in over 650 locations — which helps BFL to diversify portfolio concentration risk
beyond intensely competitive markets and deliver a lower cost of loan acquisition.
 Professional loans AUM grew by 73% over FY2018 to ₹ 5,284 crore, enabled by a ‘Direct to
Customer’ (D2C) initiative, analytics-based eligibility and robust risk assessment. The
professional loans portfolio contributes to 34% of unsecured SME lending and continues to
deliver robust results.

BFL has launched two new products in the SME lending business in FY2019, namely used car
financing and secured enterprise loans.

 Used car financing BFL offers both refinancing and purchase financing of used cars under this
business. Gross deployments in FY2019 were ₹ 300 crore.
 Secured enterprise loans Under this business, BFL offers small ticket loans of around ₹ 10
lakh against mortgage of self-occupied residential and commercial property in smaller towns.
Gross deployments in FY2019 were ₹ 316 crore, with a closing AUM of ₹ 300 crore.

Secured lending comprises of loan against property, home loans, lease rental discounting and
developer financing. Since February 2018, incremental business of secured lending has been done
through BFL’s 100% subsidiary, Bajaj Housing Finance Limited (BHFL).

69
9.3.A.6 Rural Lending

This business caters to financial services need of rural consumers. In FY2019, BFL expanded its rural
footprint by setting up branches in two new states and penetrating deeper in the existing states. At the
end of FY2019, it was present in 903locations across 13 states and union territories in India. The
business had an AUM of ₹ 9,243 crore as on 31 March 2019 — up by 69% from ₹ 5,458 crore a year
earlier.

BFL's rural business has also started offering fixed deposit schemes from February 2019. This will
further widen BFL’s product offerings to rural customers and expand its retail liabilities business.

9.3.A.7 Commercial Lending

Commercial lending comprises of six products: loan against securities, loans to financial institution
group lending, warehouse receipt financing, working and growth capital loans to auto component
manufacturers, loans to light engineering industry and loans to speciality chemical industry verticals.
Commercial lending business closed FY2019 with an AUM of ₹ 12,026 crore. BFL decided to wind
down its warehouse receipt financing business from April 2019 given the stress witnessed in the
agrarian sector and the lack of a sustainable profit model.

9.3.A.8 Deposits

At the end of FY2019, BFL had a deposit book of ₹ 13,193 crore, representing a growth of 69%
compared to the end of FY2018. The deposit book’s contribution to BFL’s standalone borrowing was
15% against 12% as at the end of FY2018. To grow the retail and high networth individuals (HNI)
deposits, BFL has set up seven wealth management branches on pilot basis in Pune in March 2019.

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9.3.A.9 Financial Performance

Table 4 gives BFL’s standalone financial performance for FY2019 vis-à-vis FY2018.

71
Chart C: BFL’s standalone profit after tax(₹ In Crore)

FY2019 profit is as per Ind AS, FY2018 profit has been re-casted as per Ind AS while FY2015 to
FY2017 numbers are as per IGAAP

Table 9 gives a select key ratios for FY2019 compared with FY2018

72
 9.3 CASE STUDY 2
(B) IL&FS Crisis

Almost all the NBFCs have been under severe liquidity stress since the fall of industry major IL&FS
in September 2018. The crisis has been so bad that the third largest home finance player DHFL has
been sent to bankruptcy courts, also because of the large fraud alleged to have committed by its
management. The spike in bad loans is being driven by the realty books, which has almost trebled as
of the September 2019 quarter to 10 per cent, says the Crisil report.

9.3.B.1 Background

In 1987 IL&FS was formed by three financial institutions, Central Bank of India, Housing
Development Finance Corporation (HDFC) and Unit Trust of India (UTI), to provide loans for major
infrastructure projects. After few years two big international institutions, namely Mitsubishi (through
Orix corporation Japan) and the Abu Dhabi Investment authority bought the shares of IL&FS.
Subsequently, Life Insurance Corporation India, Orix and ADIA became its largest shareholders, a
pattern that continues to this day.

73
Infrastructure Lending and Financial Services (IL&FS) has more than 250 subsidiaries. IL&FS has
financed some of the largest infrastructural projects in India – for e.g. Chennai-Nashri tunnel (longest
road tunnel in India) & is considered as a pioneer in PPP projects. IL&FS was envisioned to provide
long term big infrastructure loans which the banks were reluctant to provide.

From July to September 2018, two subsidiaries of IL&FS’s reported having trouble paying back loans
and inter corporate deposits to other banks and lenders, resulting in the RBI requesting its major share
holders to rescue it. Recently, Government of India has taken control of IL&FS’s, after it failed to
pay off debt payments. Since this move by the government there has been an increase in volatility in
the stock markets. A new board was constituted as the earlier board was deemed to have failed to
discharge its duties. The new board consists of Kotak Mahindra Bank managing director Uday Kotak,
former IAS officer & Tech Mahindra head Vineet Nayyar, former Sebi chief G N Bajpai, former
ICICI Bank chairman G C Chaturvedi, former IAS officers Malini Shankar and Nand Kishore.

IL&FS has been recognized as systematically important institution due to the size of Infrastructure
projects it funds. If IL&FS fails then there will be repercussions in various fields like agriculture,
education, health, sanitation etc.

74
9.3.B.2 Reasons for failure of IL&FS

Lack of regulators

 Rating Agencies – The rating agencies gave IL&FS an AAA rating and this encouraged
investment in the company but now they have changed the rating of IL&FS as junk.
 Shareholders – Major shareholders failed to monitor the company that they invested in.
 Board of Directors – All the senior officers have resigned from their posts.
 RBI – RBI is considering itself a regulator today but it could have monitored the situation
before the crises unfolded.
 Government of India –It never properly assigned any regulator.

Source and use of funds

 Increase in interest rates of short term borrowings.

 Loans skewed in the long term – Most debts that IL&FS had to pay off were short term while
the loans it had granted were majorly long term.
 Lacking transparency in financial position and too many loans to own subsidiaries.
 No clear distinctions between public & private projects.

Complex company Structure

 Too many subsidiaries – with more than 250 subsidiaries, the auditing and monitoring of the
company is difficult for any auditing firm or regulator.

Ethical Issue

75
  Crony capitalism – there have been known cases where things were hidden deliberately &
unviable projects were sanctioned to please the ruling parties.

9.3.B.3 Effects of IL&FS crisis

 Loss of confidence of investors.

 Many mutual funds have invested in its Bonds, Certificate of Deposits. The default and
further fear of default is contagious to all financial markets which resulted in loss of money
for many investors during last few months.
 Government decision to pump more funds to meet with crises can result in widen of fiscal
deficit which has adverse repercussion on inflation, exchange rate, growth etc.
 It can lead to diversion of funds which were meant for social sector programs.
 It leads to increased litigation in National Company Law Board (NCLB) as shareholders
decided not to allow further defaults by IL&FS

9.3.B.4 Solutions

 Simplifying the complex structure of IL&FS.

 Making stringent laws to deal with lack of transparency in both companies structure and
finances as well as rating agencies
 Minimizing red-tapism, reducing paper work to avoid stalling of projects.
 Board of directors should be held accountable for such major defaults and should be brought
under regular audit mechanism.
 Auditing should be done by independent third party auditors appointed by the government in
consultation with RBI and major share holders. This will ensure greater transparency in
auditing of financial records.

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  Bringing IL&FS properly under the ambit of SEBI or RBI.
 Fast tracking land acquisition and environment clearances.
 The government can look at disinvestment of deteriorating assets rather than bailing them out
from the tax payers money

As it is rightly said “A stitch in time saves nine”. It is important that the government takes corrective
action before it is too late to handle similar incidents.

10: CONCLUSION AND SUGGESTIONS

10.1 Conclusion

NBFCs have been playing a very significant role from the view point macroeconomic outlook and the
structure of the Indian financial system. NBFCs are the perfect or even better alternatives to the
traditional Banks for meeting a range of financial requirements of a business activity.

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They offer rapid and efficient services without going through complex formalities. However in order
to survive and to continuously grow, NBFCs have to focus on their core strengths while recovering
their weaknesses. They need to be very vibrant and constantly try to search for new products and
services in order to carry on in this competitive financial market. Since NBFCs small loans are not
covered in the SARFAESI Act, a reform in this area is quite immediately needed. An appropriate
legislative amendment regarding NBFCs would go a long way in stimulating the faith of the investors
and which in turn would greatly contribute to the growth of this sector.

The upcoming years will be very vital for NBFCs and only those who will be able to meet the
challenge and prove themselves will survive in the long run. NBFCs though active in various parts of
the country need to present a transparent image of itself before the society. Some foul play act of
various NBFCs and duping of innocent customers has distort the image of NBFC network. A strict
compliance regarding the registration is needed as most of the rural population is indulged with the
NBFC. Although NBFC cannot raise funds through deposits but it can offer other products in order to
procure funds at low cost. The market for NBFC is rapidly growing and in order to survive and
compete with commercial banks it need to gain trust of people.

10.2 Remedies to Improve the Functioning of NBFCs

In 2020, NBFCs will have no choice but to leverage technology heavily to keep costs and Non-
Performing Assets (NPAs) low. Alternative credit scoring tools/models – social profiling,
psychometric tests etc, RPA, Bots and Data analytics will play a major role this year. These tools will
help in better customer credit profiling, reduce cost, launch new products quickly and help in bringing
transparency and improving customer servicing.

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The key drivers for these would be changing customer needs and behaviour, The introduction of such
specialised players and systems will truly transform the banking value chain in its entirety. This
presents a strategic opportunity for NBFCs to ensure sustainable growth over a long term.
Partnerships with payments banks, bill payment providers and other financial institutions, such as
insurance and asset management companies, will help NBFCs offer the complete proposition—that
is, from deposits to lending, investments and transactions. The reach of NBFCs, along with their
strong understanding of the market, can help them position themselves as a better alternative to the
traditional ways of banking.

Furthermore, the Indian consumer is increasingly adopting digital as a way of daily life. India is
currently the second biggest smartphone market, with a user base of 299.24 million. To stay relevant
in such an environment, NBFCs need to rethink their strategy to enhance their product portfolio
(positioning and pricing), processes (internal and customer facing) and end-to-end customer
experience. Additionally, they need to leverage the vast digital (and social) customer data available to
be able to serve customers better.

The absence of income proofs or IT returns due to temporary/self-employment are some of the
primary reasons for the tepid credit penetration in India. Digital and social data can often act as a
surrogate to such documents to help NBFCs make better credit decisions. With the launch of the
Digital India programme, a flagship programme of the Government of India to digitally empower
society, NBFCs will have to find ways to serve the millennial customers through the digital means.

11: BIBLIOGRAPHY

 RBI-Financial Stability Report

 CRISIL Rating Criteria for Finance Companies Mumbai

 “Non-Banking Financial Companies (NBFCs) in India” book by Jafor Ali Akhan

 Nidhi Bothra, & Kamil Sayeed. Legal Updates. Vinod Kothari & Company

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  [Link]

 [Link]

 [Link]

 [Link]

 [Link]

 [Link]

 [Link]

over-to-rbi-govt/articleshow

 [Link]

 [Link]

 [Link]

12: APPENDIX

Question 1:

Which age group do you belong to? *

o 15-19

o 20-29

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 o 30-39

o 40-49

o 50-59

o 60 & above

Question 2:

Gender *

o Female

o Male

o Other: ________

Question 3:

Occupation *

o Student

o Student & working

o Professional & pursuing part time courses

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 o Self-Employed

o Homemaker

o Retired

o Other: __________

Question 4:

What is your Annual Income? *

o < Rs 1,50,000

o Rs 1,50,000 - Rs 5,00,000

o Rs 5,00,000 – Rs 10,00,000

o Rs 10,00,000 – Rs 20,00,000

o Above Rs 20,00,000

Question 5:

From where did you come to know about the NBFCs ? *

□ Friends & Family

□ Newspapers & Magazines

□ Television & Online Platforms

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 □ Other :__________

Question 6:

For which services have you approached any of the NBFCs *

□ Loans & advances

□ Savings & Investment Plans

□ Acquisition of shares, stock, bonds etc

□ Insurance

□ Money Transfer Services

□ Other :_________

Question 7:

Have you invested in any of the NBFCs ? *

o Yes

o No

o Maybe
Question 8:

Do you get sufficient returns compared to the market? *

o Yes

o No

o Maybe

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 o Not Applicable

Question 9:

How much do you trust the services provided by NBFCs? *

0 1 2 3 4 5 6 7 8 9 10
Never Availed O O O O O O O O O O O Excellent

Question 10:

Rank the factors that influence the preference of NBFCs over Banks ? *

Very Important Neutral Not Important

Competitive rate of

Interest O O O

Quick disbursal of

Funds O O O

Faster processing

System O O O

Access to loans with

poor credit history O O O

Question 11:

According to you, which NBFC is the safest to invest in ? *

o Bajaj Finance Limited

o Mahindra & Mahindra Financial Services Limited

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 o Muthoot Finance Ltd

o Cholamandalam Finance

o Power Finance Corporation Limited

Question 12:

Would you recommend taking loans from NBFC ? *

o Yes

o No

o Maybe

Question 13:

Do you think IL&FS crisis affected investments in the NBFCs ? *

o Yes

o No

o Maybe

Question 14:

Looking at the current market scenario, is investing in NBFCs a good idea ? *

o Yes

o No

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 o Maybe

Question 15:

Do you think in the coming years there will be a positive shift in the investment patterns in
NBFCs ? *

o Strongly Agree

o Agree

o Neutral

o Disagree

o Strongly Disagree

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