FIDC Finance Industry Development Council

Transcription

1 Finance Industry Development Council Non-Banking Finance Companies (NBFCs) Contribution to the Economy & Way Forward Presented by: Raman Aggarwal Chairman 28 September, 2017 Page 1

2 NBFCs : Overview (As on March 31, 2017)* No. of Deposit Taking NBFCs = No. of Non-Deposit Taking NBFCs -Asset Size < Rs. 500 cr = 11,118 -Asset Size >= Rs. 500 cr (NBFC-ND-SI) Total No. of NBFCs Registered with RBI * As per RBI s Financial Stability Report dt. June = = 11,

3 NBFCs : Overview (As on March 31, 2017)* As per RBI s Financial Stability Report dt June 2017 Y-o-Y Growth FY17 (FY16) Growth in Aggregate Balance Sheet size (Y-O-Y) Growth in Share Capital Net Profit (%age to total income) = 14.50% (15.50%) = 15.20% (4.80%) Growth in Loans and Advances for Total Investments = 14.00% (18.30%) = 16.40% (16.60%) = 11.90% (10.80%) Return on Assets (net Profit as %age of total assets) Return on Equity (net profit as %age of equity) = Gross NPA (as %age of total advances) Net NPA (as %age of total advances) = CRAR (minimum prescribed by RBI is 15%) Growth in Total Borrowings for = 22.00% (24.30%) = 15.00% (15.30%) Leverage Ratio NBFCs have performed better than Public Sector Banks * As per RBI s Financial Stability Report dt. June % (2.10%) = 6.80% (7.90%) 4.40% (4.60%) = = 2.30% (2.50%) 2.80% (2.80%)

4 NBFCs : Overview (As on March 31, 2017)* Distribution of Credit given by NBFCs Industry Services Retail Sector Others % % % % ** As per Economic Survey , Volume II dated August 2017, Ministry of finance, Government of India

5 NBFCs : Overview (As on March 31, 2017)* NBFCs Assets Loans & Advances - 70% Investments - 17% Others(*) - 13% (*) Cash and Bank balances Other Current Assets Other Assets ** As per Economic Survey , Volume II dated August 2017, Ministry of finance, Government of India

6 NBFCs : Overview (As on March 31, 2017)* NBFCs Liabilities Capital & Reserve Bank borrowings Debentures Commercial papers Others (*) % % % % % (*) All India FIs ECBs Public Deposits Pension Funds Current liabilities & provisions ** As per Economic Survey , Volume II dated August 2017, Ministry of finance, Government of India

7 NBFCs : Overview (As on March 31, 2017)* NBFCs Borrowings from Financial System - Pension Funds are new investors - Bank Borrowings have declined from last year SCBs AMC MFs Insurance Cos Pension Fund Others - 41% - 35% - 20% - 2% - 2% * As per RBI s Financial Stability Report dt. June 2017

8 NBFCs : Overview (As on March 31, 2017)* Network of the Indian Financial System Bilateral exposure (both payables and receivables) NBFCs are the 3rd Largest Scheduled Commercial Banks AMCs MFs NBFCs All India FIs Insurance cos and HFCs UCBs & Pension fund Others - 51% -13% -12% - 7% - 8% - 1% - 8% * As per RBI s Financial Stability Report dt. June 2017

9 Role of NBFCs

10 Greater Role of NBFCs in the Current Scenario The greater role of non-banking sector in resource mobilization, and hence credit intermediation, helped commercial sector, albeit partially, to make up for historically low bank credit outstanding growth. Thus, problems in the banking sector are leading to greater reliance on non-banks for borrowers as well as savers. Against asset quality concerns, credit intermediation by public sector banks has retrenched and that by NBFCs and Mutual Fund Funds has increased significantly. * As per RBI s Financial Stability Report dt. June 2017

11 Why NBFCs Ø Successful track record of more than 60 years Ø Key aspects of financial activity are well regulated (almost at par with banks): Registration with the regulator Minimum size (Net owned Fund) Minimum Capital Adequacy Ratio Prudential Norms on asset classification, income recognition and provisioning Know Your Customer (KYC) & Anti Money Laundering Guidelines Asset Liability Management Guidelines Credit Concentration Norms Maintenance of SLR Code of Fair Business Practices Ø Ø Ø Ø Promote Urban Financial Inclusion also (in addition to rural financial inclusion) Use modern technology and have developed sound MIS NPA levels have been lower than that for banks Small & Medium NBFCs are having a local/ regional presence (and the large NBFCs through their branches or franchisees) are well versed with the local conditions/requirements

12 Why NBFCs? Contd.. Ø Prevent concentration of credit risk in banks only and complement the banking services Ø Provide prompt & tailor made services with least hassles Ø Provide a personalized touch Guidance in insurance matters and help in their hour of need at any time of the day Ø Cater to a class of borrowers who : are unbankable Do not necessarily have high income are honest & sincere (gauged by the personal touch maintained with them)

13 Expert Committees /Task Force /Working Group on NBFCs Ø Bhabatosh Datta Study Group Reduced the number of entities to be regulated by inducing them to form corporate bodies Regulatory authority should strengthen its inspection machinery NBFCs usefully supplement the activities of banks in both deposit mobilization & lending Capable of playing a dynamic role in the economy Ø James Raj Study Group Need for regulation and not prohibition of deposit acceptance by NBFCs Ø Chakaravarty Committee Regulation for NBFCs should not curb their activities which genuinely help trade & Industry System of licensing of NBFCs with a suitable cut-off point in regard to the level of their business Ø Narasimham Committee Full regard to the important and growing role of Leasing & Hire Purchase Institutions Need to have linkage by banks with NBFCs Prudential Norms and guidelines along with off-site supervision

14 Expert Committees / Task Force / Working Group on NBFCs Ø Shah Committee Registration of NBFCs should be mandatory Entry level of Rs. 50 Lakhs NoF (Net Owned Funds) Regulation should be directed to the asset side of the balance sheet NBFCs cater to a section of borrowers left outside the purview of banks by the monetary & credit policy NBFCs play a role in enlarging the degree of financialization of savings Growth of NBFCs & general economic growth are positively co-related Ø Khanna Committee Under the RBI Act, RBI to be empowered to regulate NBFCs w.r.t entry point, compulsory registration, investment in approved securities and creation of reserve fund Comprehensive supervisory framework by stratifying NBFCs based on size and off-site surveillance system NBFCs play a significant role in economy, especially in dispensation of credit to Road Transport & SSI sectors - mobilization of deposits

15 Expert Committees /Task Force /Working Group on NBFCs Ø Vasudev Committee Constituted after the infamous CRB debacle and the subsequent scams Formed the basis for prevailing NBFC Regulation NBFCs have greater reach & flexibility Provide retail services to small & middle businesses and Road Transport Operators Constitute an important link between banks and requirer of services Leasing & Hire Purchase Finance Companies perform a very important intermediation role conducive to the country s economic well being Small NBFCs are more efficient in consumer finance Ø The Parliamentary Standing Committee on Finance NBFCs work like quasi banks Provide funds to the sectors where a credit gap exists NBFCs play a complementary & competitive role Easy access, absence of many formalities & easy money availability make NBFCs attractive to public

16 Expert Committees /Task Force /Working Group on NBFCs Ø The RBI Working Group on NBFCs (Usha Thorat Committee) Over recent years NBFCs have assumed increasing significance and have added considerable depth to the financial sector. It has become important to ensure that dynamism displayed by NBFCs in delivering innovation and last mile connectivity for meeting the credit needs of the productive sector s of the economy is not curbed. Ø Key Advisory Group on NBFCs (Ministry of Finance) NBFCs have been playing a complimentary role to other FIs including banks in meeting the funding needs of the economy. They help to fill the gaps in availability of financial services in regards to the product as well as customer and geographical segments. They have been at the forefront of catering to the financial needs and creating livelihood sources of the un-bankable masses in rural and semi urban areas. NBFCs have all the key characteristics to enable the government to achieve the mission of financial inclusion. All of them have recognized and appreciated the Role of NBFCs

17 Financial Inclusion As Defined by RBI Ø Financial Inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular at an affordable cost transparent manner by mainstream institutional players in a fair and

18 How suitable are NBFCs for Promoting Financial Inclusion NBFCs Reliability High- 20 Yrs of regulations almost at par with banks Affordablitiy High- compared to MFIs & local money lenders Accessibility High- As they cater to unbankable segment in rural & semi urban areas Flexibility High- A balance between flexibility & low delinquencies maintained NBFCs have all the key characteristics to achieve Financial Inclusion

19 Examples of Innovation Shown by NBFCs

20 nnovation in Products Ø Used/ Second hand Vehicles / Equipment financing With the banks venturing into new asset backed retail financing A huge untapped market Ø Reconditioned Vehicles / Equipment Financing Providing authenticated second hand vehicles to illiterate customers Backed with warranty Ø Financing Vehicles Run on cleaner fuels like CNG/ LPG In compliance to the court orders Contributing to the cleaner environment Cashing on the incentives Ø Three Wheeler Financing Only mode of public transport in small towns & villages No skills required Small ticket size Ø Financing of Solar Lanterns Remote areas having no electricity Funded by International Agencies including World Banks

21 nnovation in Products Contd.. Ø Financing Tyres & Refrigeration Kits Providing additional finance for the customer in crisis ØFinancing for Retro Fitting of CNG Kits in Vehicles Enables used vehicles to comply to the court orders and new emition norms ØGold Loans Fastest mode of secured lending Huge potential as gold is an integral part of Indian family Widespread in rural areas specially in South India ØSmall Ticket Personal Loans No skills required Small ticket size

22 nnovation in Operation Ø Accepting Repayment by Cash Borrowers do not have bank accounts ØFlexibility in Repayment Schedule Not insisting on EMIs Borrowers repay part of their daily earnings on weekly/ fortnightly basis ØGuiding & Helping in Asset Purchase Tie-ups with manufacturers and Sale-Purchase Agents Educate the customer on brand selection Providing prompt and door step after sale-service ØTaking Care of Asset Insurance Tie-ups with Insurance Companies Handling of claims from intimation to getting the asset repaired to issuance of claim cheques

23 nnovation in Business Model Ø The Franchisee Model Bigger players appoint smaller one s as their franchisee Leads to geographical spread of operations Sharing of Profit & Loss ØBusiness Associates (BAs) Model Cost saving model Increase in geographical spread without opening branch offices BAs are local entrepreneurs having grasp on the prevailing local conditions and customers needs Stand Guarantee in every case sourced by them Fully responsible for recoveries Assets are physically verified Disbursement linked to their recoveries/ collections

24 Examples of Innovation in Allied Activities Ø Srei - A leading NBFC has setup the First Construction Equipment Bank in India Ø Some Banks have outsourced their recovery operations to NBFCs Ø Handbook on Repossession A comprehensive handbook on Dos and Don ts of Repossession of assets in case of default Ø Issuance of Co-branded Credit Card A Large NBFC having a tie-up with a bank Exclusively meant for truck drivers Best suited to meet on route expenses

25 Regulation of NBFCs

26 Legal Frame Work The Reserve Bank of India Act, 1934 (As amended by Reserve Bank of India (Amendment) Act, 1997) - Chapter IIIB : Provisions Relating to Non-Banking Institutions Receiving Deposits and Financial Institutions - RBI is empowered to regulate - Guidelines/Directions Issued By RBI which are dynamic

27 Definition of NBFC Sec. 45 I (c) and Sec. 45 I (f) Define the activities covered under the definition of NBFCs The List of activities include Financing, Acquisition of shares/ stock/ bonds/debentures or securities, hire purchase, collecting monies in lump-sump and otherwise Does not include agricultural operations, industrial activities, sale purchase of goods, purchase/construction/sale of immovable property A company must have any of these activities singly or taken together as its Principal Business to be defined as a NBFC

28 Definition of Principle Business RBI Press Release Dt. April 8, 1999 Ø If 50% or more of a company s total assets (netted off by intangible assets) are financial assets and If 50% or more of a company s gross income is from financial assets then the Principal Business of the company is that of a NBFC Note : Bank FD is not considered as a financial asset

29 Classification of NBFCs Classification Liabilities Based A) (Category-B) (Category-C) Activity Based Size Based - Deposit taking - Non- Deposit taking - Subsidiary Company NBFC D (Category- NBFC - ND NBFC - ND - Asset Financing NBFC - AFC - Loans NBFC LC - Investments NBFC - IC - Infrastructure Financing NBFC - IFC - Micro Financing NBFC - MFI - Factoring NBFC FACTORS - Infrastructure Debt Fund IDF NBFC - Core Investment CIC - Assets of 500 Crores & Above NBFC - ND - SI (Systemically Imp.)

30 The Key Issues

31 Overview NBFCs not included in the official agenda on Financial Inclusion Focus has been on regulation instead of development of NBFCs Lack of level playing fields with banks & HFCs, specially in taxation matters Fund raising is a big challenge, specially for small & medium NBFCs Some of the State Govts treat NBFCs as money lenders under the State Money Lenders Act despite regulation by the RBI Need to assign differential risk weights to assets based on their risk profile Ø Need for Formalized arrangement for Regular interaction with RBI and the Ministry of Finance Ø Leasing needs to be promoted as a tool for capital formation

32 Funding of NBFCs Bank Funding Lack of linkage by banks with NBFCs despite strong recommendations by various Expert Groups Need for liberal Bank Funding at competitive rates Wholesaler Retailer relationship between banks and NBFCs needed Deposit acceptance is discouraged by RBI. Securitization Guidelines issued by RBI have restricted securitization of receivables it needs to be Originator friendly Priority Sector status accorded to bank lending to NBFCs for on-lending to priority sector has been withdrawn. Urgent need for a refinancing window specially for small and medium NBFCs - MUDRA can play an important role

33 Imprudent Taxation of NBFCs Income Tax Act - Deduction allowed to banks, FIs & HFCs, for non-recognition of income on NPAs and provisions made against NPAs (u/s 36(i)(vii) of Income Tax 7 to 10% NBFCs allowed 5% only* Income on NPAs is accounted on receipt basis u/s 43D of Income Tax Act by Banks and FIs - denied to NBFCs only Exemption from TDS requirements on EMIs denied to NBFCs only TDS on lease rentals entails deduction of TDS from the principal component also GST rate on Lease Rentals of an asset give on lease = GST rate on the normal sale of that asset No incentive to Leasing GST on Sale of Repossessed Assets is unjustified Denial of depreciation benefits to the lessor in-spite of CBDT circular Low rate of depreciation (@15%) on Construction and Mining Equipment - need to increase it to at least 30% (at par with CVs) *Union Budget

34 Recovery Avenues for NBFCs Union Budget granted coverage under the SARFAESI Act, but with the following riders: - Only NBFCs with asset base of 500 cr and above, have been given coverage - Sections on Enforcement of Security Interest applicable only in cases where the ticket size of the loan is 1.0cr and above NBFCs do not have access to Debt Recovery Tribunals Indirect means - Criminal complaints for Cheque bouncing u/s 138 of The Negotiable Instruments Act : Time consuming and not very effective Filing Application for appointing Receiver under the Arbitration Act Sale of the asset cannot be done till the arbitration proceedings end

35 Recent Developments

36 World Bank Group (Through IFC) Collaborates with to conduct Training Programs for NBFCs on - Commercial Credit Reporting - Movable Asset Financing

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38 Engagement Letters Signed

39 NABARD Initiates Refinancing of NBFCs Ø NBFCs with Credit Rating AA- and above refinanced by NABARD Ø NBFCs with lower Credit Rating to be refinanced by NAB SAMRUDDHI (Subsidiary of NABARD)

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41 Hon ble Prime Minister Shri Narendra Modi in his address to the nation on December 30th 2016 announced coverage of NBFCs under the Credit Guarantee Scheme (CGTMSE) for MSME Lending

42 Following the PMs address, NBFCs are engaged in regular discussion for MSME Financing, with: - Ministry of MSME (through Secretary and Additional Secretary) - SIDBI - CGTMSE - MUDRA

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44 Recent Developments FDI Norms have been further relaxed entry level fixed at 2 cr and additional capital requirements done away with NBFCs with asset base of 500 cr & above given coverage under the SARFAESI Act Demonetization had adversely impacted collections & disbursements in Q3 & Q4 of FY Insolvency and Bankruptcy Code, 2016 is a game changing law : - Recognizes business failures and provides an exit route - Acceptance of Insolvency application against the defaulting debtor by NCLT stays all other legal proceedings under any other law - Time bound resolution plan - If resolution is not feasible, liquidation in a time bound manner - Clearly lays down priority in which various creditors, claimants will be repaid - Creditors dues and Employee wages get higher priority over Govt dues Impressive growth, better asset quality (low NPA levels), adequate CRAR have put NBFCs as a Bright Spot in the economy

45 Way Forward

46 Future Scenario Relaxation in norms likely to attract lot of FDI RBI may create only 2 categories of NBFCs CIC and Non CIC Indian Finance Code (IFC) by FSLRC proposes activity & not entity based regulation Huge potential for financing SMEs/MSMEs by NBFCs Leasing as a tool for capital formation and lending to low capital SMEs needs to be promoted : World Bank has shown interest New Players like P2P Lenders may change the rules of the game Financial Technology (Fintech) shall play a transformational role Intangible Asset based lending holds immense promise and potential

47 NBFCs Role in the PM s Vision of New India Ø Driving Financial Inclusion for more than 70 yrs Ø Innovation and Flexibility Ø Promoting & Encouraging Entrepreneurship Ø Regulation history of 20 yrs Ø Regulatory Framework Harmonised with Banks and other FIs Ø Impressive & sustained Growth Ø Better Asset Quality Lower level of NPAs Ø Likely to play a key role in MSME Financing

48 Thank You Page 48