An Overview of Indian NBFC Industry

Contents
An Overview of Indian NBFC Industry ..................................................................................................... 1 Classification of Indian NBFCs ......................................................................................................... 2 Key players ...................................................................................................................................... 2 Key Growth Drivers ............................................................................................................................. 3 Performance of key industry segments .............................................................................................. 3 Indian automobile industry............................................................................................................. 3 Indian tractor industry .................................................................................................................... 4 Construction equipment ................................................................................................................. 4 Housing finance............................................................................................................................... 4 Gold loans ....................................................................................................................................... 4 Regulatory landscape .......................................................................................................................... 4 Usha Thorat Committee recommendations ................................................................................... 5 Effects of recommendations on the industry ................................................................................. 5 Opportunities ...................................................................................................................................... 5 Financial inclusion ........................................................................................................................... 5 Vehicle financing ............................................................................................................................. 6 SME financing.................................................................................................................................. 6 Housing finance............................................................................................................................... 6 Challenges ........................................................................................................................................... 6 Future prospects ................................................................................................................................. 7

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An Overview of Indian NBFC Industry

The Non Banking Financial Companies (NBFCs) have emerged as an integral part of the Indian financial system by catering to the credit needs in under-served areas and unbanked customers. The sector has been recognised as complementary of banking system by introducing diversification in the financial sector, simplified sanction procedures, flexibility and timeliness in meeting the credit needs. According to the Economic Survey 2011, NBFCs as a whole account for 11.2% of assets of the total financial system. In the rural and semi-urban India, the sector plays a critical role in financing long-term infrastructure, construction equipment, leasing, real estate, vehicles and SMEs. At present, more than 80% of equipment leasing and hire purchase financing in India are financed by NBFCs (Source: Indian Brand Equity Foundation).

Classification of Indian NBFCs

The NBFCs are broadly divided into the following categories depending on their nature of business: Equipment Leasing Company Hire-purchase Company Loan Company Investment Company Infrastructure Finance Company

Key players
Shriram Transport Finance Mahindra & Mahindra Financial Corporations Magma Finance Bajaj Finserv Religare Enterprises LIC Housing Finance Muthoot Finance Manappuram Finance JM Finance

In Financial Year 2013, the lowest growth of the Indian economy (GDP growth 5%) affected the NBFC industry as well. The industrys retail credit projects 17% growth in FY 2013, compared to 32% in 2012 (Source: CARE). The key industry segments (construction equipment, commercial vehicle and gold) which constitute around 56% of total retail credit, witnessed moderate growth. Nevertheless, the industrys long-term outlook remains stable. The major NBFCs maintain a strong buffer against expected credit quality pressures.

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Key Growth Drivers

Advanced technologies to accelerate operational efficiency by 30-40 per cent Well-informed rural population driving strong credit growth Innovative, diversified and customised product portfolio

Flourishing consumer credit market (Indian consumer market to grow by 67% from 2013 to 2020)**

Growth Drivers of Indian NBFC Industry

Supporting Government initiatives, such as the National Rural Financial Inclusion Plan

Growing per capita income

(** Source: Euromonitor)

Performance of key industry segments

Indian automobile industry
The Indian automobile industry witnessed a sluggish growth in FY 2013. The overall production of the industry declined considerably. Rising inflation, interest rate and oil price weakened the consumer sentiments. Increased excise duty further affected the growth of the passenger car and commercial vehicle segment. Overall automobile export has also witnessed de-growth of 1.34%, as compared to 2012. Passenger Vehicle exports grew by 9.02%, while the other segments like CV, three wheelers and two wheelers fell by 13.35%, 16.22% and 0.72% respectively.

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Indian tractor industry

Indian tractor market, the largest global tractor market by volume, declined marginally to touch 5,25,970 tractors. It registered 1.7% lower growth compared to the previous year after witnessing high growth of 32%. A delayed South West monsoon and deficient North East rains impacted the Indian agriculture, especially in the southern states. This, together with the slowdown on infrastructure spending and restrictions on quarry operations in certain parts of the country resulted in lower sales of new tractors as compared to the previous year.

Construction equipment
Owing to the slow infrastructural investments, slow growth in agriculture and various regulatory hurdles, the construction equipment industry is expected to witness around 12-15% decline in volumes in FY 2013. However, construction activity in the private sector may revive during the latter half of FY 2014, supported by a proactive policy environment. Besides, the prevailing large demand-supply gap in the domestic power sector and the need for basic infrastructure are expected to drive the construction equipment segment. (Source: ICRA)

Housing finance
Indias housing finance market projects an estimated growth of 20%, reaching a size of Rs. 1.25-1.3 trillion by the end of 2013. However, the housing finance market may witness increasing number of bad loans as greater competition forces lenders into stepping up volume to maintain profit. (Source: National Housing Bank)

Gold loans
The steady growth of gold loans market is one of the key contributors of retail NBFC growth. The Rs. 1 trillion gold market projected a 10-12% growth in FY 2013. However, the Reserve Bank of India had introduced stringent regulatory norms and restricted the Loan to Value ratio of gold loan NBFCs at 60%. The regulation curtails the availability of gold loans, which may impact the trade volume of the segment.

Regulatory landscape
Indian NBFCs operate under stringent guidelines. In fiscal 2013, RBI introduced new guidelines on securitisation and Priority Sector Lending, incorporating recommendations of MV Nair Committee. The revised Guidelines recommend: Interest spread cap of 8% is higher than the original recommendation of 6% No cap on the amount, which banks can buy through this route

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No restriction on NBFCs on amount of securitisation/assignment

Usha Thorat Committee recommendations

RBI has proposed new draft Regulatory Guidelines for NBFCs, based on the Usha Thorat Committee recommendations, which primarily includes: Tier I ratio of registered NBFCs to be increased to 10% and three years be given to achieve the required ratio (currently the minimum Tier I ratio for retail finance NBFCs is 7.5%). Asset classification and provisioning norms similar to those for banks, including standard asset provision at 0.40% (current 0.25%) and 90 days overdue norm for classifying Non-Performing Assets (NPA) from Q1 FY 2016 Strict corporate governance; RBIs permission is necessary for any change in control, sale of 25% stake and for appointment of CEOs Risk weights will be increased to 150% for capital market exposures and 125% for commercial real estate exposures (from the current 100% for both these categories). NBFCs with asset size below Rs. 250 Million will be exempted from registration with the RBI

Effects of recommendations on the industry

The policies, if implemented, will enhance long-term growth of the NBFC sector, even though some of the clauses can impact profitability in the early stages of implementation. The industry is less likely to have any material impact from the requirements of higher Tier I ratio and liquid asset coverage, as major NBFCs maintain high capital ratios and well-matched asset-liability tenors (Source: India Ratings). If the proposed requirement of registration of NBFCs at an asset size of Rs. 250 Million is implemented, the industrys small and mid-sized NBFCs will be consolidated (Source: RBI).

Opportunities
Financial inclusion
Despite the enhanced financial awareness in rural India in recent times, it has a long way to go. According to Census 2011, rural India: Covers 38% of total pan-India bank branches (32,000 branches) Offers bank access to 39% population Constitutes 9% in total deposits, 7% in total credit, 10% in life insurance and 0.6% in non-life insurance business

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Indias Government has focused on financial inclusion to provide credit facilities and other government-sponsored benefits to the rural population, which catalyses the industrys growth opportunities.

Vehicle financing
In the last five years, Commercial Vehicles (CV) loan disbursements grew by around 10% per annum owing to the growing CV sales. Moving forward, the focus of market players to drive sales and enhanced vehicle financing will augur well for the segment. However, finance penetration in this segment was impacted during the year due to the economic volatility and weak sentiment of financiers. Nevertheless, steady growth in vehicle demand and increase in finance penetration is expected to drive the CV finance industry over the next five years. By 2016-17, vehicle financing penetration levels will reach 74% for cars and 66% for UVs, following moderation in interest rates and alleviation of credit risks. These factors are expected to accelerate the vehicle finance industry growth by 18-20%, reaching Rs. 1,150 Billion in 2016-17. (Source: CRISIL)

SME financing
Despite considerable growth over the past few years, Indias Small and Medium enterprises (SMEs) often lack access to timely and adequate credit to meet working capital requirements. A majority (92.77%) of Indias SMEs lack access to finance, while only 5.18% avail finance from institutional sources (Source: YES Bank). Hence, the sector has immense potential to fuel industry growth.

Housing finance
The 12th Five Year Plan (2013-17) estimates a housing shortage of over 40 Million, especially in rural India (Source: Planning Commission). Several schemes introduced by the National Housing Bank and the Government of India to bridge the housing demand-supply gap will help the industry to grow. The housing demand is further magnified by: A favourable demographic profile (65% of the population is below 35 years) Growing family nuclearisation, leading to higher housing demand Enhanced affordability

By 2015, the home loan portfolio of finance companies is expected to reach Rs. 3,116 Billion.

Challenges
An overall sluggish economy, combined with declined automobile demand, project moderate growth of the industry in the coming years. The industry witnessed standardised products with similar payment terms and low processing fees in the wake of enhanced competition. The economic slowdown can raise the delinquency rate and enhance credit costs.

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The adverse operating environment around the Heavy and Medium Commercial Vehicles and Construction Equipment (CE) segments will keep asset quality under pressure. It may increase the aggregate gross NPA (NPA 180 days overdue) ratio of the key NBFCs to 2.7%-3.0% in 2013 from 2.1% in FY 2012. Unlike banks, NBFCs depend on non-retail borrowing. The regulatory requirements may restrict the banks to fund the NBFC sector. A tight liquidity condition will further increase costs of funds for the industry. (Source: India Ratings)

Future prospects
Global economic volatility, weak investor sentiment and increased competitions significantly affected the growth of Indian NBFCs. However, the long-term growth of the industry remains steady, owing to the expected revival of the key contributor industries. Moving forward, the NBFCs have to focus on their core strengths while improving on weaknesses. They will have to be very dynamic and constantly endeavour to search for new products and services in order to survive in this competitive financial market.

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