Classification of NBFCs According to RBI

NBFCs are classified on the basis of their liability structures, the type of activities they undertake and their systemic importance.

NBFCs were categorized as Type I and Type II companies in June 2016. The applications for Type I NBFCs, which do not have / intend to accept public funds and do not have / intend to have customer interface,areconsidered on a fast- track basis.

In terms of liability structure, NBFCs are classified into two categories

(i) NBFC accepting deposits from customers

(ii) NBFC which does not take deposits from customers

• NBFCs taking deposits from public are referred to as NBFC-D and those who don’t take public deposits are referred to as NBFC- ND • Those NBFCs, NBFCs-ND with an asset size of Rs.100 crore and above (as per the last audited balance sheet) are designated as systemically important NBFCs- ND (NBFCs-ND-SI)

 Among NBFCsND, those with an asset size of ?5 billion or more are classified as NBFCs-ND-SI. At the end of September 2018, there were 108 NBFCs-D and 276 NBFCs-ND-SI as compared with 168 and 230, respectively, at the end of March 2018. Since 1997, the Reserve Bank has endeavoured to limit the operations and growth of NBFCs-D with the objective of securing depositors’ interest. This strategy was adopted in recognition of the fact that these deposits are not covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). NBFCs-D with investment grade rating are allowed to accept fixed deposits from the public for a tenure of 12 to 60 months only with interest rates capped at 12.5 per cent. 

NBFCs can also be categorised on the basis of activities undertaken as they typically focus on niche segments and fulfil sector– specific requirements. Consequently, their varied business models require appropriate modulation of the regulatory regime. Till 2010, the NBFC sector was divided into five categories viz., asset finance companies; loan companies; residuary non-banking companies; investment companies and mortgage guarantee companies. Since then, however, newer types of activity have been added to the NBFC space. At the end of September 2018, there were 12 activity-based classifications of NBFCs.(Table VI.1)

Table VI.1: Classification of NBFCs by Activity

At the end of September 2018, the number of NBFCs registered with the Reserve Bank declined to 10,190 from 11,402 at the end of March 2018. NBFCs are required to have a minimum net owned fund (NOF) of ?20 million. In a proactive measure to ensure strict compliance with the regulatory guidelines, the Reserve Bank cancelled the Certificates of Registration (CoR) of NBFCs not meeting this criterion. The number of cancellations of CoRs of NBFCs has exceeded new registrations in recent years. 

Ownership Pattern  NBFCs

NBFCs-ND-SI constitute 84.8 per cent of the total assets of the NBFC sector. Within the NBFCs-ND-SI sphere, government owned NBFCs hold more than a third assets, indicating their systemic importance (Table VI.2). During 2017-18, the regulatory requirements for government-owned NBFCs—both non-deposit taking and deposit taking—were aligned with those for other NBFCs in a phased manner. NBFCs-D accounted for 15.2 per cent of total assets and 17.6 per cent of the total credit deployed by NBFCs at the end of March 2018. Non-government companies dominate this segment, accounting for 87.5 per cent of assets of all NBFCs-D. Unlike private limited NBFCsND-SI in which 98 companies constituted 16.1 per cent of the total assets, four private limited NBFCs-D accounted for 21.9 per cent of total assets, pointing to concentration of assets. 

Table VI.2: Ownership Pattern of NBFCs

(At end-March 2018) 

Sectoral Credit of NBFCs

Industry accounts for more than half of total credit extended by NBFCs, followed by retail, services and agriculture. A significant part of the credit to industry is provided  by government-owned NBFCs, especially by NBFCs-IFC. Retail loans of NBFCs grew at a robust 46.2 per cent during 2017-18—on top of a growth of 21.6 per cent during 2016-17—reflecting upbeat consumer demand, especially in the vehicle loans segment. Credit to the services sector was driven mainly by commercial real estate and retail trade. The growth in lending to commercial real estate is noteworthy in view of a sharp deceleration in SCBs’ credit to this sector. Credit to agriculture and allied activities revived during 2017-18, reflecting the low base of the preceding year. NBFCs’ lending to the MSME sector was also robust, compensating for the deceleration in SCBs’ credit (Table VI.6). Increasingly, NBFCs are looking for newer avenues to diversify their lending portfolios . 

Table VI.6: Credit to Select Sectors by NBFCs

Regulations on NBFCs taking Deposits

1. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid certificate of registration with authorization to accept public deposits can accept/hold public deposits

2. New NBFCs are not allowed to raise public deposits for period of two years from the date of registration. After completion of two years, detailed review is taken of the company by the regulator

3. The NBFCs can accept/renew public deposits for a minimum period of 12 months and maximum period of 60months. They cannot accept deposits repayable on demand

4. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.

5. NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR account.

6. NBFCs with net owned fund (NOF) of less than Rs.25 lakhs (with or without credit rating) are not entitled to accept public deposits

7. Evaluation of the quality of management in respect of the promoters/directors is taken into consideration while giving allowance for taking public deposits

Ongoing Regulations: NBFCS-D (Holding Public Deposits)

The NBFCs accepting public deposits should furnish to RBI:

• Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors

• Statutory Annual Return on deposits - NBS 1

 Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise

• Quarterly Return on liquid assets • Half-yearly Return on prudential norms

• Half-yearly ALM (Asset Liability Management) Returns by companies having public deposits of Rs 20 crore and above or with assets of Rs 100 crore and above irrespective of the size of deposits • Monthly return on exposure to capital market by companies having public deposits of Rs 50 crore and above

• A copy of the Credit Rating obtained once a year along with one of the Half-yearly returns on prudential norms

Other Regulations: NBFCs-ND (Not Holding Public Deposits)

• The NBFCs-ND having assets size of Rs 100 crore are required to submit a Monthly Return on important financial parameters of the company

• Board resolution to be passed to the effect that the company have neither accepted public deposit nor would accept any public deposit during the year

3. Primary Dealers

 As on March 31, 2018, there were 21 primary dealers (PDs) – 14 operating as departments of banks and 7 standalone PDs registered as NBFCs under Section 45 IA of the RBI Act, 1934. 

Operations and Performance of PDs

The PDs have mandatory obligations to participate as underwriters in auctions of government dated securities. They are also mandated to achieve a minimum success ratio (bids accepted as a proportion to bidding commitments) of 40 per cent in primary auctions of treasury bills (T-bills) and cash management bills (CMBs), assessed on a halfyearly basis.

With respect to auctions of T-bills and CMBs, all PDs achieved the stipulated minimum success ratio of 40 per cent. Outperforming their minimum prescribed performance threshold in 2017-18, the PDs achieved a share of 66.5 per cent in total issuance of T-Bills / CMBs during the year, though it was lower than 74.4 per cent in the previous year. In H1:2018-19, the PDs achieved a share of 72.1 per cent in total issuance of T-Bills/CMBs. 

During 2017-18, the government issued dated securities with face value of ?5,880 billion through auctions, marginally higher than ?5,820 billion during the previous year. PDs’ share of allotment in the primary issuance of dated securities rose during 2017-18 to 53.7 per cent compared to 47.5 per cent in 2016-17. However, against a total issuance of ?2,760 billion during H1:2018-19, allotment to PDs stood at 46.9 per cent as against 49.3 per cent during H1:2017- 18 . There was partial devolvement on three instances amounting to ?103 billion during 2017-18 as against four instances amounting to ?53 billion in 2016-17. Furthermore, there was devolvement on four instances during H1:2018- 19, amounting to ?80 billion. The underwriting commission paid to PDs increased significantly to ?613.1 million in 2017-18 as compared with ?356.6 million in the previous year due to the higher possibility of devolvement. Consequently, the average rate of underwriting commission increased in 2017-18 vis-a-vis 2016-17. In H1: 2018-19, underwriting commission paid to PDs amounted to ?876.3 million. 

In the secondary market, all PDs individually achieved the required minimum annual total turnover ratio target in outright and repo transactions for dated G-secs and T-bills. For the period H1:2018-19 as well, the required minimum annual total turnover ratio target was achieved by all PDs individually.

Performance of Standalone PDs 

The secondary market turnover of standalone primary dealers (SPDs) decreased on a year-on-year basis in the outright segment while it increased marginally in the repo segment during 2017-18, reflecting underlying slack in the market. However, the SPDs’ share in outright, repo and total market turnover increased marginally during the year. For the period H1:2018-19, the share of SPDs in the secondary market in the outright and repo segment was 31.7 per cent and 33.9 per cent, respectively. Total market share across both segments was 33.0 per cent for the period. 

During 2017-18, PDs achieved the minimum success ratio prescribed for them in primary auctions of T-bills and CMBs as well as in outright and repo transactions in the secondary market. The average underwriting commission paid to PDs during the year also increased due to an increase in devolvement. The net profits of SPDs, especially their trading profits declined considerably in 2017-18 due to the prevalence of market uncertainties. However, they have a comfortable capital position.