Mis-match of assets and Liability in India.

Shadow banking refer to the practice of banking like activities performed by non-banking finance companies
(NBFCs), which are not subject to strict regulation.

India's shadow banks are in the midst of a crippling liquidity squeeze that threatens to balloon into a full-blown crisis.
These lenders have been under pressure since last year, when a series of defaults by IL&FS forced the government
to intervene and exposed weaknesses in the sector. Other lenders like Dewan Housing Finance and Reliance Capital
are struggling. ET Wealth takes a close look at what is troubling the NBFCs.

NBFCs play a critical role in ensuring availability of loans

NBFCs have been disbursing loans at a faster clip than banks over the past few years.

NBFCs have maintained high credit growth at a time banks have gone slow on lending owing to ongoing asset quality
concerns and corrective actions.

Short term repayments as % of total borrowings

Year short term repayments as a % of total borrowings

2014 30.4
2015 30.7
2016 33.7
2017 30.0
2018 32.9

Some NBFCs have been running a large asset-liability mismatch

When liabilities far exceed assets in any period, it may lead to liquidity stress for the NBFC.
Emkay Research. Data as on March 2018
Debt paper of these NBFCs were downgraded in the past one year
Default in IL&FS bonds sparked a liquidity squeeze that spread to other NBFCs.

Company Date Earlier credit Revised credit

IL& FS 08-08-2018 AAA AA+
IL& FS 17-09-2018 AA+ D
Reliance Home 27-04-2018 BBB+ D
Finance
Reliance Commercial 27-04-2018 BBB+ D
Paper
DHFL 11-05-2018 A3+ A4+
Reliance Capital 19-05-2018 A BBB
DHFL 05-06-2018 A4+ D

Asset quality of NBFCs has deteriorated in recent years

The proportion of non-performing assets as % of the loan book has steadily increased, while capital adequacy has
declined.
Capital
Gross NPA
Period Net NPA (%) Adequacy
(%)
Ratio (%)

FY14 2.6 1.4 27.5

FY15 4.1 2.5 26.2
FY16 4.5 2.5 23.6
FY17 6.1 4.4 22.1
FY18 5.8 3.8 22.8
Sep-18 6.5 NA 21

Loan book growth for few NBFCs has moderated

With liquidity crunch denting operations, many NBFCs have gone slow on fresh advances.

Advances (Rs cr)

Growth in
Company Mar-18 Mar-19
advances
Bharat Financial 9260 7619 -18%
Indiabulls Housing
Finance 109833 92387 -16%
JM Financial 14931 14337 -4%
Edelweiss Finance 38499 38433 0%
hriram City Union Finance 27534 28811 5%
Shriram Transport
Finance 90476 96751 7%
Mutual funds have reduced exposure
Equity funds have gravitated towards quality NBFC stocks even as debt funds have cut back on NBFC debt.

Debt exposure Equity exposure

% Market value (Rs Market value (Rs
Month % holding
holding cr) cr)
Sep-18 34.57 4,37,900 7.06 65,693
Dec-18 31.34 3,98,504 7.51 75,237
Mar-19 31.03 3,93,095 7.17 77,720
May-19 28.94 4,02,271 7.22 80,154

Several NBFC shares have taken a severe beating

Ten biggest losers have collectively seen market cap erosion of nearly Rs 1 lakh crore in the past year.

1 Year price change

Company MCAP PBV CMP (%)

Indiabulls Housing Finance 23,746 1.77 555 -54

Indiabulls Ventures 15,899 7.94 252 -48
Edelweiss Financial Services 15,895 2.38 170 -45
ICICI Securities 6,971 8.36 216 -40
Shriram City Union Finance 9,000 1.57 1,364 -38.3
Aditya Birla Capital 19,780 2.29 90 -36
JM Financial 6,887 1.56 82 -35.7
Housing & Urban Development
Corp 7,727 0.79 39 -35.1

Select NBFC stocks have bucked the trend

Investors favoured NBFCs with cleaner loan books.

1 Year price change

Company MCAP PBV CMP (%)

Power Finance Corporation 34,453 0.86 131 58.7

Muthoot Finance 24,394 3.11 609 57.1

Bajaj Finance 2,04,397 12.35 3,525 55.6

REC 30,601 0.85 155 38.9

Bajaj Finserv 1,31,364 6.21 8,255 38.9

Manappuram Finance 11,429 2.98 136 31.2

NBFC vs Bank
1. Introduction of NBFC and bank.
2. Research Methodology

NBFC better than banks-

NBFCs are Better than Banks: Here’s why?
NBFCs can just make investment or lend, they don’t accept demand deposits. But when it comes
to borrowing loan most prefer NBFCs over banks and the reason for this is banks have hard rules
and requires more time to approve or sanction a loan. On the other hand NBFCs ensures the
processing is quicker and necessary loan amount is disbursed within days. Though rate of
interest is high at NBFCs most of the times as compared to banks, borrowers still prefer to take
loans from NBFC considering the ease of getting loan and less complication. However, if the
question is around which type of borrowing and lending is safe, the best answer is “Banks”.
These much more regulated, there are clear rules and regulations are places, lot of scrutinisation
is done before approving a loan (thus less chance of defaults).

In order to summaries, the three main reasons why NBFCs are preferred over banks for loans
are:

1. Competitive Interest Rates:

Rate of interest is one of the main aspects of all types of loans. Non-Banking Financial Sectors
have started to concentrate on this area in the recent decades and have brought down the interest
rates to either equally to bank lending rates or at times even lower to bank rates. With all the
other benefits when rate of interest is also lowered, borrowers found this more easy and
affordable. This has also resulted in lower EMI (Equated Monthly Installment) for borrowers.
Based on the income, credit scoring ad repayment rate of interest is charged on the borrowers
however it is at competitive rates.
2. Quick Processing:
At banks, it is very important that the applicant should fulfill the eligibility criteria but NBFC are
lenient in this aspect. This makes loan approval easier, smoother process and quicker. Most of
the times, people apply for loan when they are in immediate need of money. NBFCs have taken
this as an opportunity to meet the demand by quickly processing the loans at competitive rate of
interest. At times, borrowers are even ready to compromise on the interest rates if the loan
amount is huge and if they could get it approved quickly.

3. Less Rules and Regulations:

As NBFC are under Companies Act, the rules and regulations for lending are not as stringent as
banks. This helps borrowers to get loans easily. And the less complicated loan processing is;
borrowers are highly satisfied. Of course, the risk of default is high with NBFC and thus interest
rates and other charges will be according priced by the NBFC. Even the loan amount approved
will be quite lesser than the collateral value. This is due to the high risk of default.

4. Loan available for Individuals with Poor Credit Rating:

Individuals with poor credit rating generally will not get loans from banks. The reason for this is
banks consider borrowers are high-risk individuals if the credit scoring is low. Unless the credit
score is above 600 -650, it is very difficult to get a loan sanctioned from banks. On the other
hand, loans will be offered to individuals with low credit score by NBFCs but most of the time
the interest rates for such borrowers will be higher than market rates. Due to these
aforementioned advantages, most of the NBFCs are growing.

With regard to offering loans, banks and NBFCs will offer business, personal and retail loans.
And this is totally on the basis of the repayment capacity of the borrower. Most of the corporate
sector prefers banks however; retails sector chooses NBFCs over banks. Simple loans such are
vehicle financing loans, gold loans, home loans and durable loans are offered by NBFCs. And
customer satisfaction ratio is high here. NBFC sector is also set to expand even further in the
coming days. If someone is looking to get a quick loan approved then the first option is NBFCs
as banks are more stringent in approving loans.
he non-banking finance companies continued to perform better than the banks with the balance sheet expanding by
15.5%, said the Reserve Bank of India in its latest Financial Stability Report.

“The financial performance of NBFC sector has remained unchanged for the last two years. Net profit as a
percentage of total income remained at 15.3% between March 2015 and March 2016 and ROA stood at 22% during
the same period,” RBI said in the report.
NBFC sector is growing at the cost of banks that are saddled by bad loans and poor profitability. Banks ability to lend
is constrained due to Basel III capital requirements. Many niche NBFCs have come up over the years lending to
segments like gold, housing, infrastructure and retail.

The aggregated balance sheet of the NBFC sector expanded by 15.5% on a year-on-year basis in March 2016, the
report said.

Loans and advances for the period rose 16.6% while total borrowings were up 15.3% in March 2016. This is when
bank credit grew by less than 10%.

On the asset quality front, NBFC sector performed better than banks with the gross non-performing assets of NBFCs
as a percentage of total advances declining to 4.6% in March 2016 from 5.1% in March 2015. Net non-performing
loans as a percentage of total advances declined to 2.5% from 2.9% during the same period.

This is despite NBFCs moving to 150+ day NPA recognition norm during the last fiscal. The government in the Union
Budget has allowed NBFCs with asset size of above Rs 500 crore would be permitted to access the provisions of
Sarfaesi Act. This would further improve NBFCs’ ability to make recoveries.

The Reserve Bank of India has prescribed stringent norms on capital adequacy and NPA in order to bridge the
regulatory gaps between NBFCs and Banks, asking NBFCs to maintain minimum capital of Tier I and Tier II of not
less than 15% of their risk weighted assets.

RBI said that seven NBFCs were not able to meet the regulatory minimum capital adequacy norms of 15% as of
March 2016.

Difference Between NBFC and Bank

While banks and non-banking financial companies (NBFC) both are key
financial intermediaries, that offer almost similar services to the customers.
The major difference between NBFC and bank is that unlike banks,
an NBFC cannot issue self-drawn cheques and demand drafts.

Another important point of distinction amidst these two is that while banks
take part in the country’s payment mechanism, non-banking financial
companies are not involved in such transactions.

As finance is the basic requirement of individual’s and business’s, banks alone

cannot cater all the sections of the society. That is why NBFC came into being,
both in public and private sector, to complement banks in providing finance to
people.

Content: NBFC Vs Bank

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart
BASIS FOR
NBFC BANK
COMPARISON

Meaning An NBFC is a company that Bank is a government authorized financial

provides banking services to people intermediary that aims at providing
without holding a bank license. banking services to the general public.

Incorporated under Companies Act 1956 Banking Regulation Act, 1949

Demand Deposit Not Accepted Accepted

Foreign Investment Allowed up to 100% Allowed up to 74% for private sector banks

Payment and Not a part of system. Integral part of the system.

Settlement system

Maintenance of Not required Compulsory

Reserve Ratios

Deposit insurance Not available Available

facility

Credit creation NBFC do not create credit. Banks create credit.

 BASIS FOR
NBFC BANK
COMPARISON

Transaction Not provided by NBFC. Provided by banks.

services

Definition of NBFC

NBFC expands to Non-Banking Financial Company is a company registered

under the Companies Act, 1956 and regulated by the Central Bank i.e. Reserve
Bank of India under RBI Act, 1934. These entities are not banks, but they are
engaged in lending and other activities, akin to that of banks like providing
loans and advances, credit facility, savings and investment products, trading
in the money market, managing portfolios of stocks, transfer of money and so
on.

It is indulged in the activities of hire purchasing, leasing, infrastructure

finance, venture capital finance, housing finance, etc. An NBFC
accepts deposits, but only term deposits and deposits repayable on demand
are not accepted by it.

In India, these companies emerged in the mid-1980’s. Kotak Mahindra

Finance, SBI Factors, Sundaram Finance, ICICI Ventures are examples of
popular NBFC’s.

NBFC is divided into three categories, which are:

 Asset Companies
 Loan Companies
 Investment Companies

Definition of Bank

Banks are the financial institution, authorised by the government to conduct

banking activity like accepting deposits, granting credit, managing
withdrawals pay interest, clearing cheques and providing general utility
services to the customers. Banks are the apex organisation, which dominates
the entire financial system of the country. It acts as a financial intermediary,
between the depositors and borrowers, that ensures smooth functioning of
the economy.

Banks can be public sector banks, private sector banks or foreign banks. They
are responsible for making loans, creating credit, mobilisation of deposits, safe
and time bound transfer of money and providing public utility services.
Ownership of a commercial bank lies with the shareholder and they are
operated with the profit motive.

Key Differences Between NBFC and Bank

The difference between NBFC and bank can be drawn clearly on the following
grounds:

1. A government authorised financial intermediary that aims at providing

banking services to the general public is called the bank. An NBFC is a
company that provides banking services to people without holding a
bank license.
2. An NBFC is incorporated under the Indian Companies Act, 1956
whereas a bank is registered under Banking Regulation Act, 1949.
3. NBFC is not allowed to accept such deposits which are repayable on
demand. Unlike banks, which accepts demand deposits.
4. Foreign Investments up to 100% is allowed in NBFC. On the other hand,
only banks of the private sector are eligible for foreign investment, and
that would be not more than 74%.
5. Banks are an integral part of payment and settlement cycle while NBFC,
is not a part of the system.
6. It is mandatory for bank maintain reserve ratios like CRR or SLR. As
opposed to NBFC, which does not require to maintain reserve ratios.
7. The deposit insurance facility is allowed to the depositors of banks by
Deposit Insurance and Credit Guarantee Corporation (DICGC). Such
facility is unavailable in the case of NBFC.
8. Banks create credit, whereas NBFC is not involved in the creation of
credit.
9. Banks provide transaction services to the customers, such as providing
overdraft facility, the issue of traveller’s cheque, transfer of funds, etc.
Such services are not provided by NBFC.
Conclusion

NBFC’s are mainly established to grant credit to the poor section of the
society, whereas the banks are chartered by the government to receive
deposits and grant credit to the public. The licensing regulations of a bank are
more stringent than that of an NBFC. Moreover, a bank cannot operate
any business other than the banking business, but an NBFC can operate such
business.