NBFCs : The present scenario (Part I)

In the present economic system of India, NBFCs (Non-Banking Financial Companies) have assumed a significant role in providing accessible and affordable financial services. We will be covering NBFCs in a series of articles. This article (Part I) will focus on the present status of NBFCs in India and try to understand how they have become a vital player in financial inclusion.

As per the RBI, an NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures or securities issued by Government or local authority or other marketable securities.

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Source: RBI

With the focus of Non-Banking Finance Companies on segments neglected by banks (non-salaried professionals, individuals, traders, transporters and stock brokers), and with the ongoing stress in the public-sector banks due to mounting bad debt, NBFCs have had a lucrative opportunity to expand their presence in the Indian financial story. The RBI, in line with the growing importance of NBFCs, has a separate Department of Non-Banking Supervision, the vision of which is “to have a strong, robust and vibrant NBFC sector, complementing the banking sector”. As per an MCA report (March’14), 36,347 NBFCs exist in India. Out of these, 11,682 (32.14%) were registered with RBI as of Mar ’16. Here are some key data points related to NBFCs –

  • The aggregate balance sheet size of the NBFCs sector expanded by 14.5% during 2016-17 as compared to 15.5% during 2015-16.
  • Loans and advances increased by 16.4% and investments increased by 11.9% in March 2017, YoY
  • Whereas the banking sector has had an average NPA of around 10% in 2016-17, NBFCs have done a better job of managing risk by capping the sector’s NPAs at around 4.5%
  • Overall, NBFCs were on their way to setting a record of a robust growth of 19–22% CAGR in retail credit to reach an AUM of approximately 6.044 trillion INR by March 2017.
  • NBFCs have contributed to growth consistently over the past decade. For example, the contribution of NBFCs to commercial banking assets increased from 8.4% in 2006 to 14%+ in March 2015. Similarly, NBFC sector on an average witnessed a CAGR (Compound annual growth rate) 22% during the period between Mar ’06 and Mar ’13, with NBFCs growing faster than banking sector in most of the years
  • It was surprising to note that NBFC sector clocked a growth of 25.7% in 2011-12 although GDP growth decelerated to 6.3% in 2011-12 from 10.5% in 2010-11 (counter-cyclical movements)
  • Similar to the trend in recent years, over an extended period of time, NBFC credit grew more rapidly as compared to the banking sector – NBFC credit witnessed a CAGR of 24.3% during the period between Mar’07 and Mar’13 as against 21.4% by the banking sector.
  • Infrastructure Financing: The quantum of infrastructure finance provided by the NBFC sector witnessed a CAGR of 26.2% during the period between Mar’10 and Mar’13. In absolute terms, NBFC finance to infrastructure increased from Rs.2228 billion to Rs. 4479 billion in the mentioned period. NBFC finance to infrastructure accounted for 35.8% of their assets as of March 31, 2013, while in the case of banks it was a mere 7.6%.
  • Loans Against Property: Low turnaround time and easier documentation has allowed NBFCs to invest assets in multiple segments, especially small-scale industries and MSMEs. According to a recent CRISIL report, loan against property segment for SMEs is expected to grow by Rs. 5 lakh crore by 2018-19 and NBFCs are expected to contribute nearly half of this.
  • Market Perspective: has also been bullish. “Incrementally, in recent times, investors are allocating more to NBFCs, as compared to banks. Off late, NBFCs have outperformed banks,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.

The success of NBFCs can be clearly attributed to their better product lines, lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, with a better understanding of their customer segments. Recent reforms have been on the lines of ‘rationalization’, i.e. stricter rules for NBFCs that have a significant impact on the economy to keep the negative effects of Shadow Banking in check, while providing certain easy passes to NBFCs that don’t systematically impact the Indian economy, thereby allowing them to solve real problems without the possibility of any major threat to the economic operations.

The next series of article on NBFCs will highlight upon the drawbacks that NBFCs are facing. Credy is actively partnering with NBFCs and helping improve lending processes through automated borrower sourcing, profiling, authentication, agreement signing, repayment management, legal processing etc. Automating processes to every extent possible and building better credit underwriting algorithms to increase accuracy and speed are critical for a healthy credit business.


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech start-up Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

The mechanics behind RBI rate cut

RBI announced a Repo rate cut by 25bps. The Repo Rate was reduced from 6.25% to 6% after the Monetary Policy Committee of RBI meeting, as was widely speculated before the meeting. In this post, we will try and understand the reasons behind the rate cut. To understand the reasoning, it is essential to know the relation between inflation and repo rate.

Repo rate is used by RBI to influence the short term money supply in the economy. It is the (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks. RBI uses the Repo rate as a lever to influence inflation in the country.

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Inflation and Repo Rate (Source)

Inflation is a lagging indicator in response to the repo rate changes. The inflation rate typically reacts inversely changes in the repo rate.

If the inflation rate is higher than the limits targeted by  RBI, the RBI looks to increase the repo rate so as to encourage banks to increase the lending rates/savings rate for its customers. This, in turn, encourages the customers to consume less and save more. Similarly, when the prices are stable over time, RBI sometimes decreases repo rate to encourage private investments and thus help in increase in growth rate of GDP.

Since 2016, RBI has embraced inflation targeting as an official policy, in collaboration with Ministry of Finance. The RBI and the Government, have decided the inflation target between 5th August 2016 to March 31, 2021, 4% with an upper and lower limit of 6% and 2% respectively. In fact, the Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.

India has been going through a period of historically low inflation. The latest CPI numbers released for June 2017 show that YOY inflation went to 1.54%, much below the target lower rate of 2%. Prices of food and beverages have been under deflation since May 2017, with YoY growth going to -1.1% in June. It is worth noting that the infamously expensive pulses have gone back to their price levels of June 2015, after recording a massive drop of 22% YoY.

While disinflation has been observed over the past few month, it is not clear if it transitory or structural. A reduction in repo rate would lead to increase in prices, and RBI assesses risks of steep price rise, as well. However, with the reducing inflation trend observed in various commodities and a strong monsoon season this year, the RBI had room to reduce the Repo rate.


This article is written by Vishu Agarwal. He is a policy enthusiast who follows India’s economic and monetary policies very closely.