6.1 It is well recognised that the role of Non-Banking Financial Companies (NBFCs) as financial intermediaries is distinct from that of the banks. Most of the NBFCs have a well-defined business profile serving a niche clientele in a cost effective manner. However, a few of them have highly diversified portfolios. The liability side of their balance sheets also reflects a mixed composition driven mainly by their unique innovative schemes, interest rate premia and large-scale mobilisation efforts. The proliferation of NBFCs in the decade of 1990s left a regulatory gap, which was bridged with the amendment of the Reserve Bank of India Act, 1934 in January 1997. This has been followed by issuance of several regulations aimed at alignment of the regulatory environment of the NBFCs with that of the banks and ensuring protection to depositors. Subsequent regulatory initiatives covered areas of compulsory registration, prudential regulations, investment norms, disclosure standards, strengthening of supervisory oversight, etc. The tightening of regulatory and supervisory framework for NBFCs has also been coterminous with the rapid product development and diversification, sweeping changes in technology along with trends indicating consolidation in the financial sector.

6.2 The improvements are visible in terms of the soundness indicators, like capitalisation, asset quality, business performance and sustainability. While concentration of deposit holding in terms of types of NBFCs has not exhibited major changes, indicators of size-wise distribution and regional spread of public deposits improved considerably. However, such improvements have been accompanied by a reduction in the size of the balance sheet of the NBFC sector corresponding with the consolidation of the sector on account of mergers, closures and cancellation of certificates of registration and conversion into non-public deposit accepting activities. However, profitability and efficiency indicators of the NBFC sector improved marking a turnaround after the losses recorded for the two successive years of 2000-01 and 2001-02.

2. Non-Banking Financial Companies Regulated by the Reserve Bank

6.3 The NBFCs as defined in the Reserve Bank of India Act, 1934 are broadly classified into different categories on the basis of their principal activities. The Reserve Bank regulates and supervises the NBFCs in terms of Chapter III B of the Reserve Bank of India Act, 1934. The Reserve Bank has put in place a set of directions to regulate the activities of NBFCs under its jurisdiction. The directions are aimed at controlling the deposit acceptance activity of NBFCs in the four categories of Equipment Leasing (EL), Hire Purchase (HP), Loan and Investment Companies and deposits and business activities of Residuary Non-Banking Companies (RNBCs). Besides, the Reserve Bank has prescribed prudential norms for all the NBFCs. RNBCs are classified as a separate category as their business, which has evolved over the years, does not conform to any of the other defined classes of NBFC businesses. Certain other types of non-banking financial entities are either partially regulated by the Reserve Bank or are outside the purview of the Reserve Bank regulation.

6.4 The regulatory jurisdictions over the various types of NBFCs are clarified in Table VI.1.

3. Registration

6.5 The Reserve Bank of India (Amendment) Act, 1997 made it obligatory for NBFCs to apply to the Reserve Bank for a certificate of registration (CoR). The statutory requirement for minimum net owned funds¹ (NOFs) for

¹ Net owned funds (NOFs) of NBFCs is the aggregate of paid-up capital and free reserves, netted by (i) the amount of accumulated balance of loss, (ii) deferred revenue expenditure and other intangible assets, if any, and further reduced by investments in shares of (a) subsidiaries, (b) companies in the same group and (c) other NBFCs, and loans and advances to (a) subsidiaries and (b) companies in the same group in excess of 10 per cent of owned fund.

registration, was stipulated at Rs.25 lakh for the then existing NBFCs and Rs.2 crore for new NBFCs seeking grant of CoR on or after April 21, 1999. The three-year period provided in the Reserve Bank of India (Amendment) Act, 1997 for the NBFCs to attain the minimum NOFs necessary for registration expired on January 9, 2000. The further three-year period granted by the Reserve Bank, at its discretion, as per the Act, also came to a close on January 9, 2003.

6.6 As at the end of June 2004, a total of 38,050 applications were received for grant of CoR. Of these, the Bank has approved 13,671 applications, including 584 applications of companies authorised to accept/hold public deposits (Table VI.2).

6.7 All NBFCs holding public deposits whose CoRs have been either rejected or cancelled cannot accept fresh deposits or renew maturing deposits and have to continue repaying the deposits on due dates and dispose off their financial assets within three years from the date of application/cancellation of the CoR. Thus, there has been a fall in the number of operating NBFCs reflecting mergers, closures and cancellation of licenses. Besides, the number of public deposit accepting companies also came down because of conversion to non-public deposit-accepting activities.

4. Supervision

6.8 Supervisory oversight by the Reserve Bank over NBFCs encompassed a four-pronged strategy including a) on-site inspection, based on the CAMELS methodology, b) off-site monitoring supported by state-of-the-art technology, c) market intelligence, and d) exception reports of statutory auditors.

6.9 For closer monitoring of the linkages of NBFCs including RNBCs with capital market, a system of quarterly reporting which was subsequently changed to monthly reporting for companies having public deposits of Rs.50 crore and above, was put in place. In case of large exposures to the capital market, the companies were also required to submit funds flow statements.

6.10 With a view to addressing issues relating to systemic risk and monitoring the affairs of financial conglomerates, the Reserve Bank put in place a reporting framework for such entities. Entities having significant presence in more than one financial segments under the jurisdiction of specified regulators (RBI, SEBI, IRDA, etc.) have been covered under this framework. NBFCs subject to this reporting discipline are required to submit returns at periodic intervals on their intra-group relationships.

6.11 Recently, a quarterly reporting arrangement has been introduced for NBFCs not accepting/holding public deposits and having assets size of Rs.500 crore and above as on March 31, 2004.

6.12 During the period July 2003 to June 2004, 705 registered NBFCs (368 deposit taking and 337 non-deposit taking companies) were inspected. In addition to the inspections, the Reserve Bank also conducted 372 snap scrutinies during the same period.

5. Policy Developments

6.13 The consolidation of policy initiatives with respect to the NBFCs continued during 2003-04. A few important measures undertaken included, i) streamlining of returns related to Asset-Liability Management (ALM) and exposure to capital market, ii) alignment of interest rates, iii) simplification of the procedures for collection of interest on the Government securities, iv) alignment of regulatory norms with the banking sector with respect to exposure to infrastructure projects, v) procedural change in nomination facilities, vi) issuance of ‘Know Your Customer’ (KYC) policy, vii) allowing NBFCs to take up insurance agency business, viii) legislative initiatives in the form of follow up of Financial Companies Regulation Bill (FCRB) and ix) issuance of guidelines for Securitisation Companies and Reconstruction Companies.

6.14 Major changes effected during July 2003-June 2004 in the policies applicable to NBFCs are outlined below.

6.15 Interest rate policies for the NBFC sector has been guided with the objective of alignment of interest rates for the NBFC sector with that of the banking sector. Important components of interest rate policy include (a) The maximum rate of interest that NBFCs (including Nidhi companies and Chit Fund companies) can pay remained unchanged at 11.0 per cent per annum (effective March 4, 2003); (b) the minimum rate of interest payable by the RNBCs also remained unchanged at five per cent per annum (to be compounded annually) on the amount of deposits made in lump sum or at monthly or longer intervals and three and one-half per cent per annum (to be compounded annually) on the amount deposited under daily deposit schemes (effective April 1, 2003); (c) keeping in view the prevailing interest rates on fresh repatriable deposits accepted from non resident Indians in the entire financial system, the rate of interest which the NBFCs and Miscellaneous Non-Banking Companies (MNBCs) could pay on such deposits was aligned with that payable by the scheduled commercial banks (SCBs) on these deposits effective from September 17, 2003. As and when the interest rate for NRE deposits is revised by the Reserve Bank for scheduled commercial banks, that rate would ipso-facto be applicable to NRI deposits on repatriation basis accepted by NBFCs and MNBCs also. With effect from April 24, 2004, NBFCs are not allowed to accept fresh NRI deposits except renewing the deposits already accepted.

6.16 The ALM guidelines issued in June 2001 were made fully operational as on March 31, 2002. The first ALM Return as on September 2002 was submitted by NBFCs to the Reserve Bank by October 31, 2002. Thereafter returns are being submitted regularly on a half-yearly basis.

6.17 NBFCs and RNBCs have already been directed to dematerialise Government securities. A few Government securities and Government guaranteed bonds that have not yet been dematerialised by the issuers and are held in physical form for the time being are withdrawn by NBFCs for the purpose of collection of interest from the safe custody of their designated bankers and re-deposited with the banks after the needful has been done. To avoid the process of withdrawal and re-depositing these securities, NBFCs/RNBCs were advised to authorise their designated banks as agents by exercising a Power of Attorney in favour of them for collection of interest on due dates on these securities held in the physical form and lodged for safe custody.

6.18 Prudential norms applicable to NBFCs were amended and aligned with those applicable to banks and FIs, in particular those exposures pertaining to infrastructure projects.

6.19 The Reserve Bank in consultation with the Government of India, decided that NBFCs may adopt the Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate one person, to whom, the NBFCs can return the deposit in the event of death of the depositor/s. NBFCs were advised in July 2003 to accept nominations made by the depositors in the forms similar to the one specified under the said rules, viz., Form DA1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and variation of nomination, respectively.

6.20 Know Your Customer (KYC) guidelines for NBFCs were issued on January 6, 2004. The guidelines are akin to those issued to commercial banks covering, inter alia, (i) customer identification; (ii) KYC procedure for existing customers; (iii) ceiling for and monitoring of cash transactions; (iv) internal control system; (v) internal audit/inspection; (vi) record keeping; and (vii) training of staff and management. The Board of Directors of the NBFCs have been advised to formulate policies and procedures to operationalise and ensure observance of these guidelines in respect of all new customers. The NBFCs have also been advised to complete the identification process in respect of the existing customers by June 30, 2004. These guidelines are applicable to all NBFCs including MNBCs (Chit Fund Companies) and RNBCs.

6.21 NBFCs may take up, without approval of the Reserve Bank, insurance agency business on fee basis and without risk participation subject to certain conditions. It was clarified that the prohibition from collection of premium from the insured by the NBFCs relates only to its insurance agency business. It does not relate to insurance of the assets in which the NBFCs have insurable interest for the purpose of lease or hire purchase or hypothecation of loans to the lessees, hirers and the loanees. However, NBFCs intending to set up insurance joint ventures with equity contribution on risk participation basis or making investments in the insurance companies, would continue to obtain the prior approval of the Reserve Bank as envisaged in earlier guidelines dated June 9, 2000.

6.22 The Standing Committee on Finance of the Parliament has submitted its recommendations to the Government of India, on the FCRB. The Government has, in turn, called for the comments of the Reserve Bank on the recommendations of the Standing Committee. In view of the recent developments in the financial sector, the provisions of FCRB are being revisited.

6.23 The Government enacted the SARFAESI Act to enable banks and FIs to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or construction. In the light of the Supreme Court judgement in the Mardia Chemicals Ltd., certain amendments to the SARFAESI Act were necessitated. Certain other incidental changes have also been proposed taking suggestions received in this regard from several quarters. The Reserve Bank has so far granted CoR to three Asset Reconstruction Companies (ARCs) viz., Asset Reconstruction Company of India Limited (ARCIL), Assets Care Enterprise Limited (ACEL) and ASREC (India) Limited (ASREC). ARCIL has begun its operations and has acquired assets of book value of Rs.9,631 crore at a price of Rs.2,089 crore and has issued security receipts worth Rs.2,102 crore. ACEL is yet to commence its operations. The proposed merger of IFCI, one of its main sponsors, could be the probable cause for the delay. The third company, ASREC (India) has been granted CoR on October 11, 2004² . In order to ensure that the ARCs have a sound capital base and a stake in the management of the NPAs so acquired by them, the Reserve Bank has increased the requirement of minimum owned fund for commencement of business by these companies to an amount not less than 15 per cent of the assets acquired or to be acquired or Rs.100 crore whichever is less, on an aggregate basis.

6.24 In view of the expertise gained by NBFCs in financing second hand assets and to encourage credit dispensation, bank financing to NBFCs was liberalised. Henceforth, banks were allowed to extend finance to NBFCs against second hand assets financed by them, provided suitable loan policies duly approved by the banks' Boards are put in place.

6.25 At present, NBFCs accepting public deposits are regulated and supervised by the Reserve Bank. Over a period, the dependence of the NBFCs (other than RNBCs) on public deposits as part of their overall resources has declined. The deposits of NBFCs declined from Rs.6,500 crore in 2000-01 (17.2 per cent of their total liabilities) to Rs.3,400 crore in 2003-04 (12.7 per cent of the total liabilities). The number of deposit taking NBFCs has also declined from 996 in 1997 to 577 by September 2004. Internationally, acceptance of public deposits is restricted to banks, and non-banks including NBFCs raise resources from institutional sources or by accessing the capital market. NBFCs are encouraged to move in this direction in line with international practices. The Reserve Bank will be holding discussions with NBFCs in regard to their plan of action for voluntarily phasing out of their acceptance of public deposits and regulations on banks' lending to NBFCs will be reviewed by the Reserve Bank as appropriate.

6.26 The Primary Dealers (PDs) system has been in vogue in India for the last nine years. PDs serve as important intermediaries to promote activity in the Government securities market, especially in the development of the secondary market. The main objective of promoting PDs is to make the Government securities market vibrant, liquid and broad based and to ensure development of underwriting and market making capabilities for Government securities outside the Reserve Bank. PDs obligations include an annual bidding commitment, underwriting the primary issuance and offering two-way quotes. In return, PDs have access to Subsidiary General Ledger (SGL), current accounts, collateralised liquidity support and liquidity support through LAF scheme from the Reserve Bank. PDs also have access to the call money market as borrowers and lenders.

6.27 With the merger of SBI Gilts Ltd. and DFHI Ltd. recently, the number of PDs in the system came down from 18 to 17. PDs largely deal in Government securities and other interest rate products and support the borrowing programme of the Government of India and State Governments. For financing their securities holdings, they depend on short term funding thereby incurring an inherent mismatch. PDs are a systemically important segment of the financial system in view of their number, their market share in Government securities market and their participation in money market. Since PDs are highly leveraged in general, regulatory oversight thereon is desirable. Central banks across the world, typically, review the performance of the PDs and make continuation of their operations performance based.

6.28 The off-site supervisory returns required to be submitted by the PDs were rationalised during the year. Six returns were discontinued and three returns were revised. A new quarterly return on major financial indicators and various ratios was introduced from the quarter ended December 31, 2003.

6.29 With a view to enabling PDs to manage their exposure to interest rate risk, they were allowed to deal in exchange traded interest rate derivatives in a phased manner. In the first phase, they were permitted to transact only in interest rate futures on notional bonds and Treasury bills for the purpose of hedging the risk in their underlying investment portfolio. Subsequently, based on the feedback received, they were permitted to trade in these products subject to prudential guidelines and appropriate disclosures.

2 Also refer to Box V.4 of the Report.

6.30 Operational guidelines were issued to PDs for Portfolio Management Services (PMS). PDs would require prior approval of the Reserve Bank and registration with Securities and Exchange Board of India (SEBI) before undertaking PMS activity. They are permitted to offer PMS services only to entities not regulated by the Reserve Bank. Prudential guidelines were also issued to PDs on their investment in non-Government securities. PDs are prohibited from investing in unrated debt securities and investments in unlisted instruments is limited to 10 per cent of the non-Government securities portfolio.

6.31 The revised ‘capital adequacy standards and risk management guidelines’ for PDs were issued in January 2004. Minimum holding period under Value-at-Risk (VaR) measure was reduced from 30 days to 15 days. This reduced market capital charge enabled PDs to hold higher portfolio. The reporting for capital adequacy was standardised. Some off-balance sheet items (such as, underwriting commitments), not included earlier, were included for reckoning of the risk weighted assets and capital adequacy. Guidelines relating to issue of Subordinated Debt Instruments under Tier II and Tier III capital have also been issued.

6.32 A cap of 200 per cent of their NOFs (as at the period ending March of the preceding financial year) was fixed on PDs borrowings in the call market in February 2004.

6.33 PDs need to have a sound capital base so as to absorb the adverse shocks in the event of upward movement of yields. Therefore, in June 2004, prudential guidelines were issued on dividend distribution policy with focus on payout ratio and capital adequacy. Dividend payout ratio for the PDs, having Capital to Risk Weighted Assets Ratio (CRAR) at 20 per cent or above in all the four quarters of the previous year, was capped at 50 per cent while for others, the dividend payout rate was capped at 33.33 per cent. A PD is not permitted to declare dividend if the CRAR in any of the four quarters has been below the minimum prescribed CRAR of 15 per cent.

6.34 In order to evaluate the role of PDs in the Government securities market and to undertake a comprehensive examination of the entire range of issues relating to the PDs with particular emphasis on their role and obligation, ability to cope with emerging risk and possible diversification of their balance sheet in general and the structure of their balance sheet in the context of changing financial environment, a sub-group of the Technical Advisory Committee (TAC) on Money, Foreign Exchange and Government Securities Markets was formed (Chairman: Dr. R.H. Patil). The Report of the sub-group is being placed before the TAC for advice to enable further action.

6.35 The Fiscal Responsibility and Budget Management Act stipulates that, with effect from April 1, 2006, the Reserve Banks participation in primary issues of Government securities will stand withdrawn. Consequently, open market operations (OMO) will become a more active instrument, warranting a review of processes and technological infrastructure consistent with market advancements. The Reserve Bank's intervention directly in the market or through PDs on a real time basis may become necessary. A Study Group would be constituted for strengthening the OMO framework to address these emerging needs and equip the Reserve Bank as well as the market participants appropriately.

6. Business Profile of the NBFC Sector

6.36 A broad business profile of the NBFC sector as at the end-March 2002 and end-March 2003, based on the periodic returns submitted by deposit accepting/holding companies is presented in Table VI.3 and Chart VI.1³ . As at end-March 2002, the total outstanding public deposits of the 910

³ The data, however, are not strictly comparable across the years in view of differences in the total number of reporting companies.

6.37 The aggregate assets of the NBFC sector declined marginally due to the reduction of Rs.3,815 crore in the assets of Loan Companies. However, this was partially offset by increase for other categories of NBFCs, viz., (i) Equipment Leasing and Hire Purchase Companies (Rs.1,754 crore), (ii) RNBCs (Rs.1,904 crore), (iii) Investment Companies (Rs.132 crore) and (iv) MNBCs (Rs.14 crore), respectively.

6.38 The profile of public deposits of different categories of NBFCs is provided in Table VI.4. At the disaggregated level, public deposits with the RNBCs and other NBFCs increased by 16.9 per cent and 24.2 per cent, respectively, during 2002-03 as compared with 2001-02. It may also be observed that the size of public deposits of Equipment Leasing Companies, Investment and Loan Companies has significantly declined by 23.5 per cent and 68.0 per cent, respectively, during the same period. However, since their shares in total deposits held by the NBFCs are small, their impact on the volume of public deposits of NBFCs was negligible (Chart VI.2). RNBCs hold a large share of public deposits. The total volume of public deposits of NBFCs in fact rose by 6.8 per cent during 2002-03.

6.39 The size of public deposits held by NBFCs shows wide variation. Range-wise analysis of public deposits held by them is given in Table VI.5. It may be observed that number of NBFCs holding public deposits in the range of Rs.20 crore and above came down to 35 as at end-March 2003 from 42 NBFCs at end-March 2002. However, these NBFCs accounted for more than 80 per cent of total public deposits held by all the NBFCs in both the years.

6.40 The Reserve Bank publishes quarterly data on broad liquidity (L3) encompassing monetary liabilities of the banking sector, postal

7. Region-wise Composition of Deposits held by NBFCs⁴

6.41 The regional spread of the deposits held by NBFCs showed significant improvement (Table VI.6). The share of Eastern Region in the total deposits of the NBFCs declined significantly from 42.8 per cent in March 2002 to 38.0 per cent in March 2003. On the other hand, the Central Region accounting for 27.7 per cent of the aggregate public deposits as at end-March 2002 has shown a sharp increase in its share to 38.6 per cent as at end-March, 2003. The public deposits held by NBFCs in four metropolitan centres of Mumbai, New Delhi, Kolkata and Chennai has declined sharply to 59.2 per cent as at end-March 2003 from 69.8 per cent as at end-March 2002

8. Interest Rate and Maturity Pattern of Public Deposits with NBFCs

6.42 The interest rates offered by the NBFCs declined sharply in line with the easy interest rate environment. There was a significant rise in the quantum and percentage of public deposits in the interest rate range of upto 10 per cent and 10 to 12 per cent during the year 2002-03 (Chart VI.4). Deposits in the interest rate range of 10 to 12 per cent now constitute the largest component in the portfolio. On the other hand, public deposits in

interest rates range of 12 to 14 per cent, 14 to 16 per cent and more than 16 per cent declined. The public deposits in interest rate range of 12 to 14 per cent declined significantly from 39.2 per cent as at end-March 2002 to 22.6 per cent as at end-March 2003 (Table VI.7).

6.43 The maturity-wise analysis of public deposits held by NBFCs is presented in Table VI.8.

6.44 The broad trends indicate that outstanding public deposits with NBFCs (other than RNBCs) declined from Rs.5,933 crore as at end-March 2002 to Rs.5,035 crore at end-March 2003. The overall decline of Rs.898 crore (15.1 per cent) was evenly distributed in all the maturity buckets ranging from ‘Less than one year’ to ‘five years and above’.

6.45 In the declining interest rate scenario, the interest rate differential between banks and NBFCs has narrowed over the years (Table VI.9).

9. Asset Profile of NBFCs

6.46 The asset profile of NBFCs during 2001-02 and 2002-03 indicates that out of the 905 reporting companies, 62 NBFCs, with an asset size of Rs.50 crore and above, accounted for 92.2 per cent of the total assets in 2002 (Table VI.10). The share of assets of the companies in this range has remained unchanged though their number has changed marginally. Out of 870 reporting companies (excluding RNBCs), 64 companies having an asset size of Rs.50 crore and above accounted for same percentage, i.e., 92.2 per cent of the total assets of NBFC sector as at end-March 2003. The number of companies in all the categories has decreased excepting the companies in the asset range of Rs.50-Rs.100 crore. The overall asset size of these companies has decreased from Rs.39,833 crore as on March 31, 2002 to Rs.37,709 crore as on March 31, 2003. The asset size of majority of the companies in each category has shown a decreasing trend during 2003, with the exception of those in the

range of Rs.100-Rs.500 crore. The reason for the reduction in the asset size of many of the companies may be attributed to conversion of a few large sized deposit taking companies to non-deposit taking companies and also for the possible reason of utilisation of their assets to liquidate their high cost deposit liabilities.

6.47 The major portion of the assets of NBFCs (excluding RNBCs) are in the form of equipment leasing and hire purchase assets. The two together constituted 39.9 per cent of the total assets of NBFCs as at end-March 2003 whereas the loans and Inter-Corporate Deposit (ICD) portfolio accounted for 35.3 per cent of their total assets (Table VI.11).

6.48 The borrowings by NBFCs (excluding RNBCs) at end-March 2002 and end-March 2003 indicate that the total borrowings have registered a marginal increase of Rs.480 crore during 2002-03 (Table VI.12). Funds raised through issue of debentures which constituted 17.4 per cent of the total borrowings at end-March 2002, increased to 21.9 per cent as at end-March 2003. The resources raised through ‘Other Sources’ also increased from 14.8 per cent as at end-March 2002 to 21.0 per cent as at end-March

2003. The Central/State Governments ceased to be a major source of funding for the sector with the reliance on this source declining by almost 50 per cent during the period under review.

6.49 Lead data on the performance of the major NBFCs (other than RNBCs) holding public deposits of Rs.20 crore and above accounting for three-fourth of sectoral assets based on returns introduced on the basis of the Working Group on "Money Supply: Analytics and Methodology of Compilation" (Chairman: Dr. Y.V. Reddy, 1998) is given in the Table VI.13. The

structure of assets and liabilities of major NBFCs reveals a marginal increase in share of public deposits during 2003-04 accompanied by larger recourse to bank loans, partly driven by the softening of the lending rates. In terms of deployment of funds, only loans and advances recorded a marginal increase in contrast to decline in the other areas of business.

6.50 The profitability analysis of the NBFCs indicates that both income and expenditure of these companies registered decline during 2002-03 (Table VI.14). Income witnessed a decline of 5.1 per cent, largely due to a drop in fund-based income. Total expenditure of NBFCs declined by Rs.830 crore (15.6 per cent) mainly due to a sharp contraction in financial expenditure by Rs.540 crore. The decline in financial expenditure, in turn, was on account of a significant decline in interest expenses. While the other components of expenditure also declined, the decline in ‘other expenditure’ was larger than the decline in ‘operating expenditure’. This resulted in a turnaround with the NBFCs recording net profit of Rs.339 crore in 2002-03 as against a net loss of Rs.212 crore in 2001-02 (Chart VI.5).

6.51 Interest expended by NBFCs declined from 25.6 per cent of the total income as at end-March 2002 to 19.2 per cent of the total income as at end-March 2003 reflecting the soft interest conditions prevailing in the economy. The non-interest expenses incurred also decreased from 73.7 per cent of the total income to 69.2 per cent of the total income for the period under review (Table VI.15 and Chart VI.6). This reflected a decline in the operating expenses including wages and establishment cost.

6.52 The NOFs of reporting NBFCs (Table VI.16) indicate that the number of companies in most of the NOFs ranges has decreased. However, the ratio of public deposits to the NOFs maintained by these companies has remained stable in 2002 and 2003 with the exception of companies in the range of NOFs between Rs.0.25 crore to Rs.2.0 crore, Rs.2.0 crore to Rs.10 crore and Rs.50 crore to Rs.100 crore.

6.53 The capital adequacy norms were made applicable to NBFCs in 1998. The norms relating to Capital to Risk-weighted Assets Ratio (CRAR) stipulate that every NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capital that shall not be less than (a) 10 per cent on or before March 31, 1998; and (b) 12 per cent on or before March 31, 1999, of its aggregate risk-weighted

6.54 The gross and net non-performing assets of the reporting NBFCs has experienced a steady decline in recent years (Table VI.18). Lower provisioning for the half-year ended at September 2003 led to a marginal increase in net NPAs of the NBFCs.