Contents

1. Overview of the NBFC sector

1.1 Introduction 1.2 NBFCs - growth and evolution 1.3 Bank Exposure to NBFCs 1.4 Summing up

INTRODUCTION:Non-Banking Financial Companies (NBFC) have rapidly emerged as an important segment of the Indian financial system. Moreover, NBFCs assume significance in the small business segment as they primarily cater to the credit requirements of the unorganised sector such as wholesale & retail traders, small-scale industries and small borrowers at the local level. NBFC is a heterogeneous group of financial institutions, performing a wide range of activities like hirepurchase finance, vehicle financing, equipment lease finance, personal loans, working capital loans, consumer loans, housing loans, loans against shares and investment, etc. NBFCs are broadly divided into three categories namely (i) NBFCs accepting deposits from banks (NBFCD); (ii) NBFCs not accepting/holding public deposits (NBFC-ND); and (iii) core investment companies (i.e. those acquiring share/securities of their group/holding/subsidiary companies to the extent of not less than 90% of total assets and which do not accept public deposits.) The segment has witnessed considerable growth in the last few years and is now being recognised as complementary to the banking sector due to implementation of innovative marketing strategies, introduction of tailor-made products, customer-oriented services, attractive rates of return on deposits and simplified procedures, etc. While the functions of NBFCs are just like banks, there are few differences between both the institutions. These are: (i) NBFC cannot accept demand deposits; (ii) NBFC is not part of the payment and settlement system as well as it cannot issue cheques drawn on itself and (iii) deposit insurance facility of Deposit Insurance & Credit Guarantee Corporation is not available for NBFC depositors unlike in the case of banks. Non-Banking Financial Companies (NBFC) have rapidly emerged as an important segment of the Indian financial system. Moreover, NBFCs assume significance in the small business segment as they primarily cater to the credit requirements of the unorganised sector such as wholesale & retail traders, small-scale industries and small borrowers at the local level. NBFC is a heterogeneous group of financial institutions, performing a wide range of activities like hirepurchase finance, vehicle financing, equipment lease finance, personal loans, working capital loans, consumer loans, housing loans, loans against shares and investment, etc. NBFCs are broadly divided into three categories namely (i) NBFCs accepting deposits from banks (NBFCD); (ii) NBFCs not accepting/holding public deposits (NBFC-ND); and (iii) core investment companies (i.e. those acquiring share/securities of their group/holding/subsidiary companies to the extent of not less than 90% of total assets and which do not accept public deposits.) The segment has witnessed considerable growth in the last few years and is now being recognised as complementary to the banking sector due to implementation of innovative marketing strategies, introduction of tailor-made products, customer-oriented services, attractive rates of return on deposits and simplified procedures, etc. While the functions of NBFCs are just like banks, there are few differences between both the institutions. These are: (i) NBFC cannot accept demand deposits; (ii) NBFC is not part of the payment and settlement system as well as it cannot issue cheques drawn on itself and (iii) deposit

insurance facility of Deposit Insurance & Credit Guarantee Corporation is not available for NBFC depositors unlike in the case of banks.

Definition of 'Non-Banking Financial Company - NBFC'

Non-banking financial companies, or NBFCs, are financial institutions that provide banking services, but do not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still covered under banking regulations.

Regulatory Framework The RBI Act was amended in 1997 to provide for comprehensive regulatory framework for NBFCs. As per the RBI (Amendment) Act 1997, the RBI can issue directions to NBFCs & its auditors, prohibit deposit acceptance and alienation of assets by NBFCs and initiate action for winding up of NBFCs. The new regulations provide:

Compulsory registration for all NBFCs, irrespective of their holding of public deposits, for commencing and carrying on business of a non-business financial institution The amended act also classified NBFCs into three broad categories i) NBFCs accepting public deposits; ii) NBFCs not accepting/holding public deposits; and iii) core investment companies (i.e. those acquiring shares/securities of their group/holding/subsidiary companies to the extent of not less than 90% of total assets and which do not accept public deposits.) Minimum entry point net-worth of Rs 2.5 million which was subsequently revised upwards to Rs 20 million Deposit mobilisation linked to net-worth, business activities and credit rating Maintenance of 12.5% of their deposits in liquid assets Creation of a Reserve Fund and transfer of 20% of profit after tax but before dividend to the fund Ceiling on maximum rate of interest that NBFCs can pay on their public deposits NBFCs with an asset size of at least Rs 1 billion or a deposit base of at least Rs 200 million are required to have Asset-Liability Management systems and constitute an Asset-Liability Management Committee

Further, in order to monitor the financial health and prudential functioning of NBFCs, the RBI issued directions regarding acceptance of deposits, prudential norms like capital adequacy, income recognition, asset classification, provisioning for bad and doubtful assets, exposure norms and other measures. For Instance, capital to risk-weighted assets ratio (CRAR) norms were made applicable to NBFCs in 1998. As per the CRAR norms, every deposit taking NBFC is required to maintain a minimum capital, consisting of Tier I and Tier II capital, of not less than 12% (15% in case of unrated deposit-taking loan investment companies) of its aggregate riskweighted assets and of risk-adjusted value of off-balance sheet items. Besides, before 2000, the prudential norms applicable to banking sector and NBFCs were not uniform. Within the NBFC sector also, the prudential norms applicable to deposit taking NBFCs were more stringent than those for non deposit taking NBFCs. Since 2000, the RBI has initiated measures to reduce the scope of regulatory arbitrage between banks, NBFCs-D (Deposit taking NBFCs) and NBFCsND (Non-Deposit taking NBFCs). The regulatory framework has undergone significant change in the last few years. The regulatory policies, which mostly focused on NBFCs-D until past few years, are now paying increasing attention to NBFCs-ND as well. The change in regulatory stance is largely due to a significant increase in both the number and balance sheet size of NBFCs-ND segment that gave rise to systemic concerns. In view of these developments, NBFCs-ND with assets size of Rs 1 bn and above were classified as systemically important NBFCs (NBFCs-ND-SI) and were subjected to limited norms & regulations such as CRAR and exposure norms prescribed by the RBI. The CRAR for these companies has been set at 12% since March 31, 2009 and has been raised to 15% upto March 31, 2010. Trends & Progress of the NBFCs Business Since late 1980s up to mid 1990s, the number of NBFCs increased substantially on the back of easy access of funds from capital market IPOs and deposits from the public. In 1981, there were 7,063 NBFCs. The number went up to 24,009 in 1990 and there were as many as 55,995 NBFCs by 1995. The high deposit rates offered by NBFCs led investors to invest their funds in NBFCs. The deposit base of the NBFCs grew at an average rate of 88.6% per annum between the period Apr-91 to Mar-97. However, strong growth in NBFCs could not be sustained as in the late 1990s several loans granted by the NBFCs turned sticky, leading some of the large NBFCs to default in repayment to their depositors. This led the RBI to introduce stringent guidelines in 1997-98 which hampered the ability of NBFCs to raise deposits. Banks also became wary of lending to NBFCs, which translated into high cost of funds for NBFCs. Moreover, increasing competition from the banking system that was opened up for private sector banks in early 1990s affected the NBFCs business. Given these developments, many NBFCs with asset base in excess of Rs 1 billion had to exit their operations. NBFCs, however, recovered from this phase and witnessed strong growth during 2000-02. Regulatory Framework The RBI Act was amended in 1997 to provide for comprehensive regulatory framework for NBFCs. As per the RBI (Amendment) Act 1997, the RBI can issue directions to NBFCs & its

auditors, prohibit deposit acceptance and alienation of assets by NBFCs and initiate action for winding up of NBFCs. The new regulations provide:

Compulsory registration for all NBFCs, irrespective of their holding of public deposits, for commencing and carrying on business of a non-business financial institution The amended act also classified NBFCs into three broad categories i) NBFCs accepting public deposits; ii) NBFCs not accepting/holding public deposits; and iii) core investment companies (i.e. those acquiring shares/securities of their group/holding/subsidiary companies to the extent of not less than 90% of total assets and which do not accept public deposits.) Minimum entry point net-worth of Rs 2.5 million which was subsequently revised upwards to Rs 20 million Deposit mobilisation linked to net-worth, business activities and credit rating Maintenance of 12.5% of their deposits in liquid assets Creation of a Reserve Fund and transfer of 20% of profit after tax but before dividend to the fund Ceiling on maximum rate of interest that NBFCs can pay on their public deposits NBFCs with an asset size of at least Rs 1 billion or a deposit base of at least Rs 200 million are required to have Asset-Liability Management systems and constitute an Asset-Liability Management Committee

Further, in order to monitor the financial health and prudential functioning of NBFCs, the RBI issued directions regarding acceptance of deposits, prudential norms like capital adequacy, income recognition, asset classification, provisioning for bad and doubtful assets, exposure norms and other measures. For Instance, capital to risk-weighted assets ratio (CRAR) norms were made applicable to NBFCs in 1998. As per the CRAR norms, every deposit taking NBFC is required to maintain a minimum capital, consisting of Tier I and Tier II capital, of not less than 12% (15% in case of unrated deposit-taking loan investment companies) of its aggregate riskweighted assets and of risk-adjusted value of off-balance sheet items. Besides, before 2000, the prudential norms applicable to banking sector and NBFCs were not uniform. Within the NBFC sector also, the prudential norms applicable to deposit taking NBFCs were more stringent than those for non deposit taking NBFCs. Since 2000, the RBI has initiated measures to reduce the scope of regulatory arbitrage between banks, NBFCs-D (Deposit taking NBFCs) and NBFCsND (Non-Deposit taking NBFCs). The regulatory framework has undergone significant change in the last few years. The regulatory policies, which mostly focused on NBFCs-D until past few years, are now paying increasing attention to NBFCs-ND as well. The change in regulatory stance is largely due to a significant increase in both the number and balance sheet size of NBFCs-ND segment that gave rise to systemic concerns. In view of these developments, NBFCs-ND with assets size of Rs 1 bn and above were classified as systemically important NBFCs (NBFCs-ND-SI) and were subjected to limited norms & regulations such as CRAR and exposure norms prescribed by the RBI. The CRAR for these companies has been set at 12% since March 31, 2009 and has been raised to 15% upto March 31, 2010. Trends & Progress of the NBFCs Business

Since late 1980s up to mid 1990s, the number of NBFCs increased substantially on the back of easy access of funds from capital market IPOs and deposits from the public. In 1981, there were 7,063 NBFCs. The number went up to 24,009 in 1990 and there were as many as 55,995 NBFCs by 1995. The high deposit rates offered by NBFCs led investors to invest their funds in NBFCs. The deposit base of the NBFCs grew at an average rate of 88.6% per annum between the period Apr-91 to Mar-97. However, strong growth in NBFCs could not be sustained as in the late 1990s several loans granted by the NBFCs turned sticky, leading some of the large NBFCs to default in repayment to their depositors. This led the RBI to introduce stringent guidelines in 1997-98 which hampered the ability of NBFCs to raise deposits. Banks also became wary of lending to NBFCs, which translated into high cost of funds for NBFCs. Moreover, increasing competition from the banking system that was opened up for private sector banks in early 1990s affected the NBFCs business. Given these developments, many NBFCs with asset base in excess of Rs 1 billion had to exit their operations. NBFCs, however, recovered from this phase and witnessed strong growth during 2000-02. Regulatory Framework The RBI Act was amended in 1997 to provide for comprehensive regulatory framework for NBFCs. As per the RBI (Amendment) Act 1997, the RBI can issue directions to NBFCs & its auditors, prohibit deposit acceptance and alienation of assets by NBFCs and initiate action for winding up of NBFCs. The new regulations provide:

Compulsory registration for all NBFCs, irrespective of their holding of public deposits, for commencing and carrying on business of a non-business financial institution The amended act also classified NBFCs into three broad categories i) NBFCs accepting public deposits; ii) NBFCs not accepting/holding public deposits; and iii) core investment companies (i.e. those acquiring shares/securities of their group/holding/subsidiary companies to the extent of not less than 90% of total assets and which do not accept public deposits.) Minimum entry point net-worth of Rs 2.5 million which was subsequently revised upwards to Rs 20 million Deposit mobilisation linked to net-worth, business activities and credit rating Maintenance of 12.5% of their deposits in liquid assets Creation of a Reserve Fund and transfer of 20% of profit after tax but before dividend to the fund Ceiling on maximum rate of interest that NBFCs can pay on their public deposits NBFCs with an asset size of at least Rs 1 billion or a deposit base of at least Rs 200 million are required to have Asset-Liability Management systems and constitute an Asset-Liability Management Committee

Further, in order to monitor the financial health and prudential functioning of NBFCs, the RBI issued directions regarding acceptance of deposits, prudential norms like capital adequacy, income recognition, asset classification, provisioning for bad and doubtful assets, exposure norms and other measures. For Instance, capital to risk-weighted assets ratio (CRAR) norms were made applicable to NBFCs in 1998. As per the CRAR norms, every deposit taking NBFC is required to maintain a minimum capital, consisting of Tier I and Tier II capital, of not less than

12% (15% in case of unrated deposit-taking loan investment companies) of its aggregate riskweighted assets and of risk-adjusted value of off-balance sheet items. Besides, before 2000, the prudential norms applicable to banking sector and NBFCs were not uniform. Within the NBFC sector also, the prudential norms applicable to deposit taking NBFCs were more stringent than those for non deposit taking NBFCs. Since 2000, the RBI has initiated measures to reduce the scope of regulatory arbitrage between banks, NBFCs-D (Deposit taking NBFCs) and NBFCsND (Non-Deposit taking NBFCs). The regulatory framework has undergone significant change in the last few years. The regulatory policies, which mostly focused on NBFCs-D until past few years, are now paying increasing attention to NBFCs-ND as well. The change in regulatory stance is largely due to a significant increase in both the number and balance sheet size of NBFCs-ND segment that gave rise to systemic concerns. In view of these developments, NBFCs-ND with assets size of Rs 1 bn and above were classified as systemically important NBFCs (NBFCs-ND-SI) and were subjected to limited norms & regulations such as CRAR and exposure norms prescribed by the RBI. The CRAR for these companies has been set at 12% since March 31, 2009 and has been raised to 15% upto March 31, 2010. Trends & Progress of the NBFCs Business Since late 1980s up to mid 1990s, the number of NBFCs increased substantially on the back of easy access of funds from capital market IPOs and deposits from the public. In 1981, there were 7,063 NBFCs. The number went up to 24,009 in 1990 and there were as many as 55,995 NBFCs by 1995. The high deposit rates offered by NBFCs led investors to invest their funds in NBFCs. The deposit base of the NBFCs grew at an average rate of 88.6% per annum between the period Apr-91 to Mar-97. However, strong growth in NBFCs could not be sustained as in the late 1990s several loans granted by the NBFCs turned sticky, leading some of the large NBFCs to default in repayment to their depositors. This led the RBI to introduce stringent guidelines in 1997-98 which hampered the ability of NBFCs to raise deposits. Banks also became wary of lending to NBFCs, which translated into high cost of funds for NBFCs. Moreover, increasing competition from the banking system that was opened up for private sector banks in early 1990s affected the NBFCs business. Given these developments, many NBFCs with asset base in excess of Rs 1 billion had to exit their operations. NBFCs, however, recovered from this phase and witnessed strong growth during 2000-02.

Current Scenario of the NBFCs Business In recent years, the number of NBFCs once again has begun to decline on account of high cost of funds, intense competition with the banking sector and increase in consolidation activity. The total number of NBFCs2 registered with the RBI declined by 0.5% (y-o-y) to 12,740 as at endJune 2009. The number of deposit taking NBFCs (NBFCs-D) also fell sharply from 710 as at end-June 2003 to 336 as at end-June 2009, primarily due to the exit of many NBFCs from deposit taking activities.

With the number of NBFCs-D declining substantially, the public deposits held by NBFCs-D witnessed a sharp contraction. Further, the decline in public deposits held by NBFCs is indicative of shift in the pattern of resourced raised by NBFCs. Since last few years, NBFCs have preferred to raise their funds through bank loans/debentures as against public deposits. As a result, the ratio of public deposits of NBFCs to the aggregate deposits of SCBs fell to 0.53% as at endMarch 2009 as against 0.73% as at end-March 2008. The data reveals that amongst various categories of NBFCs, public deposits held by equipment leasing companies and loan companies registered significant decline of 70.6% (y-o-y) and 43.3% (y-o-y) respectively during FY09. This is mainly because of reclassification of some of these companies as asset finance companies. Concomitantly, public deposits of asset finance companies increased by 17.5% (y-o-y) during FY09.

While public deposits of NBFCs ranged from less than Rs 5 mn to above Rs 500 mn, almost 60.9% of NBFCs held public deposits which amounted to less than Rs 5 mn. Further, except the deposit-class more than Rs 100 mn & up to Rs 200 mn and Rs 200 mn & up to Rs 500 mn, the deposits held by NBFCs in all deposit-groups declined during FY09.

Total assets/liabilities of NBFCs (excluding RNBCs) registered a growth of 1.3% (y-o-y) during FY09 as against 53.6% (y-o-y) during the previous fiscal. The significant moderation in growth of assets can largely be attributed to the decline in assets of loan companies.

Among NBFC group, asset finance companies (AFCs) held the largest share in total assets/liabilities (70.3%). AFCs continued to witness considerable rise in assets during FY09 primarily due to reclassification of NBFCs that was initiated in December 2006 and the process of which is still continuing. Assets of loan companies, on the other hand, declined during FY09 after registering a substantial growth during FY08 following the restoration of IFCI Ltd and TFCI Ltd from FI category to loan category of NBFCs. Assets of equipment leasing companies continued to decline subsequent to reclassification of NBFCs. Further, the asset holding pattern remained highly skewed in FY09, with just 4.4% of NBFCs with asset size of above Rs 5 bn holding almost 95.8% of total asset value of all NBFCs. Borrowings3, which has emerged as a major source of funds for NBFCs, registered growth of 9.3% (y-o-y) as at end-March 2009. While borrowings by equipment leasing companies and loan companies declined, those by asset finance companies and hire purchase companies witnessed an increase during FY09. Further, borrowings from banks & financial institutions witnessed a significant rise of 29.3% (y-o-y) as at end-March 2009. The borrowings from the Government which had registered a sharp growth during FY08 due to inclusion of IFCI Ltd and TFCI Ltd into NBFC category, declined by 21.4% (y-o-y) as at end-March 2009. Financial Performance of NBFCs Operations of NBFCs, which witnessed sharp contraction during FY04 due to a decline in resource mobilisation, improved thereafter. During FY08, though expenditure witnessed an increase of 45.4%, rise in both fund based income and fee based income led to significant growth in operating profits (263.2% y-o-y during FY08) and net profits (298.3% y-o-y during FY08). Despite the volatile domestic financial markets, financial performance of NBFCs in terms of income and net profits remained modest. Expenditure witnessed some deceleration in growth during FY09. However, the pace at which the expenditure increased during FY09 was higher than that for income, in turn leading to a 2.2% (y-o-y) decline in operating profit. Net profit, on the other hand, registered a moderate growth mainly due to lower provisioning for tax. Given the moderation in income, the cost to income ratio deteriorated to 74.1% during FY09 from 68.9% during FY08.

Gross NPA as well as net NPA (as percentage of gross advances & net advances respectively) continued to decline during 2007-08. Among NBFC group, gross NPA as percentage of gross advances of equipment leasing & hire purchase companies increased during FY08 on account of reclassification of NBFCs. In contrast to the trend during the last few years, Gross NPA ratio increased to 2.7% during FY09 from 2.1% during FY08. Net NPA remained negative with provisions exceeding NPA at end-March 2009. Amongst the NBFC segments, there was a sharp improvement in the asset quality (as reflected in various categories of NPAs) of equipment leasing companies while asset quality of hire purchase companies witnessed sharp deterioration during FY09 as compared against the previous year.

In case of capital adequacy ratio, the number of NBFCs with less than the minimum regulatory Capital to risk-weighted average ratio (CRAR) of 12% declined to 9 at end-March 2009 as against 47 as at end-March 2008. Further, at end-March 2009, almost 95.7% of NBFCs had CRAR of 12% or more as compared with 85.6% of NBFCs during the corresponding period of the previous financial year. This indicates that compliance with CRAR requirement has improved in FY09. The ratio of public deposits to net owned fund4 (NOF) for all categories of NBFC remained unchanged at 0.2% as at end-March 2009 from the corresponding period of the previous financial year. Among NBFC group, while the ratio of public deposits to NOF for loan companies and hire purchase companies declined during FY09, that of remaining categories registered a marginal increase. Impact of Global Financial Crisis on NBFCs The deepening of global financial crisis in 2008 led to drying up of external route of financing for the Indian corporate sector. Further, with rising risk aversion among international investors,

there was a substantial outflow of foreign funds from domestic equity markets, making it difficult for companies to raise funds domestically. Given the tight liquidity conditions, companies redeemed their investments in mutual funds to finance their own funding needs. The wave of redemptions was witnessed in mutual funds which in turn affected NBFCs segment as mutual funds is the major source of debt financing for NBFCs. Further, with the deteriorating credit environment, NBFCs providing unsecured personal loans and consumer finance witnessed rise in their non performing assets. The impact of slowing domestic demand was primarily felt in automobile sector. The demand for vehicle finance (especially, commercial vehicle, two-wheeler & three wheeler finance) witnessed substantial decline. This coupled with increased levels of asset quality slippages, have adversely impacted profitability of NBFC sector in FY09. Given the worsening liquidity conditions of NBFCs, the RBI announced a slew of liquidity augmentation measures which include: i. NBFCs-ND-SI were permitted as a temporary measure to raise short-term foreign currency borrowings under the approval route subject to fulfillment of certain conditions. The resources raised were to be used only for refinancing of short-term liabilities and not for creation of fresh assets. It was also advised that the maximum amount should not exceed 50% of the NOF or US$ 10 mn (or its equivalent), whichever was higher. Eleven companies were granted permission under the facility to borrow funds to the tune of US$ 834.95 mn plus foreign currency equivalent of Rs 15.66 bn (not availed of) out of which seven have borrowed so far to the extent of US$ 645.58 mn. Banks were permitted, on a temporary basis, to avail of liquidity support under the LAF window through relaxation in maintenance of SLR to the extent of up to 1.5% of their NDTL, exclusively for meeting the funding requirements of NBFCs and mutual funds. The risk weight on banks exposure to NBFCs-ND-SI was reduced to 100% from 125% irrespective of credit rating, while exposure to Asset Finance Companies which attracted risk weight of 150% was also reduced to 100%. NBFCs-ND-SI were permitted to augment their capital funds by issue of Perpetual Debt Instruments. Deferred the proposed increase in the CRAR to be maintained by NBFCs-ND-SI to 12% and subsequently to 15% by one year, i.e. 12% by March 31, 2010 and 15% by March 31, 2011. Provided direct lending facility as a Lender of Last Resort (LOLR) where RBI lends to NBFCs-ND-SI against their rated CPs through a SPV by subscribing to its bonds. The facility was operationalised in January 2009 through an SPV called IDBI SASF Trust to provide liquidity support against investment grade paper of NBFCs, subject to fulfillment of certain conditions. It was designed as a LOLR facility to facilitate an orderly downsizing of balance sheet of financially sound NBFCs which faced short term temporary liquidity requirement. The facility has been availed by only one NBFC so far which has drawn Rs 10.40 bn under the scheme and there is no outstanding balance as on date.

ii.

iii.

iv. v.

vi.

The slew of measures announced by the RBI coupled with reduction in key policy interest rates, resulted in gradual improvement in domestic liquidity conditions, in turn providing some support to the NBFCs segment. In the past few months, domestic and external financing conditions have witnessed a considerable improvement. Also, there has been some resumption of foreign capital inflows in the domestic equity market. Liquidity conditions have remained comfortable as indicated by easing of call money rates and increased recourse of banks to reverse repo window. In view of the aforementioned developments, the RBI in its Q2 FY10 review of monetary policy withdrew some liquidity boosting measures that were introduced as a part of monetary stimulus in FY09. The special term repo facility for SCBs, for funding to NBFCs, mutual funds, and housing finance companies was terminated. In addition to this, the RBI initiated few regulatory measures with regards to the NBFCs. These include:

Introduction of a category of NBFCs as infrastructure NBFCs, defined as entities which hold minimum of 75% of their total assets for financing infrastructure projects. Linking the risk weights of banks exposure to infrastructure NBFCs to the credit rating assigned to the NBFC by external credit assessment institutions (ECAIs).

Challenges & Future Outlook While NBFCs have witnessed substantial growth over the years, there are few areas of concern which need to be addressed. For instance, while NBFCs have enjoyed an edge over banks in semi-urban & rural markets where banking network is not yet strong, they have limited spread in urban markets. Nonetheless, in recent years, NBFCs have begun to create niches for themselves that are often neglected by banks. These primarily include providing finance to non-salaried individuals, traders, transporters, stock brokers, etc. In the past few years, the increased competition from banks in the retail finance segment has led to excess diversification by NBFCS from their core business activities. The sector has witnessed introduction of various innovative products such as used vehicles financing, small personal loans, three-wheeler financing, IPO financing, finance for tyres & fuel, asset management, mutual fund distribution and insurance advisory, etc. Besides, NBFCs are aspiring to emerge as a one-stop shop for all financial services. NBFCs have also ventured into riskier segments such as unsecured loans, purchase finance for used commercial vehicles, capital market lending, etc. Moreover, NBFCs customer profile is concentrated on the self-employed segment. The earlier mentioned factors increase their risk profile which could have adverse impact on the financial health of NBFCs. Although some improvement has been witnessed in auto sales in last few months, the demand for vehicle finance is likely to remain subdued. Besides, given the significant slowdown in the Indian economy, NBFCs were encountering structural challenges such as increased refinancing risk, short-term asset-liability mismatch leading to decelerating growth and declining margins. This is expected to have a bearing on the profitability of NBFCs in the medium term.

Given that growth in vehicle finance might remain low in the medium term, NBFCs are expected to focus on rural and semi-urban markets. Credit requirements of rural population are primarily met by banks from organised sector or local money lenders. Though, in recent years there has been some penetration of NBFCs in this segment, the market still remains largely untapped. There is a large section of rural population which does not have access to credit either because of their inability to meet the lending covenants of banks or due to high interest rates of local money lenders. This provides a huge opportunity for NBFC sector to spread their business in the rural & semi-urban markets.