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The market share of non-bank finance companies (NBFCs) would continue to expand, believes
India Ratings and Research (Ind-Ra). The expansion would be supported by NBFCs‟ ability to
customize products, price the risk and manage ultimate credit costs, especially related to small-
ticket loans, viz., microfinance, light commercial vehicle (CV), used CV, small-ticket housing
loans and loan against property. However, competition is likely to intensify in certain segments
such as large-ticket housing, new heavy CV and large-ticket loan against property. Thus, risk-
adjusted pricing may come under pressure. As the transition to the formalization gains
momentum, many NBFC borrowers may turn poachable and creditworthy for banks.
NBFCs have generally maintained a matched asset-liability profile, which will help them in the
current scenario of tightening liquidity and rising interest rates. However, there are few NBFCs
that have been aggressive toward the funding side and have increased their reliance on short-term
funding, creating an asset-liability tenor mismatch. With the hardening of interest rates and
heightened competition limiting maneuverability on the lending side, Ind-Ra expects margins to
come under pressure for NBFCs.
Ind-Ra does not expect any significant rise in delinquencies in the NBFC sector and, hence,
expects credit costs to remain stable. NBFCs‟ asset quality has been largely resilient to the twin
disruption of demonetization and goods and services tax implementation. The government‟s
increased focus on the rural economy in the budget for 2018-19 could be a boost for NBFCs with
a significant portion of their assets in rural areas. Meanwhile, few segments (microfinance
institution) and, to some extent, LAP have been disproportionately impacted. According to Ind-
Ra, while stress in the microfinance segment has peaked out, large-ticket LAP would remain
under pressure, as small and medium-sized enterprise borrowers remain under pressure in the
wake of the transition to the goods and services tax. Additional pressure on NBFCs book could
be from their lending to real estate developers, where stress would start reflecting, especially if
funding becomes tighter either from NBFCs or private equity firms
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NBFCs have been slowly moving into the space of commercial banking. When banks slowed
down their lending business in the wake of huge bad loans, NBFCs continued to grow at a higher
pace. As of March 2018, there were 11,402 NBFCs registered with the RBI, of which 156 were
deposit accepting NBFCs (NBFCs-D), and 249 systemically important non-deposit accepting
NBFCs (NBFCs-ND-SI). The aggregate balance sheet size of the NBFC sector as of March 2018
was Rs 22.1lakhcrore. There was deceleration in share capital growth of NBFCs in 2017-18
whereas borrowings grew at 19.1%.
NBFCs in India include not just finance companies, but also a wider group of companies that are
engaged in investment, insurance, chit fund, nidhi, merchant banking, stock broking, alternative
investments etc. as their principal business. NBFCs being financial intermediaries are supposed
to play a supplementary role to banks. NBFCs, especially those catering to the urban and rural
poor including the micro-finance institutions (NBFC-MFIs) and asset finance companies have a
complementary role in the financial inclusion agenda of the country. Further, some of the big
NBFCs infrastructure finance companies are engaged in lending exclusively to the infrastructure
sector, and some are into factoring business, thereby giving a fillip to the growth and
development of various sectors. In short, NBFCs bring diversity to the financial sector.
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CURRENT POSITION OF NBFCS
Gross Payables
insurance co's
20%
Banks
46%
Mutual funds
34%
NBFCs were the largest net borrowers of funds from the financial system, with gross payables
(loans) of around Rs 717,000crore and gross receivables of around Rs 419,000crore in March
2018. A breakup of gross payables indicates that the highest funds were received from banks
(44%), followed by mutual funds (33%) and insurance companies (19%). HFCs were the second
largest borrowers with gross payables of around Rs 528,400crore and gross receivables of only
Rs 31,200crore. As of March 2018, HFCs‟ borrowing pattern was quite similar to that of NBFCs
except that financial institutions also played a significant role in providing funds to HFCs. Like
NBFCs, long-term debt, loans and CPs were the top three instruments through which HFCs
raised funds from the financial markets. Now with the system facing a liquidity crunch, mutual
funds, insurance companies and other big investors are unlikely to invest in NBFCs in a big way.
The exposure of banks to NBFCs had shot up by 27%, or over Rs 1lakhcrore, to Rs 496,400crore
in a span of six weeks in March 2018.
However, banks started cutting their exposure since April 2018, leading to a 4.6% decline in
their exposure to NBFCs, according to RBI data. The outstanding credit of banks was at Rs
391,000crore in March 2017. The sudden spike in bank exposure to NBFCs prompted RBI to
direct banks to bring down the exposure.
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FUND RAISING BY NBFC IN INDIA
Assets, in this case, are defined as the investments made (equity/debt/structured products) in the
operations of an NBFC as a financing organization, while liabilities are defined as the amounts
owed to parties that have supplied the monies for the financing activity. The interest rate charged
between both leads to an arbitrage, thereby resulting in a Net Interest Margin. The arbitrage so
created is the value derived from the expertise and experience of the officials in the NBFC to
identify correct segments for investment at a higher risk-reward ratio and generate extra-ordinary
returns in the Indian/Corporate context.
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4. Treasury and Rupee Resources Departments
Broadly, the act of raising money supply lies within the ambit of the rupee resources department,
which manages long and short term instruments used within an NBFC to match the supply with
the demand. Once the resources are raised and the funds are with the company, the Treasury
department is responsible for the deployment, any asset liability mismatch and call/money
market instruments to be decided when the funds are parked.
1. Liquidity Risk
The risk of an investment that cannot be marketed or sold off easily to a third party, in order to
minimize losses
Risk that a loss may occur on account of public/private equity shares held in the portfolio, for the
equity investments made by the NBFC. NBFCs manage and control their treasury activities on
the basis of the various risks involved rather than on the basis of the particular type of financial
instrument dealt with. Extensive IT systems are put in place to measure these risks along with
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VAR (value at Risk), and an appropriate haircut is made to the investment when necessary. At all
times, a probability of default and a Loss given Default (LGD) is calculated, that varies with the
change in the profile of the company that is invested in. The VAR method would be employed to
assess potential loss that could crystallize on trading position or portfolio due to variations in
market interest rates and prices within a defined period of time.
The changes in market interest rates have earnings and economic value impacts on the
institution‟s banking balance sheet (book size). Given the range of loan product offerings of an
NBFC, it would be endeavored to measure IRR on the banking book that assesses the effects of
the rate changes on both earnings and economic value. As the simplest measure, the Treasury
Mid-Office may compute simple maturity (fixed rate) gaps, re-pricing (floating rate) gaps and
duration gaps. Considering the volume of data practically all the NBFCs use IT systems for
maintaining treasury operations.
NBFCs are now operating in a fairly deregulated environment and are required to determine on
their own, interest rates on deposits, subject to the ceiling of maximum rate of interest on
deposits they can offer on deposits prescribed by the Bank; and advances on a dynamic basis.
The interest rates on investments of NBFCs in government and other securities are also market
related. Intense competition for business involving both the assets and liabilities has brought
pressure on the management of NBFCs to maintain a good balance among spreads, profitability
and long term viability. Imprudent liquidity management can put NBFCs' earnings and
reputation at great risk and these pressures call for structured and comprehensive measures.
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The managements of NBFCs have to base their business decisions on a dynamic and integrated
risk management system and process, driven by corporate strategy. NBFCs are exposed to three
major risks in the course of their business - credit risk, market risk and operational risk. It is,
therefore, important that NBFCs introduce effective risk management systems that address the
issues relating to market risks primarily interest rate and liquidity risks.
NBFCs need to address these risks in a structured manner by upgrading their risk management
and adopting more comprehensive Asset-Liability Management (ALM) practices. ALM provides
a comprehensive and dynamic framework for measuring, monitoring and managing liquidity and
interest rate risks of the NBFCs that needs to be closely integrated with the business strategy. It
involves assessment of various types of risks and altering the asset-liability portfolio in a
dynamic way in order to manage risks.
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1. ALM Management Information Systems, its availability, accuracy, adequacy and
expediency
ALM should be supported by a management philosophy which clearly specifies the risk policies
and tolerance limits. This framework needs to be built on sound methodology with necessary
information system as back up. The central element for the entire ALM exercise is the
availability of adequate and accurate information with expedience. Collecting accurate data in a
timely and speedy manner is the major requirement. This needs computerization and the data
should be networked.
The ALCO consisting of the NBFC's senior management including Chief Executive Officer
(CEO) should be responsible for ensuring adherence to the limits set by the Board as well as for
deciding the business strategy of the NBFC (on the assets and liabilities sides) in line with the
NBFC's budget and decided risk management objectives. The committee will be chaired by
CEO/CMD/President or the Director and the Chiefs of Investment, Credit, Resources
Management or Planning, Funds Management / Treasury, International Business and Economic
Research can be members of the Committee. In addition, the Head of the Technology Division
should also be an invitee for building up of MIS and related computerization.
The ALM Support Groups consisting of operating staff should be responsible for analyzing,
monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts
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(simulations) showing the effects of various possible changes in market conditions related to the
balance sheet and recommend the action needed to adhere to NBFC's internal limits.
1. Balance sheet planning for appropriate risk-return, and the management of interest rate and
liquidity risks.
2. Product pricing for loans and advances, and assessment of a base rate.
3. Deciding on desired maturity profile and mix of assets and liabilities that can be added on in
the future.
4. Developing a perspective on the interest rate and deciding on the future business strategy to
contain interest rate risk.
5. Reviewing the funding policy to minimize liquidity risk.
The ALM guidelines introduced on 27 July 2001 was applicable only to Systemically Important
Deposit taking NBFCs (NBFC-D) with asset size of Rs.100crores and above or with public
deposits of Rs. 20crores and above. Such NBFC-Ds were required to make the ALM guidelines
operational from 31 March 2002 and submit one consolidated half yearly ALM return to Reserve
Bank of India Comprising of three parts
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The ALM guidelines were made applicable to Systemically Important Non Deposit taking
NBFC (NBFC-ND-SI) with asset size of Rs.100crores and above from 1 August 2008. Three
separate returns were introduced for submission to RBI from 1 January 2009
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SOURCES OF FUNDS (NBFCS)
There are three primary sources of funds looking to raise money without deposits:
1. Term Loans
These are through term loans obtained from banks in a single quantum, after deciding on the
amount of funds to be deployed in the normal course of operations of the NBFC. The advantage
of doing so is that banks can usually lend at much lower rates owing to the nature of the CASA
deposits, which favors the business model of NBFCs that have a more aggressive risk-return
profile. These kind of loans can be unsecured or secured through G-sec (which again is
monitored by the Treasury Department), and repayment can be done in bullet or a structured
schedule. This repayment should ideally be mirrored with the repayment schedules of the assets
on the balance-sheet. A good credit rating is mandatory for raising large sums at a competitive
interest rate.
2. Bonds
Bonds are used as a common route to reduce the interest rate on the sources of funds. The
coupon rate on the bond is selected in order to reflect the rating profile of the NBFC as well as a
return better than the G-Sec. In some cases, tax-free bonds are also issued for priority sectors
such as infrastructure and roads. The maturity profile of these bonds coincides with the
repayment/interest schedules of the investments made by the NBFCs (and displayed as assets on
the balance sheet). Bonds can be issued to retail investors as well, which is a primary advantage
for NBFCs during bond placement.
3. Commercial Paper
Short term loans offered by an NBFC can be issued by raising funds through Commercial Paper
(CPs). CPs is short term unsecured promissory notes issued by companies, with tenure of 3
months to 12 months.
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RECOVERY MECHANISM FOR NBFC
Recovery Mechanism for NBFC is not covered under the SARFAESI Act. Though RBI has
strengthened NPA Norms, it has not laid out clear guidelines either on recovery mechanism or
basically the provisions which can entail an NBFC to take action against the defaulters.
SAFEASI Act was enabled to facilitate banks & financial institutions in order to realize their
long-term assets, improve recovery by possession mechanism & thereafter selling & attaching
them for reducing NPA burden.
Most NBFC‟s are unable to recover their debt portion. A lot of cases surmounting to Crores of
funds are being dragged to court every year by NBFC‟s.
The panel in RBI working group has recommended to Act i.e. SARFEASI to be even extended to
NBFC‟s as well. Right now the applicability is just confined to
a) NBFC‟s registered with RBI having an asset size of 500Crore i.e. strategically important
NBFC‟s.
Making sure that all disputes arising out of disputes between the customers & third parties are
heard & disposed of at a higher level.
In the matter of recovery of loans, NBFCs should not resort to undue harassment viz. persistently
bothering the borrowers at odd hours, use of muscle power for recovery of loans etc. As
complaints from customers also include rude behavior from the staff of the companies. NBFCs
shall ensure that the staff is adequately trained to deal with the customers in an appropriate
manner.
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The Board of Directors should also provide for periodical review of the compliance of the Fair
Practices Code and the functioning of the grievances redressal mechanism at various levels of
management.
In case of secured loans, recovery mechanism & an enabling clause should be there in the Loan
Agreement, in general parlance called as „Re-possession Clause‟ which is legally enforceable
It is a matter of fact to be analyzed whether the recovery mechanism of the NBFCs is badly hit
due to the scaling down of the credit appraisal mechanism or due to the documentation problems
or due to the repaying habits of the borrower or due to the inadequate collection policies.
I. Receivable Management
It encompasses the collection & management as well as processing of the activities involved in
fund transfer. It calls for designing of an appropriate collection policy by the organization.
The basic objective while formulating the collection policy is to ensure the earliest possible
payments on receivables without any customer loss through an ill will. Prompt collection of
accounts tends to reduce the investment required to carry receivables and the costs associated
with it & the ratio of bad debts is likely to decrease.
II. Analysis
A chance is given to all the borrowers if they are facing any problem in repaying the EMI‟s on
time. They can approach the NBFC and ask to restructure the loan to enable the smooth
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repayment process. Just a single missed the opportunity and it can bring huge losses for
the registered NBFC. The RBI guideline states that the NBFC‟s have to give a reasonable
amount of time to pay the due amount along with an opportunity of being heard. In case of any
demise like death, serious ill-health or accident the NBFC give time lag to the customers and his
family.
The provisions which can entail an NBFC to take action against the defaulters must always have
a clear picture of your financial health. They should be aware of when you can resume your
payments on time. Pulling one‟s hands from unnecessary expenses can add a sum of amount to
your savings and help to repay your debts on time. It‟s not only a moral obligation but also a
legal responsibility to pay off your loan dues completely and that too on time as agreed between
the lender and the borrower. Few easy ways can sort the situation temporarily but still, it is
important to ensure that you pay all your dues and your creditworthiness is not harmed in any
way.
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ROLE OF MIS IN NBFC COMPANIES
NBFC (Non-Banking Financial Companies) are responsible for doing a lot of things a bank does,
and are regulated by Reserve Bank of India. By providing loans to acquiring financial assets,
NBFCs prove to be mighty useful despite their shortcomings.
Since one person filling all the shoes at the same time is impossible, MIS (Management
Information System) was created. Rather than a system, it‟s a concept for making the managerial
tasks efficient to carry out and with relative ease. To be put simply, MIS is a hardware and
software setup that provides managers with information for decision-making, organizing,
planning and monitoring a firm all in a synergetic and efficient manner.
NBFCs follow a hybrid architecture which places them somewhere between a company and a
bank they‟re a centaur of sorts. This mechanism calls for the need of an MIS a financial MIS to
be precise. The objective of an MIS in NBFCs will be to generate and maintain information
related to the customers, bankers and that pertaining to the organization‟s finance
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maintaining a record for each and monitoring its movement physically is impossible. A
management information system can enhance this process by automating the mobilization
process and increasing the sales-investment ratio.
2. Long-term loans:
Another reason people prefer NBFCs over banks is because banks don‟t provide long-term
credit. NBFCs ease this requirement by providing ample levels of funding to small and large
industries alike. Statistics report that NBFCs have shown nearly 22% growths in comparison to
banks. This means a majority of people take help from NBFCs and not from banks. The number
of borrowers NBFC houses can‟t be charted easily. Management information systems help
hugely with this requirement. Managing customers in thousands is not possible with the 100
employees an NBFC houses. An MIS will radically change the process of managing the
customer information of money borrowed, interest percent, and loans pending, etc. efficiently.
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APPLICATION OF MIS: LOAN MANAGEMENT
SYSTEMS IN NBFCS
In an NBFC, lending loans, manual verifications, collection, and cross-checking data can be a
hassle. With the advent of MIS in several organizations, NBFCs are benefitting from a particular
software system that is known as Loan Management Systems. Automating several critical
processes, these systems create a cohesive network for seamless collection of data, processing
and simplify lengthy, cumbersome tasks into easily executable functions.
While the market is flooded with a host of Loan Management Systems, most of the prominent
software shares a few characteristics in common. A good Loan MIS will let an NBFC achieve
the following:
1. Paperless On boarding: By enabling data collection in a digitized manner, an MIS can
eliminate the paperwork involved, reduce the time taken to process the applications, and allow
access to loans in an easy, hassle-free manner.
2. Multi-user system: Multi-level access is provided to different employees based on the hierarchy
in the NBFC to enable effective tracking of data, escalations, and easy delegation of the task to
respective individuals.
3. The power of AI: What the average human brain can‟t do, an MIS can Some Loan Management
Systems are integrated with advanced AI features, allowing easy detection of fraud or fake
documentation.
4. E-KYC: KYC of customers can be done completely in an electronic manner, minimizing the
overheads involved and reducing application processing times to a large extent.
5. Organized management: Data is centrally collected on a cloud storage that allows safe, secure
and reliable access to sensitive information and provides more control over how the data is used.
6. Automate loan collections: On receiving the mandates from the system, it sends out auto-
messages to the desired loan payers for collection, collates the funds received and generates
auto-reports.
7. Track defaulters: Instead of sifting through a massive pile of data, a loan management system
can easily pick up on defaulters, allowing easy tracking.
8. Real-time updates: Considering the dynamic nature of the financial world, any efficient loan
management system should work in real-time, and deliver updates as and when they occur.
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9. Access restriction: Since a loan management system provides access to sensitive information,
the access, as such, needs to be highly restricted. Admins can assign roles based on the hierarchy
in the NBFC.
10. Comprehensive Accounting: From calculating Income to expenditure to interests levied, an
efficient Loan Management System will be able to execute lengthy accounting calculations in a
matter of seconds.
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TOP 10 NBFC IN INDIA
NBFCs also provide a wide range of monetary advices like chit-reserves and advances. Hence
it has become a very important part of our nation‟s Gross Domestic Product and NBFCs alone
count for 12.5% raise in Gross Domestic Product of our country. Most people prefer NBFCs
over banks as they find them safe, efficient and quick in assisting with financial requirements.
Moreover, there are various loan products available and there is flexibility and transparency in
their services.
There are a huge number of NBFCs operating in our country but here‟s a look at the current top
10 NBFCs in India
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4. Mahindra & Mahindra Financial Services Limited
Mahindra Financial Services Limited (MMFSL) was established in 1991 and has over 1000
branches, and a customer base of over 3 million, all over the country. MMFSL is one of the most
renowned organizations and has two affiliates offering Insurance services and rural housing
financial services. It also specializes in offering gold advances, vehicle advances, corporate
advances, home credits, working capital advances and much more.
7. Cholamandalam
Cholamandalam Investment and Finance Company Limited (Chola), was incorporated in 1978 as
the financial services arm of the Murugappa Group. Chola started as an equipment financing
company and has surged ahead as a complete financial services provider offering all kinds of
services like - vehicle finance, home loans, home equity loans, SME loans, investment advisory
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services, stock broking and a host of other financial services to customers. Chola has 725
branches across India with assets under management above INR 35,000Crores
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