Non-Banking Financial Institutions (NBFIs) play an important role in the Indian financial system given their unique postion of providing complimentarity and competitiveness to banks. On account of intensification of the global financial crisis in September 2008, some impact was experienced in the sector, thereby creating liquidity constraints for NBFIs. In response, the Reserve Bank introduced special fixed term rate Repo under liquidity adjustment facility (LAF) to banks exclusively for the purpose of meeting the funding requirements of Non-Banking Financial Companies (NBFCs). Besides, certain precautionary measures were taken by the Reserve Bank since October 2008 to enhance the availability of liquidity to NBFCs. These steps indirectly helped in dealing with the market pressure which had been building up. All India Financial Institutions (AIFIs) were extended refinance facilities of Rs.16,000 crore. Ceiling on aggregate resource mobilisation and umbrella limit were raised for EXIM Bank and NHB; select AIFIs were allowed to offer market related yield to maturity (YTM). Financial Institutions (FIs) exhibited robust performance in terms of assistance sanctioned and disbursements, balance sheet size and net profit. The weighted average cost of long term resources raised by AIFIs witnessed a mixed trend. Asset quality of FIs improved during the year vis-à-vis the previous year. Regulation of NBFIs in India was being progressively strengthened well before the onset of the global financial crisis. The Reserve Bank undertook regulatory and supervisory policy initiatives in terms of capital to risk weighted asset ratio (CRAR), exposure norms and classification of assets. While the balance sheet size of Primary Dealers (PDs) moderated during the period mainly on account of decline in secured loans and decline in Government securities, their financial indicators like net profit and return on average assets improved during 2008-09 vis-à-vis 2007-08.

1. Introduction

6.1 While the Indian financial system is dominated by banks, NBFIs play an important role by complementing banks in providing a wide range of financial services. Banks have an edge in providing payment and liquidity related services, while NBFIs tend to offer enhanced equity and risk based products. NBFIs are heterogeneous as a group, functionally as well as in terms of size and nature of activities. The major intermediaries that are included in the NBFI group are Development Finance Institutions (DFIs), insurance companies, non-banking financial companies (NBFCs), primary dealers (PDs) and capital market intermediaries such as mutual funds. The NBFIs are providing medium to long-term finance to different sectors of the economy.

6.2 In the wake of the recent global financial crisis and its fall out on the financial institutions (FIs), the Reserve Bank took a number of measures to preserve financial stability and arrest the moderation in the growth momentum. To ensure adequate availability of liquidity in the system and maintain conditions conducive for flow of credit to all productive purposes, particularly to the housing, export and industrial sectors, the Reserve Bank provided special refinance facilities to the Small Industries Development Bank of India (SIDBI),the National Housing Bank (NHB) and the Export-Import (EXIM) Bank of India in December 2008. The ceiling on aggregate resources mobilised by SIDBI, NHB and EXIM Bank, and the ‘umbrella limit’ for NHB and EXIM Bank were also raised. The Reserve Bank took policy initiatives for NBFCs also. As a measure aimed at expanding rupee liquidity, the Reserve Bank provided a special repo window under the LAF for NBFCs. In addition, an existing special purpose vehicle (SPV) was used as platform to provide liquidity support to NBFCs. In December 2008, systemically important non-deposit taking NBFCs (NBFCs-ND-SI) were permitted, as a temporary measure, to raise foreign currency short term borrowings under the approval route subject to certain conditions.

6.3 During 2008-09, the combined balance sheets of FIs, viz., National Bank for Agriculture and Rural Development (NABARD), SIDBI, NHB and EXIM Bank, continued to expand. The financial performance of FIs also improved. Net interest income as well as non-interest income of these FIs increased during 2008-09. The asset quality of the FIs improved as net non-performing assets (NPAs) to net loans ratio declined significantly during 2008-09. The NBFIs in the Indian financial system continued to be resilient as the Reserve Bank had taken various measures to minimise the adverse effects of the ongoing financial crisis on the system.

6.4 NBFCs have been competing with and complementing the services of commercial banks for a long time. The NBFCs as a whole account for 9.1 per cent of assets of the total financial system. The Committee on Financial Sector Assessment (CFSA), 2009 observed that NBFCs are largely compliant in areas relating to licensing, permissible activities, capital adequacy, risk management process, credit risk, problem assets, large exposures, supervisory approach, supervisory techniques and supervisory reporting. However, the assessment has revealed that there are certain gaps in areasrelating to home-host co-operation, transfer of significant ownership, major acquisitions, exposure to related parties, market, liquidity and operational risks, internal control and interest rate risk in the banking book. The CFSA’s recommendations in this regard will be looked into by the Reserve Bank.

6.5 In order to strengthen the market infrastructure of Government securities market and make it vibrant, liquid and broad-based, the PDs system was introduced by the Reserve Bank in 1995. The PDs system is designed to facilitate Government’s market borrowing programme and improve the secondary market trading system by contributing to price discovery, enhancing liquidity and turnover, encouraging voluntary holding of Government securities amongst a wider investor base. The PDs system developed significantly over the years and currently it serves as an effective conduit for conducting open market operations. As of end-September 2009, there were 19 PDs, of which 11 were Bank-PDs and eight stand-alone PDs.

6.6 In this perspective, spread over five sections, this chapter analyses the performance of FIs in section 2. Section 3 explains the trends and developments relating to NBFCs and RNBCs. Activities and performance of PDs have been elaborated in section 4, followed by the conclusion in section 5.

2. Financial Institutions

6.7 Based on the major activity undertaken by FIs, they are classified into three broad categories. First, there exists the term-lending institution - EXIM Bank, whose main activity is direct lending by way of term loans and investments. Second, there are refinance institutions such as NABARD, SIDBI and NHB, which mainly extend refinance to banks as well as NBFIs. In the third category, there are investment institutions such as LIC, which deploy their assets largely in marketable securities. State/regional level institutions are a distinct group and comprise State Financial Corporations (SFCs), State Industrial and Development Corporations (SIDCs) and North Eastern Development Finance Corporation Ltd. (NEDFi). Some of these FIs have been notified as Public Financial Institutions by the Government of India under Section 4A of the Companies Act, 1956.

6.8 As on March 31, 2009, there were four FIs viz., EXIM Bank, NABARD, NHB and SIDBI which were under full-fledged regulation and supervision of the Reserve Bank. Industrial Investment Bank of India (IIBI), a financial institution with headquarter at Kolkata is in the process of voluntary winding up in view of its very poor financial position.

Regulatory Initiatives for Financial Institutions

6.9 In the wake of the emerging global developments and their fall out on financial institutions, the Reserve Bank received requests from select FIs for liquidity support for on-lending to HFCs/NBFCs/MFIs and exporters, and accordingly, took a number of measures as follows:

Refinance Facility to SIDBI, EXIM Bank and NHB

6.10 As a measure to encourage flow of credit to sectors, which were coming under pressure due to the ongoing global financial crisis, in December 2008, the Reserve Bank provided refinance facilities of Rs.7,000 crore, Rs.5,000 crore and Rs.4,000 crore for SIDBI, EXIM Bank and NHB, respectively, under the relevant provisions of the Reserve Bank of India Act, 1934. The availment of refinance by the above FIs under this facility is restricted to a period of 90 days and the amount could be flexibly drawn and repaid during the period. The facility could be rolled over and would be available up to March 31, 2010. Advances under this facility are charged at the repo rate under the LAF of the Reserve Bank. The funds provided under the refinance facility should be utilised as per the policy approved by the Board of therespective financial institutions, and in adherence to the extant exposure norms for these entities. To facilitate monitoring, the financial institutions are required to submit a weekly report on the utilisation of the refinance facility to the Reserve Bank. The amount outstanding under the special refinance facility remained small up to February 2009 for each institution, but picked up in the subsequent months. The utilisation of refinance facility as at end-June 2009 is indicated in Table VI.1.

Ceiling on Aggregate Resources Mobilised by SIDBI, NHB and EXIM Bank

6.11 The ceiling on aggregate resources mobilised was raised to 12 times of the net owned funds (NOF) for SIDBI and NHB and 13 times of NOF for EXIM Bank with effect from December 8, 2008 for a period of one year from the existing norm of 10 times of NOF as per the last balance sheet, subject to meeting CRAR requirements.

Umbrella Limit for EXIM Bank and NHB

6.12 The ‘umbrella limit’ for FIs which consists of aggregate borrowings through five specified instruments, viz., term deposits, term money borrowings, certificates of deposits (CDs), commercial papers (CPs) and inter-corporate deposits (ICDs) should not at any time exceed 100 per cent of their NOF as per its latest audited balance sheet. The umbrella limit was raised to 200 per cent of NOF for one year with effect from December 8, 2008 for EXIM Bank and January 15, 2009 for NHB, subject to review and subject to Asset Liability Management (ALM) guidelines of the Reserve Bank.

Select AIFIs Allowed to Offer Market-related Yield to Maturity

6.13 While issuing bonds/debentures, the select FIs viz., SIDBI, NHB, EXIM Bank and NABARD can offer market related YTM. Accordingly, the current stipulation that the yield to maturity offered at the time of issue of bonds should not exceed 200 basis points above the YTM on the Government of India securities of equal residual maturities would not apply with effect from December 8, 2008 for a period of one year.

Prudential Guidelines on Treatment of Restructuring of Advances of Select AIFIs

6.14 The guidelines regarding treatment of restructuring of advances issued to banks have been mutatis mutandis applied to the select FIs. Provisions relating to certain activities generally not undertaken by FIs, such as extending working capital, overdrafts and personal loans would, however, not be applicable to them.

Operations of Financial Institutions

6.15 Financial assistance sanctioned and disbursed by FIs sharply increased during 2008-09 as compared to that in the previous year. A major part of the increase in financial sanctions and disbursements was accounted for mainly by investment institutions (especially LIC) followed by the term lending institutions (Table VI.2 and Appendix Table VI.1).

6.16 During 2008-09, though there was increase in both financial assistance sanctioned and disbursed by FIs, the increase in disbursements (93.3 per cent) was more pronounced than the sanctions (70.2 per cent) (Table VI.2) (Chart VI.1).

Assets and Liabilities of FIs

6.17 The combined balance sheets of select FIs (NABARD, NHB, SIDBI and EXIM Bank) during 2008-09 expanded sharply by 20.8 per cent over the previous year. On the liabilities side, the resources raised by way of bonds and debentures declined by 9.3 per cent during 2008-09. However, deposits and borrowings registered sharp increases of 80.7 per cent and 20.0 per cent, respectively. On the asset side, loans and advances continued to expand by 21.5 per cent and investment portfolio also recorded an increase of 21.8 per cent. Cash and bank balances and other assets registered an increase of 22.7 per cent and 8.8 per cent, respectively. Within liability, the share of deposits increased from 20.2 per cent to 30.2 per cent while other items showed a marginal to moderate decline. Composition of assets remain roughly unchanged during 2008-09 as that of 2007-08 (Table VI.3).

Resources Mobilised by FIs

6.18 Resources raised by the FIs during 2008-09 were considerably higher than those during the previous year. While the short-term resources raised witnessed a sharp rise during 2008-09 as compared with that a year ago, the long-term and foreign currency resources raised declined. NHB mobilised the largest amount of resources, followed by EXIM Bank and SIDBI. Foreign currency resources raised by EXIM Bank moderated while that by SIDBI expanded sharply during 2008-09 (Table VI.4 and Appendix Table VI.2).

6.19 Resources raised by FIs from the money market rose sharply during 2008-09 with the utilisation of umbrella limit reaching 58.0 per cent as compared to 22.9 per cent in the previous year (Table VI.5).

Sources and Uses of Funds

6.20 Total sources/deployment of funds of FIs increased sharply by 39 per cent during 2008-09. 65.0 per cent of the funds of FIs were raised internally, which recorded a growth of 91.5 per cent. External sources, which contributed 30.7 per cent of sources of funds during 2008-09 as compared to 51.7 per cent during previous year, recorded a decline of 17.4 per cent due to turmoil in global financial markets. A large part of the funds raised were used for fresh deployments (65.5 per cent), followed by repayment of past borrowings (19.0 per cent) during 2008-09. The fresh deployment registered a growth of 55.1 per cent and other deployment 137.9 per cent during 2008-09 over 2007-08. (Table VI.6 and Appendix Table VI.3)

6.21 The weighted average cost of long-term resources raised by AIFIs recorded a mixed trend during 2008-09 (Table VI.7 and Appendix Table VI.4). The weighted average maturity of long-term resources raised by FIs increased, except for EXIM Bank and NHB during 2008-09.

Lending Rates

6.22 NHB, SIDBI and EXIM Bank raised their Prime Lending Rates (PLRs) marginally during 2008-09 as compared to the previous year (Table VI.8).

Financial Performance of Financial Institutions

6.23 Net interest income and non-interest income of FIs increased by 22.5 per cent and 31.1 per cent, respectively. However, in contrast with the decline in the previous year, the wage bill increased by 26.1 per cent during 2008-09. The operating profit increased by 33.5 per cent during the year. The net profit of FIs also increased despite higher provisions for taxation (Table VI.9).

6.24 The interest income and the non-interest income as percentage of working funds (except EXIM Bank) increased for all FIs. Operating profit as percentage of working funds and return on average assets (ROA) improved for all FIs except NABARD. The ROA was the highest for SIDBI followed by NABARD, EXIM Bank and NHB (Table VI.10).

Soundness Indicators: Asset Quality

6.25 It is significant to note that the FIs recorded improvement in their asset quality during 2008-09 notwithstanding the fall out of the ongoing global financial crisis. In terms of net NPA to net loans ratio, the asset quality of SIDBI and EXIM Bank improved during the year. Net NPA ratio of NABARD, however, increased marginally (Table VI.11).

6.26 Improvement in asset quality was also observed in terms of a substantial increase in standard assets of the FIs except NHB in which there is a slight decrease in the standard assets. Furthermore, none of the FIs had any assets in the ‘loss’ assets category as at end-March 2009 (Table VI.12).

Capital Adequacy

6.27 The capital adequacy ratio of all the FIs continued to be significantly higher than the minimum stipulated norm of 9 per cent. Notwithstanding this, CRARs of NABARD, NHB and SIDBI at end-March 2009 were lower than those in the previous year, while CRAR of EXIM Bank increased at end-March 2009 compared to the previous year (Table VI.13).

3. Non-Banking Financial Companies

6.28 The Reserve Bank of India Act, 1934 was amended in January 1997 to provide a comprehensive legislative framework for regulation of NBFCs. The amended Act, inter alia, provided for compulsory registration and minimum NOF for all NBFCs. It also gave the Reserve Bank powers to determine policies and issue directions to NBFCs regarding income recognition, accounting standards, NPAs, capital adequacy, deployment of funds as well as purposes for which advances would be made, etc.

Regulatory and Supervisory Initiatives

6.29 Regulation of non-banking entities is being progressively strengthened and the process had started before the onset of the global financial crisis. Issues relating to the level playing field between bank sponsored NBFCs and non bank associated NBFCs and other issues of regulatory convergence and regulatory arbitrage were examined with respect to systemic implications. Non Deposit taking NBFCs with asset size of Rs.100 crore and above were defined as systemically important and an elaborate prudential framework was put in place.

6.30 Initially, with a view to protect the interests of depositors, regulatory attention was mostly focused on NBFCs accepting public deposits (NBFCs-D). Over the years, however, this regulatory framework has been widened to include issues of systemic significance. The sector is being consolidated and while deposit taking NBFCs have decreased both in size as well as in terms of the quantum of deposits held by them, NBFCs-ND have increased in terms of number and asset size. NBFCs-ND-SI (NBFCs-ND with asset size of Rs.100 crore and above) are subject to CRAR and exposure norms prescribed by the Reserve Bank.

6.31 The changing regulatory policy also recognised that those activities of NBFCs which are creating productive asset must be given special consideration. Accordingly, reclassification of NBFCs was effected in December 2006, in terms of which companies financing real/physical assets for productive/ economic activities would be classified as Asset Finance Companies (AFCs). The other two categories of NBFCs would be Loan Companies (LCs) and Investment Companies (ICs).

Monitoring of Frauds in NBFCs

6.32 In July 2008, the Reserve Bank revised the approach towards monitoring of frauds in NBFCs issued in March 2008. Accordingly, NBFCs were advised to report frauds in their subsidiaries and affiliates/joint ventures.

Guidelines for Securitisation Companies (SCs) and Reconstruction Companies (RCs)

6.33 The Reserve Bank revised the formats of quarterly statements to be submitted by Securitisation Companies/Reconstruction Companies (SCs/RCs) in September 2008. The revised statements would capture, inter alia, data on position of owned fund of the SCs/RCs (including FDI component); position of acquisition/realisation of financial assets from banks/FIs by the SCs/RCs in terms of the SARFAESI Act, 2002; and information as regards security receipts (SRs) issued, redeemed and outstanding at the end of particular quarter.

6.34  It was clarified that a SC/RC was neither a ‘bank’ nor a ‘financial institution’ under the provisions of the SARFAESI Act. Therefore, the acquisition of financial assets by a SC/RC from another SC/RC would not be in conformity with the provisions of the said Act. There was, however, no bar on SCs/RCs deploying their funds for undertaking restructuring of acquired loan accounts with the sole purpose of realising their dues.

Treatment of Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL) for Computation of Capital

6.35  As creation of DTA or DTL gives rise to certain issues impacting on the balance sheet of the company, NBFCs were advised on July 31, 2008 that the balance in DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose. Further, DTA will be treated as an intangible asset and should be deducted from Tier I capital. In this connection, it was further clarified that DTL created by debit to opening balance of Revenue Reserves or to Profit and Loss Account for the current year should be included under ‘others’ of “Other Liabilities and Provisions” and DTA created by credit to opening balance of Revenue Reserves or to Profit and Loss account for the current year should be included under item‘others’ of “Other Assets.”

Prevention of Money Laundering Act, 2002 – Obligation of NBFCs

6.36 In August 2008, NBFCs, as a part of transaction monitoring mechanism, were required to put in place an appropriate software application to throw alerts when the transactions are inconsistent with risk categorisation and updated profile of customers. In the case of NBFCs, where all the branches are not yet fully computerised, the Principal Officer of the NBFC was required to cull out the transaction details from branches which are not computerised and suitably arrange to feed the data into an electronic file with the help of the editable electronic utilities of Cash Transaction Report (CTR) and Suspicious Transaction Reports (STR) as have been made available by Financial Intelligence Unit-India (FIU-IND) on their website. It was further clarified that cash transaction reporting by branches/offices of NBFCs to their Principal Officer should invariably be submitted on a monthly basis and the Principal Officer, in turn, should ensure to submit CTR for every month to FIU-IND within the prescribed time schedule.

Regulation of Excessive Interest charged by NBFCs

6.37 The Reserve Bank issued directions regarding excessive rates of interest in January 2009. Accordingly, now the Board of each NBFC should adopt an interest rate model taking into account the relevant factors such as cost of funds, margin and risk premium, and determine the rate of interest to be charged for loans and advances. The rate of interest should be an annualised rate so that the borrower is aware of the exact rate that would be charged to the account.

Ratings of NBFCs

6.38  In February 2009, all NBFCs (both deposit taking and non-deposit taking) with asset size of Rs.100 crore and above were required to furnish the information about downgrading/upgrading of assigned rating of any financial product issued by them, within fifteen days of such a change in rating, to the Regional Office of the Reserve Bank under whose jurisdiction their registered office is functioning.

Policy Initiatives for NBFCs-ND-SI

Guideline on Capital Adequacy, Liquidity and Disclosure Norms for NBFC-ND-SI

6.39  The Reserve Bank reviewed the extant guidelines regarding NBFCs-ND-SI and the final guidelines were issued on August 1, 2008. In terms of these guidelines, the minimum CRAR for each NBFC-ND-SI was raised from the existing 10 per cent to 12 per cent to be reached by March 31, 2009 and further to 15 per cent by March 31, 2010. In view of the economic downturn and based on several requests received, this requirement was postponed for one year. The NBFCs-ND-SI are required to make additional disclosures relating to CRAR, exposure to real estate sector and maturity pattern of assets and liabilities in their balance sheet from the year ending March 31, 2009.

Enhancement of NBFCs’ Capital Raising Option for Capital Adequacy Purposes

6.40 In October 2008, taking into consideration, the need for enhanced funds for increasing business and meeting regulatory
requirements, the Reserve Bank decided that NBFCs-ND-SI may augment their capital funds by issue of Perpetual Debt Instruments (PDIs). Such PDIs shall be eligible for inclusion as Tier I Capital to the extent of 15 per cent of total Tier I capital as on March 31 of the previous year.

Raising of Short Term Foreign Currency Borrowings

6.41 In December 2008, systemically important NBFCs-ND-SI were permitted, as a temporary measure, to raise foreign currency short term borrowings under the approval route subject to certain conditions. In this connection, all the NBFCs-ND-SI that have availed short term foreign currency loans were advised to furnish a monthly return as per the prescribed format within ten days from the end of the month to which it pertains.

Acceptance of Deposits by Chit Fund Companies

6.42  In order to regulate the credit system of the country to its advantage, MNBCs were prohibited with effect from August 18, 2009 from accepting deposits from public except from the shareholders, which was subject to the conditions specified in the MNBC (RBI) Directions 1977. Any deposit accepted and held by the MNBCs other than from its shareholders as on date shall be repaid on maturity and shall not be eligible for renewal.

Requirement for obtaining prior approval of RBI in cases of acquisition/transfer of control of NBFCs accepting deposits

6.43  To enable RBI to verify the ‘fit and proper’ character of the management of NBFCs is continuously maintained, it has been decided that any takeover/acquisition of shares or merger/ amalgamation of a deposit taking NBFC with another entity or any merger/amalgamation of an entity with a deposit taking NBFC that would give the acquirer/another entity control of the deposit taking NBFC, would require prior permission of RBI with effect from September 17, 2009. Applications in this regard are to be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the Company is located.

Introduction of Interest Rate Futures-NBFCs

6.44  To hedge the underlying exposures, directions were issued covering the framework for trading of Interest Rate Futures by NBFCs in exchanges in India recognized by SEBI subject to RBI/SEBI guidelines in the matter.

Profile of NBFCs (including RNBCs)

6.45  Total number of NBFCs registered with the Reserve Bank, consisting of NBFCs-D (deposit-taking NBFCs), RNBCs, mutual benefit companies (MBCs), miscellaneous non-banking companies (MNBCs) and Nidhi companies, declined from 12,809 at end-June 2008 to 12,740 at end-June 2009 (Table VI.14). The number of NBFCs-D also declined from 364 at end-June 2008 to 336 at end-June 2009, mainly due to the exit of many NBFCs from deposit taking activity. Of the 336 deposit taking NBFCs, 275 NBFCs filed annual returns for the year ended March 2009 by the cut off date of September 30, 2009. The number of RNBCs declined to two at end-March 2009.

6.46 Total assets of NBFCs declined to Rs.95,727 crore during 2008-09 from Rs.99,014 crore in previous year. Public deposits also recorded a decline to Rs.21,548 crore at end-March 2009 from Rs.24,400 crore at end-March 2008. Net owned funds (NOF) witnessed a growth of 8.8 percent and stood at Rs.13,458 crore as on end-March 2009. The share of RNBCs in NBFCs in terms of total assets, public deposits and NOF recorded marginal decline during 2008-09 over previous year (Table VI.15).

6.47 The ratio of deposits of reporting NBFCs to the aggregate deposits of scheduled commercial banks dropped to 0.53 per cent at end-March 2009 from 0.73 per cent at end-March 2008 mainly due to the decline in deposits of reporting NBFCs. The share of NBFC deposits in broad liquidity aggregate (L3) also declined over the year (Chart VI.2).

Operations of NBFCs (excluding RNBCs)

6.48 Total assets/liabilities of NBFCs (excluding RNBCs) expanded at the rate of 1.3 per cent during 2008-09 as compared with 53.6 per cent during 2007-08 (Table VI.16). Borrowings, which is the major source of funds for NBFCs, increased by 9.3 per cent during the year, while public deposits declined by 4.9 per cent indicating the continuing shift in the pattern of resources raised. On the assets side, hire purchase assets and loans and advances, which are major items of assets witnessed growth of 6.3 per cent and 12.0 per cent, respectively as compared with 27.9 per cent and 70.2 per cent, respectively, during previous year. Growth of total investments of NBFCs decelerated mainly due to deceleration in investment in approved securities. Other investments increased by 37.4 per cent during 2008-09 as compared with 30.0 per cent during 2007-08.

6.49 Among NBFC groups, asset finance companies (AFCs) held the largest share in total assets/liabilities (70.3 per cent), followed by loan companies (28.9 per cent), hire purchase companies (0.6 per cent) and equipment leasing (0.3 per cent) (Table VI.17). The increase in assets/liabilities of AFCs was mainly on account of reclassification of NBFCs, which was initiated in December 2006 and the process of which is still continuing. The share of equipment leasing companies declined to below 1 per cent subsequent upon the re-classification of NBFCs in 2006-07. The relative significance of various NBFC groups reflected largely the pattern of their borrowings as deposits constituted a small share (2.6 per cent) of their total liabilities. Of the total deposits held by all NBFCs, asset finance companies held the largest share in total deposits of NBFCs (70.3 per cent), followed distantly by loan companies with a 19.9 per cent share and by hire purchase companies with a share of 9.6 per cent (Table VI.17).

Deposits: Profile of Public Deposits of Different Categories of NBFCs

6.50 Continuing the trend of the previous year, public deposits held by all groups of NBFCs taken together, declined moderately during 2008-09. This trend is indicative of the shift in preference of NBFCs from public deposits to bank loans/ debentures. The decline in public deposits was mainly evident in the case of loan companies and equipment leasing companies due to reclassification of some of these companies as asset finance companies. Deposits of asset finance companies increased by 17.5 per cent during 2008-09 (Table VI.18).

Size-wise Classification of NBFCs Deposits

6.51 Deposits held by NBFCs ranged from less than Rs.0.5 crore to above Rs.50 crore (Table VI.19). The deposits held by NBFCs in all deposit-groups declined during 2008-09, except in the deposit-class ‘more than Rs.10 crore and up to Rs.20 crore’ and ‘more than Rs.20 crore and up to Rs.50 crore’. The share of the deposit class ‘Rs.50 crore and above’ in total deposits was 80 per cent, while that of other deposit classes combined together was only about 20 per cent of total public deposits of the NBFC sector.

Region-wise Composition of Deposits held by NBFCs

6.52 Following the trend of the previous year, deposits held by NBFCs across all the regions declined during 2008-09 except western region (Table VI.20). Western region recorded the growth of 85.7 per cent in the public deposits. As in the previous year, the southern region accounted for the largest share of deposits (around 76 per cent), followed by the northern region (around 15 per cent) and the western region (around 8 per cent). The presence of NBFCs in the north-eastern region continued to be nil during the year. Among the metropolitan cities, Chennai continued to hold the largest share of deposits, while New Delhi continued to account for the largest number of NBFCs.

Interest Rate on Public Deposits with NBFCs

6.53   The share of public deposits held by NBFCs contracted in the interest rates up to 10 per cent declined from 73.0 per cent in 2007-08 to 30.1 per cent in 2008-09, while those contracted in the bracket ‘more than 10 per cent and up to 12 per cent’ witnessed a sharp rise from 25.4 per cent to 65.0 per cent (Table VI.21).

Maturity Pattern of Public Deposits

6.54 Deposits with the maturity period of ‘less than 1 year’, ‘more than 1 year and up to 2 years’ and ‘5 years and above’ increased during the year. Deposits in the maturity bucket of ‘more than 2 years and up to 3 years’ and ‘more than 3 years and less than 5 years’ declined significantly at end-March 2009. As a result, their share in total deposits recorded a decline in total deposits (Table VI.22).

Borrowings by NBFCs

6.55 The outstanding borrowings by NBFCs increased by 9.3 per cent during 2008-09 (Table VI.23). Borrowings by equipment leasing companies and loan companies declined, while those by asset finance companies and hire purchase companies increased during the year. AFCs continued to hold the largest share (72.8 per cent) of borrowings of all NBFCs, followed by loan companies (27.1 per cent).

6.56 Borrowings by NBFCs from banks and financial institutions increased sharply by 29.3 per cent while borrowings by way of bonds and debentures remained at the same level during 2008-09. The borrowings from Government declined by 21.4 per cent during 2008-09. Other deposits (which include, inter alia, money borrowed from other companies, unsecured loans from directors/promoters, commercial paper, borrowings from mutual funds and any other type of funds which are not treated as public deposits) also registered a decline of 2.6 per cent during 2008-09 (Table VI.24).

Assets of NBFCs

6.57 The total assets of deposit-taking NBFCs registered a marginal growth of 1.3 per cent during 2008-09 mainly on account of decline in assets of loan companies (Table VI.25). Loans and advances (7.3 per cent) as well as investments (32.1 per cent) of NBFCs also increased during the year. At end-March 2009, 73.0 per cent of total assets, 75.4 per cent of total loans and advances and 23.9 per cent of total investments by all NBFCs were held by AFCs.

Distribution of NBFCs-D According to Asset Size

6.58 The asset size of NBFCs varies significantly between less than Rs.25 lakh to above Rs.500 crore. The asset holding pattern remained skewed in 2008-09, with 12 NBFCs with asset size of ‘above Rs.500 crore’ holding 95.8 per cent of total assets of all NBFCs, while the remaining 263 NBFCs held about 4.2 per cent of total assets at end-March 2009 (Table VI.26)

Distribution of Assets of NBFCs – Type of Activity

6.59   During the year 2008-09, assets held in the form of investments and loans and inter­ corporate deposits witnessed a robust growth. While growth in assets in the form of hire purchase moderated considerably, equipment leasing assests and other assets witnessed sharp decline during 2008-09. The hire purchase activity continued to constitute the largest share (47.2 per cent) in total assets, followed by loans and inter­ corporate deposits (27.9 per cent) and investments (19.6 per cent) (Table VI.27).

Financial Performance of NBFCs

6.60   Financial performance of NBFCs in terms of income and net profit improved during 2008-09. Both fund based income (16.9 per cent) and fee based income (46.0 per cent) registered robust growth. While growth in expenditure decelerated over the previous year, it, however, witnessed higher growth than income resulting in decline in operating profit by 2.2 per cent. Net profit registered a moderate growth mainly due to lower provisioning for tax. The cost to income ratio deteriorated from 68.9 per cent 2007-08 to 74.1 per cent in 2008-09 (Table VI.28).

Soundness Indicators: Asset Quality of NBFCs-D

6.63  In contrast to the trend during the last few years, Gross NPA ratio increased to 2.7 per cent during 2008-09 from 2.1 per cent in 2007-08. Net NPA remained negative with provisions exceeding NPA at end-March 2009 (Table VI.30).

6.64 Gross NPAs (as percentage of gross advances) of asset finance companies, equipment leasing companies and investment companies and hire purchase companies declined during 2008-09. Net NPAs (as percentage of net advances) increased marginally in case of asset finance companies and hire purchase companies, while those of equipment leasing companies and investment companies decreased. NPAs of loan companies remained negative during 2008-09 also (Table VI.31).

6.65   Asset quality of various types of NBFCs as reflected in various categories of NPAs (substandard, doubtful and loss) shows that there was sharp improvement in the asset quality of equipment leasing companies and deterioration in the asset quality of hire purchase companies during 2008-09 over previous year (Table VI.32).

Capital Adequacy Ratio

6.66   CRAR norms were made applicable to NBFCs in 1998, in terms of which every deposit- taking NBFC is required to maintain a minimum capital, consisting of Tier-I and Tier-II capital, of not less than 12 per cent (15 per cent in the case of unrated deposit-taking loan/investment companies) of its aggregate risk-weighted assets and of risk-adjusted value of off-balance sheet items. Total of Tier-II capital, at any point of time, cannot exceed 100 per cent of Tier-I capital. The number of NBFCs with less than the minimum regulatory CRAR of 12 per cent declined to 9 at end-March 2009 from 47 at end- March 2008 (Table VI.33). At end-March 2009, 198 out of 207 NBFCs had CRAR of 12 per cent or more as against 280 out of 327 NBFCs at end-March 2008. The number of NBFCs with CRAR more than 30 also declined to 168 at end- March 2009 from 239 at end-March 2008. Notwithstanding this, it is noteworthy that the NBFC sector is witnessing a consolidation process in the last few years, wherein the weaker NBFCs are gradually exiting, paving the way for a stronger NBFC sector.

6.67  NOF of NBFCs is the aggregate of paid- up capital and free reserves, netted by (i) the amount of accumulated losses; and (ii) deferred revenue expenditure and other intangible assets, if any, and adjusted by investments in shares, and loans and advances to (a) subsidiaries, (b) companies in the same group, and (c) other NBFCs (in excess of 10 per cent of owned fund). Information on NOF can complement the information on CRAR. The ratio of public deposits to NOF in the case of loan companies and hire purchase declined during the year ended March 2009, while that of other category companies witnessed a marginal increase. The ratio of hire purchase companies continued to be negative because of negative NOF. The ratio of public deposits to NOF for all categories of NBFCs taken together was unchanged at 0.2 per cent at end-March 2009 (Table VI.34).