A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). Financial activity as principal business is when a company's financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI.

RBI has made various alterations in the NBFC norms in recent years in order to improve the issues in the financial sector. All NBFCs audited balance sheet will be considered important. NBFC are also required to maintain a minimum n reserve of 10%. Further NBFC is required to comply with the minimum regulations and capital norms as far as possible. Those companies that are registered with RBI as NBFC are exempted from some provisions of NBFCS as per the recent report. In 2014, RBI announced that the primary compulsory requirements in order to accept the deposits from the public are obtaining minimum credit rating reserve requirements. NBFC mentioned the increment rate of 1.5 that was allowed to fund the reserve requirements of the public. But there were companies that were not able to raise their funds at such aggressive costs.

Recently, members of NBFC met with RBI regarding urging for relaxation rate in the norms of credit rating rates as they are unable to meet the reserve requirements as allowed by RBI. During 2014-2015, there has been the upward trend in terms of raising funds mainly with the help of commercial papers and debentures. The overall balance sheet of NBFC showed a considerable improvement in its performance regarding maintaining of the considerable amount of reserves as stated by RBI related to the progress of NBFC sector in the segment of Auto Loan, Home Loans.

Industry Overview

During 2016, there has been significant growth in the performance of NBFC. Their contribution to the financial sector was above 14% in 2015. The success of NBFC depended on some of the factors which included: lower cost, strong risk management capabilities, better understandings with the segments of the segment. RBI has permitted 100% Foreign Direct Investments (FDI) that were carried by NBFC that helped to bring foreign capital in the country. In fact, this was one of the recent improvements of NBFC. Recently, a report revealed that India will require a total investment of about $1 trillion for meeting the requirements of demands of housing with the banks and infrastructure facilities, and NBFCs were the one that was responsible for providing funds for this purpose.

In September 2016, five NBFCs were cancelled by RBI while two NBFCs submitted their certificate to the central bank. In recent years, after RBI announced some of the measures in order to improve the corporate base of the market, the stock of some banks decreased while the stock of NBFC increased. NBFC were benefited after getting the license of Universal Banking from RBI. During five years, NBFC has doubled their share in the market in segments such as Auto Loans, Home Loans. Profitability in the financing of the home loans leads to improvement in the overall economy. The performance of NBFC with reference to the above-mentioned segments was: its relative impact based on the profitable outlook and growth, the complete assessment of the market share of each segment. From the above figure, it can be stated that during 2013-14, there has been the hike in the financial performance of NBFC; as a result, their market started flourishing in a better way.

There has been the constant decrease in the financial growth of NBFC from 2011-2015. This was mainly due to the cancellation of license done by RBI. Moreover, the investment of NBFC also had fewer capitalization norms that were specified by the government. The reason behind this downward trend was mainly because of the cancellation of the license that was done by RBI as because NBFC's were not able to meet the credit requirements as specified by RBI. Overall, RBI's policy of cancelling the registration of NBFC had the negative impact on the economic growth. However, as time passed by that is in the year 2015-16, the performance was stable in other words there was neither improvement in the performance nor decrease in the performance. But during 2016-17, financial performance improved to a great extent as a result of which RBI didn't cancel the license of some of the weak NBFC companies.

Demonetization weighing heavily on the sector

In 2015, growth in loans remained lethargic for the sector while the Non-Performing loans continued to rise. In the current fiscal, NBFCs were able to mark a recovery by posting moderate earnings. NBFC evolved as an important part of Indian financial services that operated across the variety of segments including Home Loans, Auto loans, and gold loans. The financial sector emerged as an important source of financing and provided strong competition to the financial as well as bank institutions. They are certainly capable of spreading risk as a result of financial distress. However, in next quarter there will be a challenging phase with respect to the growth of assets thereby having the impact in the development of growth.

According to the annual report of 2016, Cholamandalam Finances stated that the home loans that were provided by them had a steady increase in the growth. Their business has been flourishing in 45 branches of the states of Karnataka, Tamil Nadu, Andhra Pradesh, Gujarat, and Rajasthan. The main aim of their business was to the construction of homes. As per the report, the growth of NBFC will be around 16-18% as compared to 5 year this is normally due to a slowdown in the new launches as well as sales. According to the report, the outlook looks positive. The quality of the assets of the housing companies was good in comparison the Non- performing assets. This made the housing finance one of the most leading products in India with reference the increase in the competition. Thus, it leads to overall improvement in the growth of the finance industry. However, there were certain players who started to enter as self-employed borrowers. Improvement in the housing segment leads to high growth and entry of lots of players.

As per the annual report of 2016, Sundaram finance, despite the growth of credit, the credit growth of the housing companies hiked any 18%. After considering the favorable impact of the interest rates offered by RBI Sundaram Finance got the license of 41 finance housing companies that lead to considerable growth in the financial sector. According to the operational and financial performance on the basis of borrowing in 31st march 2016 showed that Out of the total borrowings the Sundaram Finance, NHB finance reconstructed 29%, term loans reconstructed 14%, non-convertible debentures reconstructed 33%, public deposit reconstructed 16%, and commercial papers reconstructed 8%. Overall showed an NBFC had a positive effect of the norms that were developed by RBI. Some of the possible outcomes of the Sundaram Finance with reference to NBFC The housing finance industry became very competitive after entry of new player's, a cost of funding became very moderate, a number of new launches slowed down, projects were kept on hold.

Outlook

The NBFC Sector witnessed a merger process in the last few years where those NBFCs that are weaker, are gradually diminishing and are moving out of the track. However, currently, the decline of the trend in NBFC is due to the cancellation of the registration by RBI for not meeting the requirements of credit and also due to movement of various NBFCs to the category of Non-Deposit taking. With respect to the holdings of the banks, NBFCs such as Cholamandalam finance and Sundaram finance are their biggest customers who are responsible for selling short-term commercial papers and short-term bonds. NBFC are required to increase their funds on the basis of Non-Performing Assets. The recommendations made by Central Bank on the basis are made for bringing changes in the regulations of the finance sector. Moreover, capital adequacy norms are being used by RBI for increasing the performance of NBFCs.

Consolidated Balance Sheet of NBFC Sector Y-o-Y Growth

Source: RBI, Figs in %

Source: RBI, Figs in %