Profile of the NBFC Sector based on RBI s study

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1 Profile of the NBFC Sector based on RBI s study Madan Sabnavis Chief Economist madan.sabnavis@careratings.com Author: Sushant Hede Associate Economist sushant.hede@careratings.com The RBI s Report on Trends and Progress of Banking in India provides a detailed analysis of the NBFCs which is examined here. The financial performance of NBFCs in FY18 and the first half (Apr-Sept) of FY19 is presented to get a sense of how this sector has performed. In the recent months, the NBFC sector has been facing challenging times on the liquidity front and the RBI has intervened through various measures to address these concerns. It is against this context that this profiling has been done here. RBI classifies NBFCs on the basis of: 1. Liability structure 2. Type of activities undertaken 3. Systematic importance January 2, 2019 I Economics In the first category, NBFCs are further divided into: Mradul Mishra (Media Contact) mradul.mishra@careratings.com NBFCs-D which are authorised to accept and hold public deposits - Non-deposit taking NBFCs (NBFCs-ND) which do not accept public deposits but raise debt from market and banks Among the NBFCs-ND, those with an asset size of Rs. 500 crs or more are classified as systematically important NBFCs (NBFCs-ND-SI). Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report. NBFCs are also categorised on the basis of activities undertaken and the categorisation of the same has been done provided in Annexure 1. There are a total of 12 activity-based classifications done by RBI, out of which the focus has been on 8 in RBI s report. At an aggregate level, the number of NBFCs registered with the RBI has declined from 11,402 as at end-march, 2019 to 10,190 as at end-september, Against this backdrop, the study has been divided into the following components: - Balance sheet analysis - Financial Performance based on P/L and Ratio analysis - Sectoral credit deployment of the sector In addition, a quick snapshot of the Housing Finance Companies and All-India Financial Institutions (AIFIs) has also been provided, based on RBI s report. The data for the indicators studied below pertain to the balance sheet date 30 th September, One important objective of the report is to also look at the weightage of the deposittaking NBFCs and non-deposit taking NBFCs in the various indicators analysed.

2 1. Balance Sheet Analysis Composition of Liabilities The total liabilities of the NBFC sector is Rs lakh crs out of which Rs lakh crs are accounted for by NBFC- ND-SI while Rs lakh crs are of the NBFC-D. Table 1 summarises the liability side of the NBFC sector as on 30 September, The total liability size of the NBFC-ND-SI comprises 85.4% of the total liabilities of the NBFC sector. Total borrowings account for around 70% of the total liabilities of both the types of NBFC sector. Outstanding Borrowings Table 1: Liabilities of the NBFC sector (Rs. lakh crs) Particulars NBFC-ND-SI NBFC-D Share Capital Reserves & Surplus Total Borrowings Secured Borrowings Unsecured Borrowings Current Liabilities Total The outstanding borrowings composition of the NBFC-ND-SI and NBFC-D has been presented in Chart 1 and Chart 2 respectively. Details on borrowings via debentures, banking & financial institutions (FIs), commercial paper, inter-corporate deposits (ICDs) & relatives, interest accrued and borrowings via others sources have been covered. The total borrowings of NBFC-ND-SI are Rs lakh crs while that of NBFC-D are Rs lakh crs. Chart 1: Composition of outstanding borrowings for NBFC-ND-SI (Rs. lakh crs, % share) 0.37, 2% 0.73, 5% 2.03, 13% 0.33, 12% 1.53, 10% 0.28, 2% 4.11, 26% Debentures Fis ICDs and Relatives Others 6.68, 42% Banks Commercial Paper Interest accrued 0.08, 3% 0.05, 2% 0.30, 11% 0.29, 10% 0.83, 30% 0.87, 32% Debentures Banks FIs Commercial Paper ICDs and Relatives Interest accrued Others Public Deposits - From the above two charts, we can see that the NBFC sector has a higher reliance on debentures and banks while meeting their borrowing requirements. In case of NBFC-ND-SI, 68% of the outstanding borrowing as on 30 2

3 September, 2018 is in the form debentures and banks, while NBFC-D have 62% of the outstanding borrowings as bank borrowings and debentures. - Outstanding debentures aggregating to Rs lakh crs comprises 42% of the total outstanding borrowings for the NBFC-ND-SI. - For the deposit taking NBFCs, 12% of the outstanding borrowings is in the form of public deposits. Category wise classification of outstanding borrowings (NBFC-ND-Si) Table 2 tabulates category wise classification of the outstanding borrowings. It can be seen that the Infrastructure finance company (providers of infrastructure loans) and loan companies (providers of loan finance) have the highest outstanding borrowings aggregating to Rs lakh crs which is 76.9% of the total outstanding borrowing. 2. Asset Composition Table 2: Category-wise classification of outstanding borrowings Category Amount (Rs. Lkh crs) Asset Finance Company (AFC) 1.49 Core Investment Company 0.18 Factoring - NBC 0.02 Infrastructure Debt Fund- NBFC 0.20 Infrastructure Finance Company 6.84 Investment Company 1.44 Loan company 5.25 NBFC Micro Finance Institutions 0.31 Total Credit to different sectors is the most important asset for the NBFC sector. In this section, we look at the composition of the assets, not only for the deposit taking and non-deposit taking NBFCs but also for the different categorisation of the NBFCs. The total assets of the NBFC sector is Rs lakh crs, of which Rs lakh crs is of the NBFC-ND-SI while the balance Rs. 3.8 lakh crs pertains to the NBFC-D institutions. 74% of the NBFC-ND-SI assets are loans and advances while the proportion for the NBFC-D is 90%. Table 3 below gives the division of total assets into loans and advances, total investments, cash and bank balances and other current assets. Table 3: Composition of assets for NBFC-ND-Si and NBFC- D as on 30 September, 2018 (Rs. lkh crs) Particulars NBFC-ND-SI NBFC-D Loans and Advances Total Investment Cash and Bank Other Current asset Total assets

4 A category wise analysis of the assets (only restricting it to the loans and advances) is tabulated in Table 4. The reason for restricting the analysis only to loans and advances is because it comprises a substantial part of the total assets of the NBFC sector. Table 4: Category wise analysis of loans and advances Particulars Amount (Rs. Lkh crs) Asset Finance Company (AFC) 1.78 Core Investment Company 0.07 Factoring - NBC 0.03 Infrastructure Debt Fund- NBFC 0.17 Infrastructure Finance Company 7.32 Investment Company 0.67 Loan company 5.99 NBFC Micro Finance Institutions 0.39 Total assets Similar to the outstanding borrowings, Table 4 shows that Infrastructure finance companies and loan companies are the ones which have the highest quantum of loans and advances amounting to Rs lakh crs. This is 81% of the total loans advances by the NBFC sector. 3. Financial performance This section looks at the half-yearly performance of the NBFC-ND-SI and NBFC-D companies for the period April-September, Key financial indicators from the profit and loss account like total income, total expenditure and net profit after tax are presented. In addition, some financial ratios like income to total assets, net profit to total assets, cost to income ratio, profitability indicators like Return on Assets (ROA), Return on Equity (ROE), Net interest margin (NIM), Gross Non-performing asset ratio have been presented. Profitability indicators are compared for March 2017 and March Chart 2 provides a comparison of the total income, expenditure and net profit for NBFC-ND-SI and NBFC-D companies on an aggregate level for the half year ended 30 September, Chart 2: Comparison of Financial Performance between NBFC-ND-SI and NBFC-D companies (Rs. lkh crs) Total Income Total Expenditure Net Profit NBFC-ND-SI NBFC-D 4

5 - The above chart shows that the total income of the NBFC-ND-SI companies aggregating to Rs lakh crs comprise around 80% of total income of the NBFC sector. We had also seen in the section pertaining to assets that the assets of the NBFC-ND-SI comprise 85% of the total assets of the NBFC sector. 3. Key Financial Ratios The financial ratios have been calculated for the half year ended 30 September, Though, we have seen that NBFC- ND-SI comprise almost 80% of the total income of the NBFC sector, the income and net profit measured as percentage of total asset is higher for the NBFC-D set of companies. However, Chart 3a shows that the total cost to income ratio of the NBFC-D is higher at 83.3% compared to 68.7% of the NBFC-ND-SI companies. Chart 3a: Cost to income ratio Chart 3b: Income to total assets (%) Chart 3c: Net profit to total assets (%) NBFC-ND-SI 83.3 NBFC-D NBFC-ND-SI Profitability ratios like return on assets (ROA), return on equity (ROE), net interest margin (NIM) and asset quality indicators like Gross Non-performing asset as a % of total advances (GNPA) and net non-performing asset ratio (NNPA) during FY17 and FY18 are presented below. 7.5 NBFC-D NBFC-ND-SI 1.3 NBFC-D Chart 4: Key profitability and asset quality indicators of the NBFC sector (%) ROA ROE NIM GNPA NNPA Mar-17 Mar 18 5

6 Overall NBFC-MFI Loan Company Investment Company Infrastructure Finance Compamy Asset Finance Company - The profitability indicators of the NBFC sector has improved in FY18 compared with FY17 as seen by all three indicators (ROA, ROE, NIM). - The asset quality of the NBFC sector has also improved in FY18 compared with FY17 as seen by both indicators (GNPA and NNPA ratio). Asset quality of the overall NBFC sector has also been looked as follows: 1. Classification of NBFC asset based on type of asset (Table 5) 2. Category wise analysis of NPA ratio (Chart 5) Table 5: Classification of NBFC assets based on type of asset (%) Classification of NBFC Assets % of total assets Standard Assets 93.5 Sub Standard Assets 4.8 Doubtful assets 1.4 Loss assets 0.2 The above classification of the assets has been done as on date ended 30 September, It can be seen that only 1.6% of the total assets of the NBFC sector is classified as either doubtful or loss assets as per NPA regulations. In Chart 5, we have analysed category-wise NPA ratio and this analysis has been for the year ended 31 March, Chart 5: Category-wise NPA ratio for the year ended 31 March 2018 (%) The above chart shows that the non-performing assets in the micro finance institutions and infrastructure finance company is driving the overall NPA ratio higher for the NBFC sector. Capital Adequacy Requirements Capital adequacy of the NBFC sector is measured using the capital to risk-weighted asset ratio (CRAR) and this has been presented for all different categories of NBFCs for the date ended 30 September, The stipulated norm of the CRAR 6

7 NBFC - ND - SI NBFC - MFI Loan Co Investment Co Infrastructure Finance Co IDF - NBFC AFC NBFC - D for the NBFC sector is 15%. It can be seen from Chart 6 below that the CRAR of all categories of NBFC has been above the stipulated norm. Chart 6: CRAR for different categories of NBFC sector (%) Credit deployment by the NBFC sector In this section, we look at the deployment of credit by the NBFC to different sectors and the same in covered in Table 6. Table 6: Sectoral deployment of NBFC credit (as on September 2018) Particulars Amount % (Rs. Lkh crs) Gross Advances Non-food Credit Agriculture & Allied Activities Industry Micro and Small 0.52 Medium 0.33 Large 5.13 Others 4.41 Services Real Estate 1.34 NBFC 0.36 Trade 0.41 Transport 0.22 Others 1.24 Retail Vehicle/Auto loans 1.94 Other Retail Loans 1.65 Other Non-food credit

8 - Table 6 shows that the NBFC sector has lent the highest to the industry sector (52.28%) followed by retail segment (22.08%) and services (17.96%). - It has been seen that within the industrial sector, it is the large industries which have received almost 50% of the credit disbursed to the industrial sector. The credit advanced to the large industries aggregates to Rs lakh crs. - Within the services sector, it is the real estate segment which receives Rs lakh crs of credit which is around 37.6% of the total credit disbursed to the services sector. Housing Finance Companies (HFCs) - The credit needs of the housing finance market are met mainly by scheduled commercial banks (SCBs) and housing finance companies (HFCs). - HFCs share in lending to housing increased from 41.0% in FY17 to 43.6% in FY18. The lending of the HFCs grew at almost twice the pace of that of the Scheduled Commercial Banks (SCBs). - At the end of March 2018, there were 91 HFCs, of which 18 were deposit-taking and the remaining 73 were nondeposit taking. - The total size of the consolidated balance sheet of HFCs has increased from Rs. 9.0 lakh crs as at the yearend 31 March 2017 to Rs lakh crs as on 31 March A sharp increase in loans and advances of HFCs has been propelled by the recent initiatives of the Government of India to boost affordable housing. - Loans and advances of HFCs constitute 4/5th of their balance sheet while more than two-third of their loan portfolio comprised housing loans in On the liabilities side, deposits and borrowings together accounted for almost four-fifth of the total liabilities of HFCs. - 43% of the total outstanding borrowing of HFCs as on year end March 2018 is borrowings via debentures followed by bank borrowings which are 1/4 th of the total outstanding borrowings. Public deposits (13%) and Commercial paper (10%) are the remaining key components of outstanding borrowings. - Both income and expenditure of HFCs decelerated in FY18 as compared with FY17. Income growth was lower due to lower fund-based income. The net profits of HFCs grew at a lower rate in FY18 as compared with FY17. - Though the GNPA (1.3%) and NNPA (0.6%) ratios of HFCs increased in FY18 compared with FY17, the asset quality of HFCs is better than that of SCBs and NBFCs. All India Finance Institutions (AIFIs) - The AIFIs consolidated balance sheet expanded by 16.4% from 6.03 lakh crs in FY17 to Rs lakh crs in FY18 on the back of higher loans and advances, which constitute the largest share of assets at 86%. - On the liability side, bonds and debentures and other borrowings also increased during the year to finance increased credit disbursement and investment activities. Borrowing via debentures comprises 26.3% of the total liabilities while deposit comprises 41.5% of the total outstanding liabilities. - Funds raised and deployed by the AIFIs doubled from lakh crs in FY17 to lakh crs in FY18. This was due to the sharp increase in repayment of past borrowings mainly through external sources of funds. - AIFIs posted a modest growth in income during the year, with a decline in non-interest income operating as a drag - All the financial ratios (profitability margins) of AIFIs decreased in FY18 from a year ago. - The total amount of the AIFIs net NPAs as well as their net NPA ratio declined during FY18. The net NPA ratio has declined from 1% in FY17 to 0.7% in FY18. 8

9 Conclusions - The NBFC sector, with a size of around 15% of SCBs combined balance sheet, has been growing robustly in recent years, providing an alternative source of funds to the commercial sector in the face of slowing bank credit. - The total balance sheet size of the NBFC-ND-SI comprises 85.4% of the total balance sheet size of the NBFC sector with the balance 14.6% accounted by NBFC-D. - In case of NBFC-ND-SI, 68% of the outstanding borrowing as on 30 September, 2018 is in the form debentures and banks, while NBFC-D have 62% of the outstanding borrowings as bank borrowings and debentures. 42% of the outstanding borrowings of NBFC-ND-SI are debentures while 32% of the outstanding borrowings of NBFC-D is raised via debentures. - Infrastructure finance company (providers of infrastructure loans) and loan companies (providers of loan finance) have the highest outstanding borrowings aggregating to Rs lakh crs which is 76.9% of the total outstanding borrowing. - Similarly, Infrastructure finance companies and loan companies are the ones which have the highest quantum of loans and advances amounting to Rs lakh crs. This is 81% of the total loans advances by the NBFC sector. - The total income of the NBFC-ND-SI companies aggregating to Rs lakh crs comprise around 80% of total income of the NBFC sector. - The income and net profit measured as percentage of total asset is higher for the NBFC-D set of companies. However, total cost to income ratio of the NBFC-D is higher at 83.3% compared to 68.7% of the NBFC-ND-SI companies. - The financial performance of NBFCs, including profitability, asset quality and capital adequacy, improved during as they weathered the transient effects of demonetisation and GST implementation. - NBFC sector has lent the highest to the industry sector (52.28%) followed by retail segment (22.08%) and services (17.96%). Within the industrial sector, it is the large industries which have received almost 50% of the credit disbursed to the industrial sector. - While in the first half of FY19, though concerns surrounding the sector due to debt defaults amidst temporary asset liability mismatches arose, the inherent strength of the sector, coupled with the Reserve Bank are continuing vigil on the regulatory and supervisory front, will ensure that the growth of the sector is sustained and liquidity fears are allayed. Annexure 1: Classifications of NBFCs by Activity Type of NBFC Asset Finance Company (AFC) Loan Company Investment Company NBFC-Infrastructure Finance Company (NBFC-IFC) Infrastructure Debt Fund-NBFC (IDF-NBFC) NBFC-Micro Finance Institution (NBFC-MFI) NBFC-Systemically Important Core Investment Company (CIC-ND-SI) NBFC-Factor Activity Financing of physical assets including automobiles, tractors and generators. Provision of Loan Finance Acquisition of securities for purpose of selling Provision of infrastructure loans. Facilitation of flow of long-term debt into infrastructure projects Credit to economically dis-advantaged groups Makes investments and loans to group companies. Acquisition of receivables of an assignor or extending loans against the security interest of the receivables at a discount. 9

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