DEPARTMENT OF COMMERCE

COMPARATIVE ANALYSIS OF NBFCs AND TRADITIONAL BANKS IN CREDIT

PROVISIONING
GROUP MEMBER:
AKSHAYA - 23351012
BRINDHA - 23351026
GOWTHAMI - 23351033
DEGREE : [Link] (BUSINESS FINANCE)

SUBJECT : BUSINESS ANALYTICS FOR DECISION MAKING

CODE NO. : MCOM5104

SUBMITTED BY TO

GOWTHAMI R DR. LAZAR SIR

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ABSTRACT:

The comparative analysis of Non-Banking Financial Companies (NBFCs) and traditional Scheduled

Commercial Banks (SCBs) in credit provisioning explores the evolving dynamics between these two types

of financial institutions, particularly in the context of their roles in credit allocation and their impact on the

broader economy. The study examines several key metrics, including growth in bank credit to NBFCs,

changes in the cost of funds and yields for both NBFCs and SCBs, and their respective credit-to-GDP ratios.

The analysis reveals that NBFCs have seen a more volatile and rapid increase in their credit-to-GDP ratio

compared to SCBs, reflecting their growing role in the financial sector, especially in underserved markets

and niche segments. In contrast, SCBs have maintained a more conservative and stable credit growth

trajectory, influenced by regulatory constraints and a more cautious lending approach. The research further

analyzes the fluctuations in the yield on advances and the cost of funds, highlighting differences in risk

appetite and operational strategies between the two types of institutions. This comparative study provides

valuable insights into the distinct business models of NBFCs and SCBs, offering a deeper understanding of

how these institutions contribute to the economy through credit provisioning, and underscores the potential

implications of their divergent growth patterns for financial stability and economic development.

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I. Introduction
The financial sector plays a pivotal role in the economic development of any nation, with Non-Banking
Financial Companies (NBFCs) and traditional banks serving as two critical components of credit
provisioning. While traditional banks have historically dominated the lending landscape, NBFCs have
emerged as significant players, particularly in catering to niche markets and underserved segments of the
population. Their distinct operational models, regulatory frameworks, and risk appetites have contributed to
differing trends in credit growth, interest rates, and default rates.

This study aims to provide a comparative analysis of NBFCs and traditional banks in terms of their credit
provisioning practices. By examining key indicators such as loan growth, interest rates, and non-performing
asset (NPA) levels, this research seeks to highlight the fundamental differences between these two types of
financial institutions. Furthermore, the study delves into the factors driving these differences, including
regulatory constraints, customer targeting strategies, risk management practices, and macroeconomic
influences.

Through this comparative framework, the research aspires to shed light on the unique contributions and
challenges faced by NBFCs and traditional banks in meeting the credit needs of diverse segments of the
economy. This analysis will offer valuable insights for policymakers, financial analysts, and stakeholders in
understanding the dynamics of the financial sector and the evolving role of NBFCs in fostering credit access
and economic growth.

In consolidation of the banking sector, one has to focus on the non-banking financial sector like NBFCs and
Unincorporated Bodies and thinks in terms of integrating them in financial system along with the banks. In
India, moneylenders, chits and other type of financial institutions play a very large role in the credit markets
for the unorganised sectors in trade, restaurants, transport, construction, and service activities. It is to be
noted that the market knowledge and information regarding these activities like retail trade are not fully
available with the commercial banker on updated basis. By and large public sector banks have been geared
to ‘Asset Based Lending’ rather lending based on the forecast cash flows. Activities like trade, transport,
hotels and restaurants, constructions etc, there are significant fluctuations in cash flows on a daily basis. In
other words risk assessment capabilities are not adequate in the context of these activities. Also funds need
to be available to these players without much paper work and based on personal assessment. Hence, the
NBFC mostly finances these activities in consolidation of banking sector should focus on integrating credit
markets which comprises of banking and non-banking sector. Any consolidation should evaluate the
following:

 Reduction in interest cost, and hence benefits the ultimate consumer;

 Enhancing the credit delivery mechanisms;

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 Introduction of rating processes at retail level;

 Creating a level playing field when global players enter the Indian markets;

 Reversing the inverse relationship between the size of borrowing and the cost of borrowing Hence it is
necessary for the Indian financial market to bring about the restructuring of the banking sector by comparing
or merging banking sector and non-banking sector ensure the growth of the economy along with the
adequate availability of the credit to the fast growing sectors of the economy.

Significance of the Study

The study on the comparative analysis of Non-Banking Financial Companies (NBFCs) and traditional banks
in credit provisioning is significant for several reasons. First, it addresses the growing importance of NBFCs
in the financial ecosystem, particularly their role in catering to underserved and niche markets that
traditional banks may overlook. By examining differences in credit growth, interest rates, and non-
performing asset (NPA) levels, the research highlights the strengths and weaknesses of each type of financial
institution, providing a holistic understanding of their contributions to the economy.

Second, the findings of this study are crucial for policymakers and regulators, as they can use the insights to
design frameworks that balance growth, stability, and financial inclusion. Understanding the factors driving
the variations in credit provisioning helps in identifying potential risks, such as rising NPAs or predatory
lending practices, and in developing measures to mitigate them.

Third, this research holds value for investors, analysts, and stakeholders in the financial sector by offering a
comparative perspective on the efficiency, risk management, and market strategies of NBFCs and banks. It
provides actionable insights into how these institutions adapt to regulatory changes, economic cycles, and
shifts in consumer demand.

Finally, the study contributes to the academic literature on financial intermediation by exploring the
evolving dynamics of credit provisioning in the Indian context. With NBFCs gaining prominence in recent
years, the research sheds light on their growing role and complements existing studies that predominantly
focus on traditional banks. In doing so, it enhances understanding of the broader financial landscape and
offers a foundation for further exploration into sustainable and inclusive credit practices.

Objectives of the study

 A comprehensive comparison of credit growth, interest rates, and default rates between
NBFCs and traditional banks.
 Insight into the factors driving the differences in credit provisioning.

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Research Methodology

1. Data collection

The study relies on secondary data collected from the following sources Published Reports, Databases,
Research Papers and Articles and Websites

2. Research Design

The study adopts a comparative research design to analyse and evaluate the credit provisioning practices
of Non-Banking Financial Companies (NBFCs) and traditional banks. The approach focuses on quantitative
analysis using secondary data to identify differences in credit growth, interest rates, and non-performing
assets (NPAs) between the two financial institutions. Data was analysed using Descriptive Statistics
and A Comparative Analysis.

Limitations of the study

 The study is dependent on the availability and accuracy of secondary data.

 External factors such as macroeconomic conditions, policy changes, and global financial trends that
may influence credit provisioning are considered but not deeply analysed.

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II. Literature Review

Mrs. Mohina satish Kulkarni1- (1986): The author reviewed the progress made by the scheduled banks since
nationalization in financing agriculture. The study also emphasized on interstate and regional imbalances.
Deals with adoption of multi agency approach and agricultural credit which will enable disbursement of
credit directly or indirectly to the borrowers and also suggest maximum agricultural credit is utilized by the
rual borrowers. The study mainly deals with agricultural credit and there was an imbalance between the
states and union territories and the percentage of credit level exceeds rural populations. Srinivasan2- (1991)
dealt with national level accelerated the flow of credit to the neglected sector and also brings correlation
between state development and relative human material resource endowment. The researcher has provided
certain recommendations which if practiced by the public sector banks can reduce the level of NPA.

Chandran Sankarnarayanan3-(1992): The last two decades have witnessed unprecedented crises in banking
sectors across the world, developed and developing countries alike. The author deals internal strengths and
weaknesses, which matter in handling NPAs of the Bank, it has also been endeavored to evaluate broadly the
various strategies available for meeting the issue. The study does not aim to work out purpose-related or
area-based strategies for managing NPAs.

Desai Maulesh4-(1992): The huge burden of NPA is breaking the back bone of the banking sector. Credit
monitoring and recovery are the methods applied for NPA management. The research study recommends
various issues relating to NPA exclusively in the Gujarat Zone. Author provides insight into warning signal
emitted before the credit becomes NPA. Aspects relating increase in bills receivable without changing
business propositions affects the profitability. The author has highlighted in order to avoid NPA the bankers
should be careful keeping in mind the warning signals which can avoid the disastrous situations or alarming
contingencies.

H.K Deshpandey5- (1994): Since NPA erodes the profitability of the banks as well as the industry the author
conducted a detail study in evaluating the credit function at zonal level with special reference to Ahmedabad
zone of Central Bank of India. Non priority Sector was the prime consideration of the research. The study
covered advances to non-priority sector with special reference to large and small scale industries. The study
provides an insight to performance appraisal and region wise award for the best performance which will
increase the efficiency and reduce the NPA T. Gunasekaran6- (1995). The author highlighted through his
research financing of agriculture by commercial banks in micro level His study was restricted to Tanjaur
District in Tamil Nadu. The researcher examined the lending pattern and disbursement of farm finance and
their overdues on farm finance by the commercial banks. Overall comparison of the commercial banks in
farm lending with other institutional partner namely the crop finance. Deals with areas of farm lending and

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their improvements in quantitative & qualitative lending pattern & recovery methods also brings about
scheme lending operations on user which is effectiveness in rural areas.

Kishor Bhoir7-(1999)” deals with the various aspects of NPA in public sector banks... Study highlighted the
main reason which turns the performing advances to non performing ones. The author recommends remedial
measures taken by the public sector banks and compromise settlement as one of the solutions to the problem
faced by the Public sector banks. The author analyzed internal and external Industrial sickness. According to
the researchers NPA has a multiple effects on the total working of Indian banking system and the banks
looses further opportunity of investment. The study also emphasized different categories of borrowers.

Pankaj B.Trivedi8-(2000): brings about the causes and factors responsible for lower Profitability and impact
of inflation and changes in price level. It very clearly implies that there is correlation between efficiency and
profitability. The author has made an attempt to suggest business strategies that PSBs will have to adopt to
come out of adverse effect. The research explains the changes that are necessary in the present set up of
PSBs and their business policies to raise their operational efficiency and profitability. The author correlates
two factors namely efficiency and profitability. The author suggested that week bank should constantly
monitored by Financial Restructuring Authority and RBI. Such reform will enable to increase the
profitability of Public Sector Banks.

Mr.Kalkoti9-(2003) The bank faces various difficulties in good performance with respect to priority
sector .Any defect in the performance can bring down the profitability of the bank. As a result, various
banking regulations and quality of assets and various measures to identify the risk has been introduced and
also the efforts are made to bring about the awareness in the industry. The researcher in his study brings
about the performance of MGB with banking credit planning and parameters useful for improving the flow
of credit planning P.Veerachamy10- (2006) the bank faces various difficulties in good performance with
respect to priority sector. The researcher in his study clearly deals with the performance of primary co-
operative agricultural and rural development in Dindigul District in Tamil Nadu. The author analysed and
examined through his study the impact of overdues of the banks. The study revealed the external factor and
internal factor as to the cause of borrower not making the due and account becoming NPA. Socio economic
institutional, psychological and political factors. Default in payment of credit is correlated with literacy and
illetracy of a borrower.

Maitah, Mansoor, Zedan, khaled, Shibani, Bashir (May 2012), Factors Affecting the Usage level of Financial
Analysis by Credit Officers in the Credit Decision in Libyan Commercial Banks, aim to give an idea about
the usage level of financial analysis in Libyan state-owned commercial banks, and the factors affecting the
process in the credit decision, since these banks owns almost 90% of Libyan banking sector assets. To
collect the data a questionnaire were distributed to credit officers and analysts in all state-owned commercial
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banks operate in Tripoli. The data was analyzed using SPSS program. The analysis results show that there is
a weak usage level of financial analysis in the decision making process of evaluating the eligibility of the
credit applicants for accredits facility. These results caused for two major reasons, first poor qualification
and professional credit officers and analysts, second the low confidence level of the financial information
presented by credit applicants. The major recommendation is increase more attention to reform the whole
process in this field.

Rajarshi Ghosh (2011) in his research paper Microfinance in India: A critique, the evolution of microfinance
in empowerment of women and poverty alleviation is studied. Microfinance is viewed as an important tool
for providing self employment for the low income rural population. This paper studies the various delivery
models of microfinance institutions which contribute to women empowerment in India.

Pankaj K Agarwal and [Link] (2014) found in their study that the sustainability of microfinance
institutions is important in order to pursue their objectives through good financial performance. This paper
studies the various players in the microfinance sector which range from not-for-profit organizations which
work towards a developmental objective to commercial banks which view microfinance as a good source of
deposits with sound banking and as a measure to reach their priority lending targets.

“Comparison of performance of microfinance institutions with commercial banks in India” by Prof Zohra Bi
and Dr Shyam Lal Dev Pandey, in their study the performance of MFIs which are self-sufficient and
comparing those with the regional commercial banks based on selected financial ratios. Microfinance
institutions provide small loans to the rural low income population. However with growth of the
microfinance institutions and with increasing competition, the MFIs have very limited access to funds. The
study reveals that the self-sufficient microfinance institutions are strong performers of ROA and ROE.

Gopinathan Thachappilly (2016), in this articles he discuss about the Financial Ratio Analysis for
Performance evaluation. It analysis is typically done to make sense of the massive amount of numbers
presented in company financial statements. It helps evaluate the performance of a company, so that investors
can decide whether to invest in that company. Here we are looking at the different ratio categories in
separate articles on different aspects of performance such as profitability ratios, liquidity ratios, debt ratios,
performance ratios, investment evaluation ratios.

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III. Data Analysis and Interpretation

1. Growth in bank credit to NBFCs

Interpretation:

The graph displays the growth in bank credit to non-banking financial companies (NBFCs) compared to the
overall bank credit growth, measured on a year-on-year (YoY) basis. The growth in bank credit to NBFCs
(represented by the blue line) shows significant volatility, with relatively low growth from September 2021
to mid-2022, followed by a steep rise that peaked in mid-2023. After this peak, the growth begins to decline,
showing a downward trend into 2024. This suggests that the demand for credit by NBFCs increased during
certain periods but has been slowing in recent months. The overall bank credit growth (represented by the
teal line) follows a more consistent, but somewhat slower, growth pattern compared to credit to NBFCs.
This indicates that credit to NBFCs has outpaced overall bank credit growth at certain points, particularly in
mid-2023, which could reflect a higher appetite for riskier or more specialized lending compared to
traditional sectors. The gray line, showing gross bank credit excluding NBFCs, follows the overall credit
growth closely but is generally slightly lower than the credit to NBFCs. The divergence between these lines
suggests that NBFCs were absorbing a larger share of the bank credit during certain periods. In conclusion,
the graph illustrates the growing role of NBFCs in the overall bank credit growth, especially in mid-2023,
but also indicates that their growth may have started to slow in the latter half of 2023 and into 2024. This
could be due to changing market conditions, shifts in credit demand, or regulatory factors affecting NBFCs,
while the overall bank credit growth remains more stable and slower in comparison.

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Descriptive Statistics

2. Changes in Yield on Advances and Movement in Cost of Funds of Scheduled

Commercial Banks

Group Change in Yields Change in Cost of Change in Yields Change in Cost of

(bps) y-o-y Funds (bps) y-o-y (bps) q-o-q Funds (bps) q-o-q

Large 162 101 14 28

PSBs

Other 140 89 24 22
PSBs

PSBs 157 98 17 26

Large 165 109 28 39

PVBs

Other 142 98 40 36
PVBs

PVBs 157 105 32 38

SCBs 157 101 23 30

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OUTPUT

Variable n Mean SD Media MAD Min Ma Range Skew Kurtosis SE

n x

Group 7 4.00 2.16 4 2.97 1 7 6 0.00 -1.71 0.82

Change in 7 154.29 9.59 157 7.41 140 165 25 -0.49 -1.62 3.62
Yields
(bps) YoY

Change in 7 100.14 6.28 101 4.45 89 109 20 -0.34 -0.97 2.37

Cost of
Funds
(bps) YoY

Change in 7 25.43 8.87 24 10.38 14 40 26 0.26 -1.40 3.35

Yields
(bps) QoQ

Change in 7 31.29 6.50 30 8.90 22 39 17 -0.06 -1.85 2.46

cost of
funds

Columns in the Table:

 n: The number of data points (7 for each variable in this case).

 Mean: The average value of the variable.

 SD: The standard deviation, indicating how spread out the data is.

 Median: The middle value of the data when ordered.

 MAD: The median absolute deviation, a measure of variability.

 Min: The minimum value.

 Max: The maximum value.

 Range: The difference between the maximum and minimum values.

 Skew: The skewness, which indicates the asymmetry of the distribution.

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  Kurtosis: The kurtosis, which measures the 'tailedness' of the distribution.

 SE: The standard error, which estimates the variability of the sample mean.

Interpretation:

 Group: The values for the group variable are categorical, with 7 distinct categories. Since this
variable is not continuous, its statistics like mean, median, and standard deviation are less relevant.
The skewness of 0.00 indicates a perfectly symmetrical distribution, and the kurtosis of -1.71
suggests a slightly platykurtic distribution (i.e., it has a lower peak than a normal distribution).

 Change in Yields (bps) - YoY: The mean change in yields year-on-year (YoY) is 154.29 bps with a
standard deviation of 9.59. The median is 157 bps, indicating that the distribution is close to
symmetric around the mean. The range of changes is between 140 bps and 165 bps, with a skewness
of -0.49, which suggests a slight leftward skew (a few low values pull the distribution slightly to the
left). The kurtosis of -1.62 suggests the distribution is slightly flatter than a normal distribution.

 Change in Cost of Funds (bps) - YoY: The mean change in the cost of funds YoY is 100.14 bps, with
a standard deviation of 6.28. The median is 101 bps, indicating that the data is fairly symmetrical.
The range is from 89 bps to 109 bps, and the skewness of -0.34 suggests a slight leftward skew. The
kurtosis of -0.97 indicates a distribution that is closer to normal but still slightly flatter than a normal
distribution.

 Change in Yields (bps) - QoQ: The mean quarterly change in yields is 25.43 bps, with a standard
deviation of 8.87, and the median is 24 bps, indicating a fairly symmetrical distribution. The range is
from 14 bps to 40 bps, and the skewness of 0.26 suggests a slight rightward skew (indicating a few
higher values). The kurtosis of -1.40 suggests a distribution that is flatter than a normal distribution.

 Change in Cost of Funds (bps) - QoQ: The mean quarterly change in the cost of funds is 31.29 bps,
with a standard deviation of 6.50, and the median is 30 bps, indicating symmetry around the median.
The range is from 22 bps to 39 bps, with a skewness of -0.06, suggesting that the data is fairly
symmetrical. The kurtosis of -1.85 indicates a relatively flat distribution.

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3. NBFCs’ Credit vis-à-vis SCBs’ Credit and GDP

Interpretation:

The graph compares the credit-to-GDP ratios for Non-Banking Financial Companies (NBFCs) and
Scheduled Commercial Banks (SCBs) over a period, likely from 2014 to 2023. The credit-to-GDP ratio for
NBFCs has shown a consistent upward trend, with a significant surge in 2018 and 2019. However, there was
a slight dip in this ratio in 2020 and again in 2022. In contrast, the credit-to-GDP ratio for SCBs has
remained relatively stable over the same period, with a small increase in 2021 followed by a decline in 2022
and 2023.

This pattern suggests that NBFCs have been expanding their credit portfolios at a faster rate compared to
SCBs. The increasing credit-to-GDP ratio for NBFCs reflects their growing role in the overall credit market,
likely driven by their focus on niche segments and more agile decision-making processes, which may allow
them to cater to underserved sectors. On the other hand, the more stable ratio for SCBs points to a more
cautious lending approach, potentially influenced by regulatory constraints and a stronger emphasis on risk
management.

The divergent trends between NBFCs and SCBs could highlight different business models and strategies,
with NBFCs focusing on market expansion and SCBs prioritizing stability and regulatory compliance. To
fully understand the dynamics at play, it would be helpful to consider the specific years shown in the graph
and the broader economic context during this period.

IV. Conclusion
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The comparative analysis of Non-Banking Financial Companies (NBFCs) and Traditional Banks (Scheduled
Commercial Banks or SCBs) in terms of credit provisioning reveals significant differences in their growth
patterns and strategic approaches. Over the past several years, NBFCs have demonstrated a more dynamic
and aggressive expansion in credit provisioning, as evidenced by their increasing credit-to-GDP ratios,
particularly notable in the years 2018 and 2019. This growth trajectory highlights the role of NBFCs in
addressing niche markets and underserved segments, aided by their more flexible and rapid decision-making
processes, which are often less constrained by regulatory requirements compared to traditional banks. In
contrast, SCBs have followed a more cautious and stable approach to credit provisioning, reflected in their
relatively flat credit-to-GDP ratio over the same period. While SCBs have seen occasional upticks in credit
growth, their lending strategies appear more conservative, likely due to stricter regulatory guidelines, risk
management concerns, and the inherent stability they aim to maintain in their operations.

The divergence in these trends suggests that NBFCs are increasingly filling the gaps left by traditional
banks, particularly in sectors where SCBs may find it too risky or costly to lend. However, while NBFCs
have been successful in expanding their portfolios, this growth has not been without its challenges, as
evidenced by the recent slowdown in credit growth, which may be due to shifting market conditions or
regulatory pressures. On the other hand, SCBs, though more stable, are less likely to meet the growing
demand for credit in niche or high-risk sectors. Thus, the role of NBFCs in the overall financial ecosystem is
becoming more pronounced, contributing to increased competition in the credit market. Understanding the
differences in their approaches to credit provisioning is essential for stakeholders, policymakers, and
investors, as it sheds light on the evolving dynamics of the financial services sector and the potential
implications for the future of credit markets in the economy.

Overall, the findings suggest that while NBFCs have carved a growing niche in the credit market,
particularly in areas that require specialized lending, SCBs continue to play a crucial role in the overall
stability of the financial system. The future trajectory of credit growth for both types of institutions will
likely depend on a combination of regulatory changes, market conditions, and their ability to adapt to the
evolving demands of borrowers.

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