Log your LOA pain with Pension Lab's brilliant campaign
Nbfc industry analysis
1. ANALYSIS OF NBFC SECTOR
SATHISH KUMAR R
ABIRAMI A
SARAVANA PRABHU B
2. Complimentary to banking system
12.7% of the total assets of financial system
Operate largely in vehicle financing, hire purchase, lease, personal loans, working capital loans,
microfinance, consumer loans, housing loans, loans against shares, investments, distribution of financial
products, etc
3. NBFC – Can accept only Demand deposits
Cost of funds
Business Model Flexibility – Limited reporting/documentation
Relaxed regulatory norms – Int. rate/ PSL/ Capital Market Exposure
DICGC not available, cannot issue cheques, NPA classification
Recovery Mechanisms – SARFAESI, DRT not present
Easy to obtain License, no restriction on
number of branches
KYC (know-your-customer) norms not Stringent
NPA Classification - 180 days vs 90 days
4.
5. Well-informed
rural
population
driving strong
credit growth
Advanced
technologies to
accelerateoperational
efficiency by 30-
40 per cent
Supporting Government
initiatives, such as the
National Rural Financial
Inclusion Plan
Innovative, diversified and
customized product
portfolio
Growing per capita
income
Flourishing consumer
credit market (Indian
consumer market to grow
by 67 per cent from 2013 to
2020)**
Favourable
regulatory
changes
11. F06 FY10 FY11
No of NBFCs 13014 12630 12409
Bank Credit of all scheduled Banks 1,572,780 3,337,659 4,060,843
NBFC advances as % of Bank Credit 10.77% 12.57% 13.20%
Assets of all scheduled banks 2,531,462 5,258,495 6,146,590
NBFC assets as a % of Bank assets 13.06% 13.33% 13.78%
Deposits of all scheduled banks 2,185,809 4,635,224 5,355,160
NBFC Public deposits as % of bank
deposits 1.05% 0.37% 0.22%
*Figuresareincrores
12.
13. Usha Thorat Committee
Tier I Capital of 10%, as against 7.5% recently
NPA recognition norm to be lowered to 90 days from 180/360 days
Standard asset provisioning -0.40% from March 31, 2014.
Acceptance of Deposits
Liquidity Management
Raising money through private placement of debenture
NBFCs finance for Purchase of Gold – LTV 60%
Operate largely in vehicle financing, hire purchase, lease, personal loans, working capital loans, microfinance, consumer loans, housing loans, loans against shares, investments, distribution of financial products, etc
“ The cost of funds have gone up significantly and hovering between 10% and 10.5%. Short-term funds are even touching 11%. So, we may also have to raise our lending rates, “ said VK Sharma, MD & CEO, LIC Housing Finance. Banks – cost of funds – deposits ranging from 4% for savings bank deposits and it ranges upto 7/8%. NBFC it depends on the credit rating. Some constraints... Higher cost of funds About 1% disadvantage vs. banks Limited sources of financing Diminishing banking appetite Shallow wholesale market Product limitations No payment system access, no CASA FX network, CC/OD facilities Others Coverage under SARFAESI accompanied by some flexibility Business model flexibility Limited reporting / documentation to RBI Relaxed regulatory norms No interest rate/pricing stipulations No mandatory priority sector lending No restriction on capital market exposure Other operational flexibility No restriction on # of branches Cost of Borrowings of Banks -
Ind-Ra: RBI Limits NBFCs’ Funding Ability; Borrowing Costs May Increase Ind-Ra-Mumbai-1 July 2013: India Ratings & Research (Ind-Ra) says that the Reserve Bank of India’s (RBI) guidelines on private placement of debentures will limit the funding flexibility of non-banking financial companies (NBFCs) and raise their borrowing costs. The guidelines aim at reducing systemic contagion risk by tightening NBFCs’ access to retail funds and convert debenture holders to secured creditors. However, the limit of two private issuances annually could severely reduce NBFCs’ access to the bond market and increase their dependence on costlier bank funding. Gold loan companies in particular could be the most affected. About 20%-40% funding of most large asset finance NBFCs is in the form of non-convertible debentures (NCDs), while the proportion is even higher for few housing finance companies, infrastructure finance and specialised lending institutions. A majority of the NCD funding is through private placement, given the higher cost and operational challenge involved in public issue. NCDs are also attractive in view of lower bond yields compared with banks’ at present. NBFCs may now explore filing a shelf prospectus for on-tap issuances, if permitted. Alternately, they may need to raise large amounts of funds twice a year. This will lead to a negative carry cost for NBFCs and could test market’s ability to fund such amounts, resulting in increased borrowing cost. NBFCs may also raise short-term bank loans or commercial papers to fund origination for six months and then replace these with long-term debentures once the window for private issuances opens up. This could however create asset liability mismatches and increase refinancing risk. NBFCs’ increased dependence on bank funding will result in higher concentration in banks, particularly for the companies with above-average loan growth. Gold loan companies will be further impacted given the lower exposure levels prescribed for banks to these companies. The higher share of funding from banks would also increase the cost of funds for larger NBFCs, as bank borrowings are typically costlier than bond market yields. The implication could be sharper for some of the higher rated large housing finance companies and specialised financial institutions as they compete with banks in the similar customer segment. NBFCs may find a bank license an attractive option for sustained access to stable funding. RBI has limited NBFCs’ private placements of debentures to twice a year along with restricting the minimum subscription amount to INR2.5m and the number of investors to 49. All bond issuances are required to be fully secured. Most large NBFCs will be highly impacted, primarily due to periodicity constraint as most of their NCDs are of larger denominations and from few wholesale investors. The NBFCs will be impacted as currently funds are being raised in multiple tranches with average issuance of about INR2bn. Smaller and gold finance NBFCs, raising retail funding through the NCDs route, will be the most affected.
2. Cost of Borrowings = Interest paid on borrowings/Average of current and previous year’s borrowings. 3. Cost of Funds = (Interest paid on deposits + Interest paid on borrowings)/(Average of current and previous year’s deposits plus borrowings).
The offer document may be printed or typed "For Private Circulation Only". General information including the address of the registered office of the NBFC, date of opening / closing of the issue etc. shall be clearly mentioned in the offer document. iii. An NBFC shall only issue debentures for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities/ parent company / associates. iv. Private placement by all NBFCs shall be restricted to not more than 49 investors, identified upfront by the NBFC. v. The minimum subscription amount for a single investor shall be Rs. 25 lakh and in multiples of Rs.10 lakh thereafter. vi. There should be a minimum time gap of at least six months between two private placements. vii. An NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue). We have received a number of queries in the matter from the industry. The main refrain of the sector is that the withdrawal of the current facility of issuing NCDs without any restrictions would result in adversely impacting their Asset Liability Management (ALM). In this connection, it is clarified, that the freedom currently available to NBFCs to raise funds through NCDs without any restriction has resulted in inadequate resource planning and higher transaction cost. One of the main objectives of the said circular is to promote discipline in resource planning and raising. It is clarified that no advances should be granted by NBFCs for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds. hereafter maintain a Loan-to-Value(LTV) ratio not exceeding 60 percent for loans granted against the collateral of gold jewellery and ii. disclose in their balance sheet the percentage of such loans to their total assets. NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 percent or more of their financial assets) shall maintain a minimum Tier l capital of 12 percent by April 01, 2014. 4. NBFCs should not grant any advance against bullion / primary gold and gold coins. All Deposit Taking NBFCs - CRAR Fifteen percent w.e.f March 31, 2012
