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Contents

P2 P4 P6
Foreword / Message from ASSOCHAM / NBFC market context / Alternative credit
P8 P15 P23
scoring / NBFC Regulations / Recent trends in funding sources for NBFCs

Non-Banking Finance
Companies:
The Changing
Landscape
www.pwc.in
Foreword from PwC
In countries such as the US and UK, large credit bureaus like Equifax, Experian and TransUnion furnish
lenders with credit scores primarily based on the loan applicants past repayment data. These credit
bureaus have also set up shop in India over the last decade, along with other players such as Credit
Information Bureau India Limited (CIBIL) and CRIF High Mark. These players operate by leveraging
sophisticated data-capturing and sharing capabilities to gather, store and share accurate loan and
repayment history. This reliance on traditional credit infrastructure presents a significant lending
challenge in India, where bureau data is often incomplete, if not altogether unavailable. According to the
World Bank, less than 1 in 10 people in low- and middle-income countries around the world have a
documented credit history.
The World Bank has endorsed the use of reported non-financial data in the credit origination processes and
considers it a powerful tool for driving financial inclusion in emerging markets. More recently, in the
Financial Inclusion 2020 (FI 2020) roadmap, Accion highlighted the great value of alternative data as an
instrument to increase financial inclusion and help achieve their FI 2020 objectives.
Currently, payment history, amounts owed, length of credit history, new credit taken and types of credit
used form the basis of credit analysis for most non-banking finance companies (NBFCs). However, in
India, unless people plan to apply for a new credit card or loan, most people give little or no thought to
their credit scores. For those who lack credit, the achievement of a score is often a vicious cycleyou
cannot get credit without a score, and you cannot build your score without credit. Barely one-fifth of the
Indian population has a valid credit score, and hence, most Indians
are unable to get a loan from an NBFC or bank in the country. Further complicating this scenario are
economic pressures that are driving the demand for more granular credit decisioning insight that traditional
credit scoring models cannot provide.
Given this context, alternative credit scoring can help lenders establish a reasonable basis for extending
credit by assessing data streams that traditional credit bureaus currently do not tap into. Data from online
social networks, mobile phone records and psychometrics are helping to evaluate the potential of
borrowers in cases where traditional credit information is scarce, enabling new lending and greater control
over risk.

NBFCs that have focussed on traditional data sources to extend lending need to realise the value of
alternative data and the need to invest in technology and analytics to develop advanced credit scoring
models that incorporate non- traditional data sources. Only then will they be able to participate in the
wave of change that has the potential to extend lending to Indias creditworthy yet financially excluded
population, and also simultaneously assisting the Indian government to achieve its goal of full financial
inclusion.

2
Furthermore, as newer business models (of the NBFCs) evolve, so must the regulations governing the
NBFCs. In order for the NBFCs to realise their true potential in the economy, the regulatory framework
must succeed in walking the thin line between under-regulation and over-regulation. With this objective, the
Reserve Bank of India (RBI) has brought about a spate of reforms in the NBFC regulations. Regulations for
smaller NBFCs that are not systemically important have been rationalised, while systemically important
NBFCs have been continuously strengthened to bring them on a par with the global standards. Some
changes are also in the pipeline and should be rolled out soon. It will be interesting to see how the NBFC
sector and the regulator work with each other to usher in an era of financial inclusion.

This report is divided into two parts. The first part presents an analysis of various alternate credit scoring
methodologies and their feasibility in the Indian context. The second part outlines a broad overview of how
the regulatory framework for NBFCs has evolved, the recent liberalisation for small NBFCs, and the
strengthening of regulations for large NBFCs, as well as some changes that could be expected in the near
future.
We congratulate the Associated Chambers of Commerce and Industry of India (ASSOCHAM) for
engaging with the industry on this game-changing subject. We thank Paritosh, Amit, Rupal,
Behram, Aastha, Nitya, Dipti and Dhawal of the Financial Services team of PricewaterhouseCoopers (PwC)
for the research and writing of this report.

Hemant Jhajhria Samip Barlota Mayur Gala


Partner Partner Director
Strategy and Digital Tax and Regulatory Tax and Regulatory
Financial Services Financial Services Financial Services

Amit G. Jain Paritosh Chhabria


Associate Director Associate Director
Tax and Regulatory Strategy and Operations
Financial Services Financial Services
3
Message from ASSOCHAM

Non-banking finance companies (NBFCs) form an integral part of the Indian financial
system. They play an important role in nation building and financial inclusion by
complementing the banking sector in reaching out credit to the unbanked segments of
society, especially to the micro, small and medium enterprises (MSMEs), which form the
cradle of entrepreneurship and innovation. NBFCs ground-level understanding of their
customers profile and their credit needs gives them an edge, as does their ability to innovate
and customise products as per their clients needs. This makes them the perfect conduit for
delivering credit to MSMEs.

However, NBFCs operate under certain regulatory constraints, which put them at a
disadvantage vis--vis banks. While there has been a regulatory convergence
between banks and NBFCs on the asset side, on the liability side, NBFCs still do not enjoy
a level playing field. This needs to be addressed to help NBFCs realise their full potential
and thereby perform their duties with greater efficiency.
Moreover, with the banking system clearly constrained in terms of expanding their lending
activities, the role of NBFCs becomes even more important now, especially when the
government has a strong focus on promoting entrepreneurship so that India can emerge as a
country of job creators instead of being one of job seekers. Innovation and diversification are
the important contributors to achieve the desired objectives.
I am happy to note that ASSOCHAM is organising the NBFC Summit to bring the various
stakeholders and the policymakers together on a common platform. I am sure the NBFC-
specific issues will be discussed and debated at length and the findings from this event will
form the policy prescription that ASSOCHAM will eventually present to the regulator and the
government, so that necessary action can be initiated to ensure healthy growth of the NBFC
sector.

Sunil Kanoria
President
ASSOCHAM

4
Message from ASSOCHAM

The NBFC sector in India has undergone a significant transformation over the past few years.
It has come to be recognised as one of the systemically important components of the
financial system and has shown consistent year-on-year growth. NBFCs play

a critical role in the core development of infrastructure, transport, employment


generation, wealth creation opportunities, and financial support for economically
weaker sections; they also make a huge contribution to state exchequer.
ASSOCHAM, along with PwC, has prepared this knowledge report with the objective of
examining the issues and challenges faced by NBFCs and to suggest measures that can be
taken to optimise their contribution.
We hope that this study will help regulators, market participants, government departments
and research scholars to gain a better understanding of the role of NBFCs in promoting
financial inclusion in our country. I would like to express my sincere appreciation to the
ASSOCHAM-PwC team for sharing their thoughts, insights and experiences.

D S Rawat
Secretary General
ASSOCHAM

5
NBFC market context
have been
the bread
and butter

thereby for retail


So far, non-banking providing banks.
finance companies NBFCs with Going
(NBFCs) have the forward,
scripted a great opportunity the latent
success story. Their to increase credit
contribution to the their demand of
economy has grown presence. an
in leaps and bounds emerging
from 8.4% in 2006 to The success India will
above 14% in March of NBFCs allow
2015.1 In terms of can be NBFCs to
financial assets, clearly fill the gap,
NBFCs have attributed to especially
recorded a healthy their better where
growtha compound product traditional
annual growth rate lines, lower banks have
(CAGR) of 19% over cost, wider been wary
the past few years and effective to serve.
comprising 13% of reach, strong Additionall
the total credit and risk y,
expected to reach management improving
nearly 18% by 2018 capabilities macroecon
19.2 to check and omic
control bad conditions,
debts, and higher
With the ongoing better credit
stress in the public understandin penetration,
sector banks due to g of their increased
mounting bad debt, customer consumptio
their appetite to lend segments. n and
(especially in rural Not only disruptive
areas) is only going have they digital
to deteriorate, shown trends will
success in allow
their NBFCs
traditional credit to
bastions grow at a
(passenger healthy rate
and of 710%
commercial (real
vehicle growth
finance) but rate)3 over
they have the next
also five years.
managed to Clearly,
build NBFCs are
substantial here to stay.
assets under
management Retail
(AUM) in NBFCs
the personal to
loan and witness
housing robust
finance growth
sector which despite
some tempor ary hiccups
We mer the mes and the 7th prop
believ fina rural Pay erty
Figure 1: e that nce secto Commission, ),
Credit
Growth at strong seg r. we remain
NBFCs as a urban me confident of
% of total dema nt. Drive healthy growth
credit
nd Ho n by in the consumer
and we highe finance
an ver, r segment. On the
25.0% increa ther dispo small and
se in e sable medium
20.0%
credit ma incomenterprises
penetr y es (SME) front,
15.0% 13.0% 13.0%
ation be a throu business
will peri gh and
10.0%
contin od increa professional
ue to of sed loans seem to
5.0%
drive mut effect be on a
the ed ivene growth
0.0%
growt gro ss of trajectory, but
h in wth gover mortgage-
the fro nmentbacked loans
consu m sche (loan against
th cto E umpti
e r s on
gr un ) 5 D
F ow its istribu
a th (P a tion
c of S n reach
t N Us d and
o B ) sector
r F 2 s s
s Cs Late m where
: nt a traditi
c cre l onal
1
o
Str dit l banks
n de do not
t ma a lend
r nd n 4
i 3 d Inc
b Digit
u 1 Kotak
al m Securities analysis,
t dis e https://www.kotaksec
urities.com/ksweb/M
i rup d eaningful-
n Minutes/Why-are-
tio i Non-Banking-
g n, u Financial-
Companies-
esp m important and PwC
t eci
2 India analysis
http://articles.econo
mictimes.indiatimes.
com/2016-03-
16/news/71573258_1
_nbfcs-indiabulls-
housing-finance-
consumer-financing
o all e 3trends Historical
and PwC
y analysis
6
Figure 2: NBFC Retail AUM (in trillion INR)

8.00
6.04
6.00 5.01
4
3.68 2.00 .
4.00 3.36 2
2
-
Mar '13
p subseque g the with
o ntly Unified payment
Overall, NBFCs
o financial Paymen s banks,
are on their way
r access) t bill
to setting a
r by Interfac payment
record of a
u granting e (UPI) provider
robust growth
r in and s
a of 1922%
principal Bharat
l CAGR in retail
licenses Bill
i credit to reach
to as Paymen
n an AUM of
many as ts
c approximately
21 System.
o 6.044 trillion
players
m INR by March
to
e 2017.
establish The
g introdu
r Way forward specialty ction of
banks
o for NBFCs over the such
which form a
w next 18 speciali
large proportion For a large and
t months. sed
of the SME loans, diverse country This is
h players
will remain muted such as India,
a over and and
due to the ensuring financial above
n system
increased access to fuel
d the s will
competition from growth and
t focussed truly
new entrants in entrepreneurship approach
h transfor
the market and is critical. With
e of the m the
traditional banks, d the launch of
other bankin
who have been e government-
industry g value
successful in p backed schemes
bodies chain
capturing and l (such as the
such as in its
retaining the e Pradhan Mantri
the entirety
upper end of the t Jan-Dhan Yojana
National . This
ticket-sized band. e [PMJDY]), there
Payment present
d has been a
Gradual economic s sa
m substantial
recovery and Corporat strategi
o increase in the
proposed regulatory ion of c
n number of bank
changes (scrapping India opportu
s accounts;
of old commercial (NCPI) nity for
o however, a mere
vehicles [CVs] and to NBFCs
o 15%5 of adults
Bharat Stage [BS] further to
n have reported
VI pollution norms) strengthe ensure
s using an account
will lead to an n and sustain
h to make or receive
uptick in the overall augment able
a payments. The
CV segment, the growth
v government and
which in turn payment over a
e regulatory bodies
will drive s long
w have taken
growth in the ecosyste term.
e decisive steps to
pre-owned CV m by Partner
i increase this
sector. However, launchin ships
g number (and
c market, with a data tepid With the
o user base of 220 availabl credit launch of
and other financial
n million, and is e to be penetr the
institutions, such as
s expected to able to ation Digital
insurance and asset
u cross 300 serve in India
management
m million users by custom India. program
companies, will
e 2017. To stay ers Digital me, a
help NBFCs offer r relevant in such better. and flagship
the complete an environment, The social program
propositionthat i NBFCs need to absence data me of the
is, from deposits to s rethink of can Governm
lending, their strategy to income often ent of
investments and i enhance their proofs act as India to
transactions. The n product portfolio or IT a digitally
reach of NBFCs, c (positioning and returns surrog empower
along with their r pricing), due to ate society,
strong e processes tempor NBFCs
understanding of a (internal and ary/self to such will have
the market, can s customer facing) - docume to find
help them position i and end-to-end employ nts to ways to
themselves as a n customer ment help serve the
better alternative to g experience. are NBFCs millennia
the traditional ways l Additionally, some of make l
of banking. y they need to the better customer
leverage the vast primary credit s through
Furthermore, a digital (and reasons decisio digital
the Indian d social) customer for the ns. means.

4 ICRA
analysis on
Indian Retail
Non-Banking
Finance Market
for nine months
ending
December
2015,
http://www.icra.
in/Files/Articles
/NOTE-DEC-12
release.pdf
5 http://
indianexpress.c
om/article/india
/india-news-
india/in-india-
bank-account-
penetration-
surges-but-43-
dormant/
7
Alternative credit scoring: The game changer
the identity of an
individual and
determine their
intent and ability to
repay a loan. In
segments, while space has addition, the ability
All data is credit data. 6 also allowing for grown
This mantra is increasingly being followed by lenders to use non- smaller loan ticket significantly
traditional sources of datamany of them not directly related to sizes. Different from merely 2
moneyto augment their traditional transaction-based in 2013 to 30 in
underwriting mechanism. These non-traditional sources of data, lending models, 2015. These
coupled with advanced analytics, can be used to assess the especially those firms either
creditworthiness of large and previously untapped customer centred on peer-to- operate as
peer (P2P) lending NBFCs,
are being rolled intermediaries
out in India in for
order to allow banks/NBFCs
good applicants to or serve as a
demonstrate their P2P lending
quality. marketplace to
connect
As per the Tracxn individual
report on borrowers and
alternative lenders directly. By
lending in India, using a wide
the number of variety of non-
start-ups in the traditional data to
online consumer evaluate credit
lending risk, these start-ups
are able to verify
Figure 3: Growth of online consumer lending in to appropriate best suited lender leads approvals
India (Source: Tracxn Alternative Lending scientificall borrower to potentially higher and lower
Landscape, IndiaJuly 2015) y match the profile to the chances of loan
~ 27 d
and earn a at a to iduals loans,
invested in alternate lending million
a
interest
companies from January 2014
to July 2015.
y
s rates. commission low ear and and
USD from both er n small cater
Top busine predom
funded Such
lenders and cost luc
sector: borrowers. whi rat sses in inantly
SME players obtain to
lending charge
Additionally, le ive
P2P firms pro ret ing millenn
a
offer vidi ur person ials
Capital Float registr
customers ng ns. al,
1q ation
F
scope for inve auto,
unding: 16 million Lendingkart fee
USD q Funding: 9.5 negotiation of stor Thes worki
million USD (refun
2q Has a q Algorithm uses
dable interest rates, s an e ng
proprietary platform 1,500 data
using 2,000 data points points to score enabling opp firms capital
to assess in
credit application
creditworthiness
q Disbursal within borrowers to ortu assist and
3q some
Dis three days
nity indiv other
bursal within seven cases) obtain capital
Figure 4: The number of Times, who might test ven g ely traditional Online
online consumer lending Google
be either ame ien co credi lending system, tools/c
start-ups founded by year s former
(Source: Tracxn Chief salaried or nt ce mp t to alternate alculat
Alternative Lending Informa self- to pro ani other lending firms ors,
Landscape, IndiaJuly 6 tion employed. the vid es. wise provide knowl
2015) 2 Quot Officer
The rapid sim ed Bes ineli numerous edge
e by
Doug rise in the plic by ide gible features and centres
11
las number of ity, alte s borr tools for an , live
2008
Merri customers spe rnat ext ower enriched and chats,
ll to
the
over the past ed e end s seamless ability
New few years is and len ing unde customer to
York a true con din tim r the experience. track
application status, etc., are incre awar s and ience for ther res ng great customer
all the features that ase enes conven customers, eby ulti in er satisfaction.
8
Spotlight 1: Lending based on data from mobile
phone records
Indians are the second-largest mobile phone users (over 590 million unique users) in the world. 7 Every time these individuals
make a phone call, send a text, browse the Internet, engage social media networks on their phones, or top-up their prepaid
cards, they deepen the digital footprints they leave behind. Data from mobile phone records, prepaid top-ups, mobile bill
payments and mobile browsing or app download history can be used to assess consumer risk and determine the
creditworthiness of underserved customers. Lenders can use the output of their credit scoring to offer unsecured, small ticket,
short-term credit at a much lower cost than traditional loans.
Vodacom,8 a mobile service provider in Tanzania, has partnered with First Access, 9 a for-profit social business focussed on
data analytics using prepaid mobile data to predict credit risk for consumers who have never had a bank account or a credit
score.10 First Access offers an instant risk scoring tool for low-income customers by leveraging demographic, geographic,
financial and social network data from a subscribers mobile records. The scores are authorised by subscribers via text
message and delivered to participating financial institutions in real time, along with a recommendation on the loan size in the
local currency, and eligibility for instant disbursal. Through this partnership, Vodacom earns revenue and increases subscriber
loyalty while demonstrating a firm commitment to inclusive development and corporate social responsibility (CSR).

Figure 5: How the First Access credit scoring model works


consent
to use
phone
records
for
From: First credit Mobile phone records:
Access assess
ment Phone calls
If Texts Bill pay
you Airtime top-up Mobile mone
just
appl
ied
for a Demographic Geographic Financial Soc
loan
at
ABC
Ban
k
and
auth
oris
ed
your
mob
ile
reco
rds
to
be
use
at financial
Loan officer texts
Customer applies
customers mobile for loan d in
your
number to First cred
institution
it
Access eval
uati
on,
repl
y1
now.
Repl
y2
to
den
y.
Repl
y3
for
mor
e
infor
mati
on.

Customer
receives
SMS from
First
Access

1 requesting
First Access makes
If the First Access conducts
recommendations to the

customer
gives
consent credit assessment based loan officer via text
on various parameters message

8
http:/
/www
.voda
com. es/36806-First-Access-and-Vodacom-Tanzania-
com/
about
-us/ho
me
9 10 http://www.cs Ink-Financial-Inclusion-Deal, The Consultative
7
Internet
and
Mobile http://
www.f
irstac
cessm
arket.
com/
Associatio
nareofSocial
(IAMAI)
Social
Mobile
India
2015 India
research;
Digital,and
in
We rwire.com/press_releas Group to Assist the Poor CGAP.org
9
Spotlight 2: Rise of social media scoring
Internet partnership with
browsing data Lenddo to explore
Over the last decade, the proliferation of thorough credit by Lenddo include
to assess the alternative credit
assessments from credit bureaus has extended lending to a the number of
creditworthines scoring solutions
wider segment of the Indian population. Nevertheless, close social media
s of customers. based on non-
to 70% of the Indian population remains underserved by accounts linked to financial data
institutional lenders.11 the customers sources.
Kreditech,14 a
Germany-based Lenddo profile,
It is important to point out some interesting facts about the number of
online lender, is
Indias digital population. Out of 350 million active social media
already using
Internet users in India in 2015, 134 million actively use friends and
data gathered
social media platformsa number which is growing followers, the
from cookies,
exponentially.12 To add to these trends, increasing Internet length of active
browser
and mobile penetration, growing acceptability time on social
behaviour and
of online payments and favourable demographics are media, and the
social media to
expected to lead the e-commerce sector in India to a strength of the
determine the
record revenue of 120 billion USD by 2020.13 This customers social
creditworthiness of
explosion of e-commerce, Internet and social media usage network (the last
its clients in
in India has led to the emergence of a new breed of online of which is
lending platforms in India and abroad that leverage social Russia, Czech evaluated by how
media and Republic, Spain,
many friends
Mexico and
vouch for the
Poland. Since its
customers
launch in 2012, the
creditworthiness).
company has
In the companys
processed more opinion, their
than 250,000 algorithm is better
applications.15 at predicting the
intention and
Lenddo,16 a Hong
ability to repay the
Kong-based
credit compared to
company, is another
traditional
company which has
underwriting
been successful in
rolling out social practices.
media credit According to Jeff
assessment across Stewart, Lenddo
multiple CEO, artificial
geographies such as intelligence (AI) is
the Philippines, simply better at
Colombia and administering
Brazil. Leveraging credit in a fair
a proprietary way.17
algorithm, Lenddo
rates borrowers on
Back home,
a scale of 1 to 1,000
companies in India
based on their
have also begun to
likelihood to repay
realise the
a loan. The scoring
potential of using
is done on the basis
social media to
of thousands of data
evaluate credit
points gathered
history. Recently,
from social media
Lendingkart (a
activity across
Saama Capital and
multiple platforms.
Mayfield Fund-
Some of the data
backed start-up)
points used
announced a
Timeline- mobile in India in 2015, We are Social
Of- p://weares india-2015;
Alternativ 13 Morgan Stanley analysis,
e- ocial.com/ http://economictimes.indiatimes.com/industry/
Lending- Internet and services/retail/indian-ecommerce-market-to-
blog/2015 Mobile grow-fastest-globally-over-3-years-morgan-
Industry-
In- stanley/articleshow/51031652.cms
Association 14 https://www.kreditech.com/
/08/digital of India
India/16- 15
12-2015- (IAMAI) http://www.ft.com/intl/cms/s/0/12dc4cda-ae59-
11e5-b955-1a1d298b6250.html#axzz46L3fvkF9
-social-
89420/ research; 16 media/#599e2fa73f79;
11 BW Businessworld: A timeline
Digital,
http://www.forbes.com/sites/tomgroenfeldt/2015/
01/29/lenddo-creates-credit-scores-using-social-
https://www.lenddo.com/
of alternative lending industry in India, 12 htt mobile-
social and 17
http://businessworld.in/article/A- credit http://yahoofinance-
yahoopartner.tumblr.com/post/128188548527/w
hat-you-need-to-know-about-social-media-
10

The Reserve Bank of India (RBI) to the subsequent section for more lower level of Internet penetration
has consistently stressed on the information.) (~33%); therefore, the richness of
importance of micro, small and data available in relation to the rural
medium enterprises (MSMEs) in 1 Predictive power: Different population might pose a challenge.
fuelling economic growth. Despite sources of data have varying levels of
contributing significantly to predictability, a fact which must be Integration with traditional
Indias growth, a large majority of considered while evaluating which sources of data: Financial institutions
MSMEs are excluded from the type of data should be used. It is must realise that alternate sources of
formal crucial that the data be able to provide data form only one part of the credit
financial sector. Although NBFCs futuristic insights into customer scoring process and must assess the
and banks are already focussing their behaviour, particularly in relation to compatibility of various sources of
efforts on targeting this lucrative likelihood of repayment. Mobile and alternate data with their existing credit
yet underserved segment, they are psychometric data have demonstrated underwriting mechanisms. This will
limited by the inability to greater predictive capability when help them develop a more complete
evaluate the credit potential of compared with other sources such picture of their customers
borrowers with thin or invisible creditworthiness, thus reducing the
credit files, collateral or bank as Internet data owing to the more default rate. NBFCs and banks should
accounts. personal nature of mobile phones. On enter into partnerships with multiple
the other hand, customers can profile agencies both within and across
Although alternative credit their online behaviour to demonstrate industry sectors to enable more robust
scoring methods offer immense the attributes that lenders are data capturing.
opportunities for financial searching for.
institutions to grow their lending
portfolios while managing risk,
we
strongly believe that such alternative
2 Ability to reach a diverse
and widespread audience: In
data should be used to augment
emerging markets such as India, digital
the credit score gathered from
footprints are limited to a fairly small
traditional means rather than using
size of the overall population. Alternate
it as a standalone means of credit
data must be selected keeping in mind
underwriting. These institutions
its applicability to the predominant
should look to alternative data as
semi-urban/rural sections of the
a source of opportunity and also
Indian society that lacks credit scores.
carefully consider the distinct
As opposed to more developed
advantages and disadvantages
economies, India has a significantly
inherent in each data source. It
is important to make the right
call on which alternative data to
leverage, especially given that there
are significant operational and
cost considerations of acquiring,
maintaining and updating such
data. Based on our analysis,
alternative data sources are most
useful in credit scoring if they
demonstrate the following:

Regulatory compliance: The


data source must comply with all
regulations governing consumer
credit evaluation. (Kindly refer
11
Spotlight 3: Assessing your
personality
Despite widespread initial criticism, psychometric surveys that use a set of questions to evaluate a potential
borrowers ability and willingness to pay are becoming increasingly popular as a credit risk assessment
tool. Psychometric tests are already being used to judge a persons reputation, character and credibility
across sectors, especially in hiring, marketing, or sales functions. The Entrepreneurial Finance Lab (EFL),
a Harvard University incubated firm, leverages psychometrics to evaluate the creditworthiness of
borrowers in over 20 emerging countries, including India. The vernacular test is a 3045 minute survey
that includes controls for fraud and gaming. Leveraging analytical models based on nine years of test
responses, applicants are assigned a three-digit credit score that predicts a borrowers probability of
default.18
EFL entered the Indian market in 2013 and has entered into partnerships with several NBFCs claiming that
lenders using its screening tool have shown up to a 50% reduction in the default rate. Janalakshmi Financial
Services (JFS), one of EFLs partner, uses EFLs psychometric credit scores to extend credit to high-scoring
applicants with faster service and less paperwork. As per reports, JFS has deployed this tool across 15
Indian states and has tested nearly 7,000 borrowers over 10 months.

Figure 6: Personality indicators assessed through psychometric scoring

Ethics Beliefs

Intelligence Personality

Business
Character
skills
18 http://businesswireindia.com/news/news-details/addressing-missing-middle-efls-psychometric-credit-scores-help-financial-institutions-lend-

entrepreneurs/38558; http://social.yourstory.com/2014/01/minority-report-efl-stop-loan-defaulters/
12

makes its evident that very limited on repayment behaviour is captured by


Regulatory environment for information is gathered by CICs in India CICs and only certain specified users
alternative credit modelling and analysed to churn out credit scores. mentioned in the act (e.g. credit
Even as a number of countries are institutions) are allowed to access credit
The Indian credit scoring environment is considering the inclusion of scores based on
regulated by the Credit Information demographic and psychometric data to this data.
Companies Act, 2005, which allows only help build better credit scores, India has
licensed entities to undertake the to catch up with existent practices of While using alternative data to predict
business of credit information defined capturing individual- or firm-level data creditworthiness and allowing access to
by the act as information related to loans, which is conspicuously missing from this information to multiple players have
advances, amounts outstanding under information sets and relevant to credit many advantages, any increase in data
credit cards, securities iassued, scoring. sharing has to be balanced with privacy
guarantees or concerns. Unchecked collection of all
user data by agencies may infringe on a
the creditworthiness of borrowers of persons privacy and increase security
credit institutions. In addition, it As alternative data is enriching a concerns. The Austrian Data Protection
mandates that all credit institutions persons chances of getting a loan Act, 2000, states that consumers must
in the country must be members of all approved, it is also being accessed by opt for the use of their private data for
licensed Credit Information Companies other businesses to offer faster or any purpose, with the option to retract
(CICs).19 The recipients of data on cheaper services. In China, credit this permission at a later stage. In a
creditworthiness from CICs are limited to scores based on a range of financial, world where all our activities leave a
banks, NBFCs, housing finance social and demographic data points digital footprint and are traceable, it is
companies (HFIs) and companies are being used to approve people for essential to give people the right to
engaged in the business of credit cards or access to fast lanes in airports, express choose what information they want to be
distributing credit in any manner. delivery of visas and even pet adoption. captured to inform their credit scores.
Employers and landlords in the US have
A quick look at the global regulatory long been accessing credit scores of
framework on credit scoring and the potential recruits and tenants before hiring
World Banks General Principles for them or giving an apartment out on lease. The multiple inadequacies of the
Credit Reporting, which suggests that Such applications of credit scores remain present law have not escaped the
data points are necessary to analyse the limited in the Indian scenario as only
creditworthiness of people, financial information
be a part of at least available with a Membership of Credit Information Companies, 15 January 2015) and
one CIC, which led CIC. Later, two RBI DNBR (PD).CC. No 019/03.10.01/2014-15, Membership of Credit
19 The CIC to issue of notifications, Information Companies (CICs), 6 February 2015, made it necessary for
Act, 2005, required incomplete DBR.No.CID.BC.60 them to be a part of all CICs in the country to resolve this issue.
credit institutions to information /20.16.056/2014-15,
13

Ensuring speedy implementation of these


regulators attention. RBI had recommendations through an enabling behaviour-based credit risk models on
constituted a committee20 to reduce the regulatory framework is the need of the the lines of those developed by online
information asymmetry between lenders hour to create a population that is better lenders, which incorporate the social
and borrowers. The committee strongly informed of their ability to obtain credit graph, personal network, employment
recommended the inclusion of non- and a score which is capable of history and educational background of
financial data points such providing greater insight into more the borrower into their credit scoring
as utility bill payments and mobile peoples repayment ability. rules.
phone payments as data inputs for
computing a credit score. To this end,
they suggested the formulation of a Conclusion Customers who are qualified to
working group comprising the In order to compete in this changing obtain credit but are unable to do so
Telecom Regulatory Authority of India lending landscape, NBFCs need because of their credit score (or lack
(TRAI), Central Electricity Regulatory to realise the immense value of thereof) will specifically benefit
Commission (CERC) and CICs to alternative data and make from the use of alternative
develop a framework for sharing data investments in technology and credit scoring mechanisms that work
between telecom companies, electric analytics to develop advanced credit alongside the NBFCs traditional credit
utilities and credit bureaus. They also scoring models that leverage both underwriting model. This will introduce
highlighted that, for every consumer of a traditional and non-traditional data healthy competition, spur product
CIC, access to a free credit report every sources. NBFCs will need to develop innovation, and ultimately help support
financial year is desirable. the Indian governments agenda of full
financial inclusion.
20
Committee formed to recommend data format for furnishing of credit
information to credit information companies, January 2014.
14
NBFC regulations:
Evolution, rationalisation and changes ahead
shadow banking
sector at the global
level could proffer
and enhanced was clearly visible
framework was put in the aftermath of
into place by the RBI the global financial
in the years 1996 and crisis of 2008. In
1997. This included the Indian context,
introduction of entry NBFCs are
point norms (EPNs), considered similar
stricter and more to shadow banks,
detailed regulations although they are
with respect to still subject to
acceptance of deposits regulatory supervision.
with an objective to The light-touch
have a focussed regulations on shadow
supervision of deposit- banks gave rise to high
accepting NBFCs, leverage and sub-credit
mandatory registration assets. The resultant
of liquidity crunch got
all NBFCs with the further transferred to
RBI (irrespective of the banking system due
their holding of to its interlinkages with
public deposits) for
Evolution of regulatory framework for commencing and Figure 7 - Risks posed
NBFCs carrying on business, by shadow banks
maintenance of a
Over the past several decades, NBFCs have emerged as important portion of deposits in
financial intermediaries, particularly for the small-scale and retail liquid assets, creation
sectors, in underserved areas and unbanked sectors. NBFCs have of a reserve fund, etc. Risks posed by
shadow banks
turned out to be growth engines in an arena where increased In 1999, the capital
importance is assigned to financial inclusion. requirement for a
fresh registration
was enhanced from 25
The growing importance of the NBFC segment in the Indian lakh INR to 200 lakh
financial system has led to a changing landscape of the NBFC INR. Furthermore, in
framework. The evolution of the regulatory framework for NBFCs 2006, in order to bridge
in India has gone through a cyclical phasefrom simplified the gap between banks
regulations to and NBFCs, non-
stringent and extensive regulations and finally towards deposit accepting
rationalisation as part of the recently revised NBFC regulatory NBFCs were further
framework. classified into
systemically important
In 1964, Chapter III B of the Reserve Bank of India (RBI) Act, NBFCs and non-
1934, was introduced to regulate deposit-accepting NBFCs. With systemically important
NBFCs emerging as an important segment deeply connected with NBFCs based on their
entities in the financial sector, coupled with failures of large asset size. Certain
NBFCs, a more comprehensive prudential norms were
imposed on such
NBFCs. Also, the focus
of RBI shifted from
deposit-accepting
NBFCs to non-deposit
accepting NBFCs.

The true magnitude


of the risks that the
Regulatory
Contagion risk
arbitrage
Asset liability
Liquidity risk
mismatch
15

the RBI too, along with various In light of the above, the RBI took
the shadow banking sector. This other regulators and the government, various steps to revamp the NBFC
gave rise to the need for a collective has been working towards framework. Various committees
effort to preserve financial stability improving the regulatory framework were appointed by the RBI in the
and one of the key issues to curb shadow banking activities past to seek recommendations on
highlighted by the G-20 leaders at that pose a risk to financial stability. the role of NBFCs in the financial
the November 2010 Seoul Summit sector, growth potential, and the
was strengthening regulation and At the same time, the RBI has not regulatory changes that should be
supervision of shadow banking. failed to recognise the important role introduced to bridge the
The Financial Stability Board (FSB) played by NBFCs in bringing about inefficiencies of the sector. Based
has been constantly working financial inclusion in the country. on the recommendations, the RBI
towards strengthening the oversight NBFCs fill the important gaps in has been modifying its regulatory
and financial inclusions by and supervising policies from time
regulation of the shadow banking catering to geographies and sectors to time to keep pace with the
system to mitigate the risks arising where the banking sector is unable to changes in the system. The
therefrom. foray into. committees that have contributed to
the development of
In keeping with the work done
on shadow banking by G-20 and
FSB,

Figure 8 - Key changes in the NBFC


regulatory framework

2013: Nachiket
Mor Committee
1992: A C Shah on financial
Committee on inclusion
NBFC sector
reforms

2013: Financial
Sector
2009: Rajan Legislative
Committee on Reforms
financial sector Commission
reforms

2011: Usha Thorat


Committee on
reforms in the NBFC
sector
Framework for Framework
Review of core
account Liberalisation for P2P
investment companies
aggregator of FDI
directions lending
NBFCs

Expected

Removal of credit
concentration Different risk Relaxation in
norms for NBFC weights to domestic NBFC-MFI
without public sovereigns directions
funds

April 2016 March 2016 Oct-Nov 2015

July 2015
Revised guidelines
for change in
control of NBFCs

November 2014 November 2014 April 2015

Revised principal Revised guidelines


Revised regulatory
business criteria on corporate
framework
for NBFC factors governance
16
Figure 9 - Revised NBFC classification

NBFC

Non-deposit Deposit
accepting accepting

NBF asse
Cs- ts =
NBFCs-ND (Total assets = <500 crore ND- >500
INR) SI crore
(Tota INR)
l
NBFCs-ND NBFCs-ND NBFCs-ND NBFCs-ND

qNo public funds qWith public funds qNo public funds qWith public funds
qNo customer qNo customer qWith customer qWith customer
interface interface interface interface

r rough public - with


e deposits, mo such
commercial requi ne gove
Recen N papers, reme y rnan
t debentures, nts, lau ce
chang Li intercorporat
e deposits
and nd
eri
requi
reme
es in C acco
and bank untin ng, nts.
the a finance. As a
g
res
regul measure of
princ
ult
atory further ing NB
iples
liberalisatio in FCs
frame n, the
remai
ext -
work definition of
n
ra ND
unch wit
A public funds co
has been ange mp h
compreh d for
amended to lia no
ensive NBF
exclude nc pub
review
funds raised Cs- e lic
of the
by issue of ND. bu fun
NBFC
instruments rde ds
regulati
compulsoril Gov n. and
ons was
y erna Un no
conduct nce
convertible der cust
ed by requ
into equity the om
the RBI irem
shares ne er
in 2014. ents
within a w inte
The Hith
period not fra rfac
revised erto
exceeding me e
regulato , all
five years wo are
ry NB
from the rk, not
framew FCs
date of onl sub
ork21 is wer
issue. y ject
designe e
tho to
d to requ
All other se any
focus ired
prudentia N pru
supervis to
l norms BF den
ory com
such as Cs tial
attention ply
tha nor
to those asset
with ms
NBFCs classificat t
gov and
which ion, ha
erna thu
genuinel provision ve
nce s
y can ing a
requ hav
pose cu
ire e
risks to sto
men co
the me
ts, mpl
financial r
suc ete
system int
h as reg
and bring erf
the ulat
operationa ac
Fair ory
l freedom e
Prac free
to smaller are
tice do
NBFCs. req
s m
The uir
Cod to
foremost ed
e con
step in to
(FP duc
this co
C) t
direction mp
and thei
was the ly
anti r
busines s make NBFCs apriva y stmen
s . very attractivete (PE) ts.
activitie vehicle forequit inve
(PD) CC. No. 2014 dat 10 mber 2014
002/03.10.001/ -15 ed Nove

17
been strengthened
considerably. For these
NBFCs, prudential
regulations and conduct of
business regulations both
remain applicable whereas
there is no prescribed
leverage ratio.

Asset classification and


provisioning norms
With view to align the asset
classification and
provisioning norms with that
of banks, a 90-day default
period has
been prescribed for the
classification of a loan as a
Syste non-performing asset. The
micall revised asset classification
y norms are summarised
impor below:
tant
NBFCFigure 10 -
s Revised asset
classification
(NBFnorms
Cs-
ND-
SI) Type of Non-performing assets (NPA) Substandard
and asset assets: Assets
Lease rental and classified as Doubtfu
deposiFY Loan assets to hire purchase NPA for a Assets re
ending become NPA if assets to become period not substan
t- overdue NPA if overdue exceeding a period e
accept March 2016 5 months 9 months 16 months 16 mo
ing
NBFC March 2017 4 months 6 months 14 months 14 mo

s March 2018 3 months 3 months 12 months 12 mo


(NBF
Cs-D)
Prudent
ial 22 DNBR (PD)
norms
CC.No.077/03.10.00
1/2015-16 dated 7
While
April 2016
the
regulator
y
framewo
rk for
NBFCs-
ND has
been
liberalise
d, the
regulatio
ns for
NBFCs-
ND-
SI and
for all
NBFCs-
D have
Similarly, the provision for standard Recently, the
assets has been enhanced from 0.25 RBI introduced
0.40% of the value of the standard an important
assets to bring it in line with that liberalisation
applicable for banks. Compliance measure. Earlier,
with the revised norm is to be any NBFC-ND-
achieved in a phased manner by the SI not accessing
end of March 2018. public funds,
either directly or
It is pertinent to note that asset indirectly, or not
classification and provisioning norms issuing
are merely accounting adjustments. guarantees had
Just because an asset is classified as a to make an
non-performing assets (NPA) does application to the
not imply that it has to be repossessed RBI for
or recalled. While many retail NBFCs dispensation
may be impacted by these stringent from the
norms, most of the foreign-owned concentration of
NBFCs may not be significantly credit/investment
impacted as they generally follow norms. The RBI
stricter norms based on their internal has now issued a
policies. notification22
whereby
Enhancement of Tier I capital concentration of
requirement for capital credit/investment
adequacy purposes norms shall not
For the NBFCs-ND-SI and NBFCs- apply to an
D, the minimum Tier I capital has NBFC-ND-SI
been increased to 10%. This is to be not accessing
achieved in a phased manner, i.e., public funds in
8.5% by end of March 2016 and 10% India, either
by end of March 2017. directly or
indirectly, and
Credit concentration norms not issuing
Furthermore, credit concentration guarantees. This
norms have been harmonised will make
between the various categories of
NBFCs by removing the the NBFC
dispensation given to asset finance model
companies (AFCs) to exceed the attractive for
defined norms by 5%. Dispensation large financial
given to infrastructure finance groups that
companies and infrastructure debt have
funds has been retained as significant
infrastructure loans are generally funds on their
high value loans. balance sheet
or plans

18

ng the s of the
to run this need for Thorat
business good Committee,
through corporat which was set up
their own e to study the
funds, and governa issues and
target high nce concerns in the
value practices NBFC sector, the
institution and also following
al lending. keeping amendments
in line have been made
Corporate with the to the existing
governance recomm regulatory
Consideri endation framework on
corporate 500 crore INR Other key
governance and and above) and changes
disclosures for NBFCs-D to applicable
NBFCs. constitute the for all
following NBFCs
Earlier, the committees:
constitution of 1 Audit Aggregatio
an audit committee n of assets
committee was 2 Nomin of multiple
mandatory for ation NBFCs in a
NBFCs with committee group
assets of 50
3 Risk The Thorat
crore INR and Committee had
committee
above or proposed that
deposits of 20 multiple
The audit
crore INR and NBFCs that are
committee is
above. The part of a
entrusted with
constitution of corporate
the task of
the nomination group23 or are
ensuring that an
committee and floated by a
information
risk committee common set of
systems audit of
was promoters
the internal
recommendatory should not, for
systems
. The revised regulatory and
processes is
framework supervisory
conducted at
makes it least once in purposes, be
mandatory for every two years. viewed on a
NBFCs-ND-SI stand-alone
(i.e. NBFCs with All NBFCs-D basis but in
assets of and NBFCs- aggregate. In
ND-SI are now line with the
mandatorily recommend
required to ation, the
rotate the audit revised
partners of the regulatory
firms appointed framework
as their provides for
statutory aggregation
auditors every of total
three years. assets of all
This was only NBFCs in
recommendat the group
ory under the (including
earlier NBFC-D) to
regulations. determine the
categorisation
Moreover, and supervision
effective 31 of an NBFC as
March 2015, an NBFC-ND or
NBFCs-ND-SI NBFC-ND-SI. If
and NBFCs-D the combined
need to put in asset size of all
place a policy NBFCs within
for ascertaining the group is 500
the fit and crore INR or
proper criteria more, each
for directors, NBFC in the
and comply group will have
with additional to comply with
disclosure the regulations
requirements. applicable to
NBFCs-ND-SI.
are Subsidiary: Parent (defined in
defined terms of Accounting Standard
to mean (AS) 21)
an
arrange 2 Joint venture (JV):
ment Defined in terms of AS 27
involvin 3 Associate: Defined in
g two or terms of AS 23
more
entities 4 Promoter-promotee: As
related provided in the Securities And
to each Exchange Board of India
other (Acquisition of Shares and
through Takeover) Regulations, 1997, for
any of listed companies
the
followin 5 Related party: Defined
23 g in terms of AS18
Comp relations 6 Common brand name
anies hips:
in the 1 7 Investment in equity
group shares of 20% and above
19

Minimum conducted by to be allowed to


net owned NBFCs, the accept deposits.
funds (NOF) minimum NOF In the intervening
of 2 crore of 2 crore INR period till 31
INR for all has now been March 2016,
NBFCs made mandatory unrated AFCs or
Earlier, only for all NBFCs, those with sub-
those NBFCs whether investment
registered registered prior ratings can only
after 21 to or post 21 renew existing
April 1999 April 1999. All deposits on
were NBFCs were maturity and
required to required to
have attain a
minimum minimum NOF
NOF of 2 level of 1 crore
crore INR. INR by the end
A large number of March 2016
of NBFCs which and need to
were registered maintain the
prior to that date NOF level of 2
were permitted to crore INR by the
continue to end of March
maintain 2017.
minimum NOF
of 25 lakh INR.
It is apparent that Rating
NBFCs with a and
minimum capital deposit
below 2 crore accepta
INR are likely to nce by
be carrying out AFCs
very limited The regulations
business for AFCs are
activities, if any. now brought in
Considering that line with those
a higher NOF for other
would be deposit-
required for the accepting
adoption of NBFCs. Existing
advanced unrated AFCs
technology and will now have to
to ensure a obtain an
sufficient capital investment
base for the grade rating by
diverse activities 31 March 2016
1 Financ Revised
ial assets in guidelines
the factoring for change
business to be in control
at least 50% of NBFCs
of total assets To ensure that all
2 Inco NBFCs are
managed by fit
me from
and proper
factoring
management, the
business to
Thorat
be at least
Committee
50% of the
recommended
gross
that all NBFCs
income should be
cannot accept
fresh required to obtain
deposits till prior approval
they obtain from the RBI for
an a change in
investment management or
grade rating. control. This
resulted in the
issuance of the
Non-Banking
The limit for
Financial
acceptance of
Companies
deposits by deposit
(Approval of
accepting AFCs has
Acquisition or
been reduced from
Transfer of
4 times to 1.5 times
Control)
the net owned
Directions,
funds, and the
2014.25 However,
credit concentration
based on several
norms for all AFCs
industry requests,
have also been
the RBI in July
brought in line with
2015, issued a
those of other revised set of
NBFCs. directions on the
requirement of
Liberalisation approval for
of principal change in control
business of NBFCs.
criteria for
NBFC-factors
To encourage As per the new
the factoring directions, prior
business in India written
and based on the permission of the
representation RBI would be
received from required in the
the industry, the following
RBI has, vide situations:
another
circular,24
1 Any
takeover or
relaxed the entry
acquisition of
point norms by
control of an
modifying the
NBFC, which
principal
may or may
business criteria
not result in
for NBFC-
change of
factors from 75
management
50%, as outlined
below: 2 Any
change in the
shareholding of y change directors
an NBFC, in the and
including manageme directors
progressive nt of the who get re-
increases over NBFC elected on
time, which which retirement
would result in would by rotation.
acquisition/tran result in
sfer of change in Prior approval
shareholding of more than would,
26% or more of 30% of the however, not
the paid up directors, be required in
equity capital excluding case of any
of the NBFC. independe shareholding
3 An nt

and
Table 1
Notific
Revisio
n in ation
MFI
limits No.
as per
new DNBR
norms
.

033/C

GM

Total indebtedness
(CDS)

-2015
Household annual income
dated

Loan ticket
26 size

Novem
% of loans for income
generation
ber

Loan limit2015
requiring mandatory
tenure of 24 months

24
DNBR
(PD)
CC. No.
003/22.
10.91/2
014-15
dated
Novemb
er 10
2014
25
DNBS
(PD)
CC
No.397/
03.02.0
01/2014
-15
dated 1
July
2014

26
Notificatio

No.DNB

R.014/C

GM

(CDS)-

2015

dated 8

April

2015,
20

income limits of exposures to


borrowers, and domestic
disbursement sovereigns.27
amount for
All loans given
NBFC-MFIs.
by NBFCs to the
The changes central
introduced are government or
summarised as loans guaranteed
under:26 by the central
going beyond government will
26% due to These changes now carry risk
buy-back of are likely to aid weight of zero
shares/reducti the growth of (as opposed to a
on in capital the loan flat risk weight
where it has portfolio of of 100 earlier).
approval of a NBFC-MFIs as
Similarly, all
competent it widens the
direct
court. The base of loan/credit/over
same is, borrowers and draft exposure
however, significantly and investment
required to be increases their in state
reported to the market size. government
RBI not later
than one Reduction in
month from its risk weights
occurrence. assigned to
sovereign
Increase in debt
lending The risk
limits for weights to be
microfinance applied by
NBFCs banks for
(NBFCs- capital
MFI) adequacy
In line with purposes also
the take into
recommend account the
ations of credit rating of
the the borrower.
Nachiket In order to
Mor create a level
committee playing field
on with banks, it
Comprehe has been
nsive a long standing
Financial demand of the
Services NBFC sector
for Small to allow
Businesses differential risk
and Low weights to
Income assets similar
Households to those
and to give a applicable for
fillip to the
banks. The
microfinance
RBI partially
industry, the
granted this
RBI
industry
significantly
enhanced the request by
borrowing reviewing the
limits for an risk weights
individual, assigned to
have to focus shift from entity-
on their core based regulation
strengths of NBFCs to
while activity-based
improving on regulation of
weaknesses. NBFCs. The
They will revised
have to be very regulatory
dynamic and framework issued
securities will
constantly by the RBI was
attract zero risk
endeavour to the first step in
weight.
search for new this direction.
Furthermore,
products and
state
services in
government
order to survive
guaranteed
in this ever-
claims, which
competitive
have not
financial
remained in
market. Due to
default, will
the innovative
attract 20% risk
and dynamic
weight.
nature of the
However, if the
NBFC sector,
loans
there is a need
guaranteed by
to redesign the
the state
regulatory
government
framework. We
have remained
have discussed
in default for a
below certain
period of more
changes in the
than 90 days, a
regulatory
risk weight of
framework that
100% should
may be seen in
be assigned.
the near future.

Move
Looking toward
ahead s
activit
NBFCs have y-
been playing a based
very important regula
role from the tion
macroeconomic The Nachiket
perspective and Mor Committee
as a core catalyst
had observed
in the Indian
that the wide
financial system.
number of
NBFCs
NBFC
are certainly
categories
emerging as
unwieldy creates
better
room for
alternatives to
regulatory
the
arbitrage and
conventional
hinders the
banks for
evolution of
meeting the
NBFCs, which
financial needs
have the ability
of various
to provide the
sectors.
broad range of
However, to
credit products.
survive and to
The committee
constantly
had
grow, NBFCs
recommended a
class thereby, the
differences in framework has
behaviour not completely
would be taken off well.
accommodated
through There are still
differential concerns with
provisioning on respect to the
the basis of definition of a
It is expected
asset class core
that the RBI will
rather than by investment
bring about
creating new company.
further
NBFC Also, with the
modification in
categories. current
the NBFC
conditions for
regulations
Rationalisat an entity to
aimed at
ion of qualify as a
consolidation
regulations core
of the different
for core investment
types of NBFCs.
investment company, it
This would
companies may be
essentially mean
The core difficult for
that the different
investment that entity to
categories of
companies undertake any
NBFCs, such as
regulations other business
an investment
were issued activity from
company or asset
by the RBI as the
finance
a welcome said entity. For
company, would
move, with instance, there
be subsumed
the intention could be several
into one single
to simplify the group holding
NBFC category.
NBFC companies which
Benefits that
framework not only hold
were previously
and shares of group
available to
regulations companies but
specific NBFC
that applies to also undertake
types, such as
group holding other business
tax benefits,
companies. activities in the
bank limits, and
However, same entity.
priority sector
since its
status may
inception, the To continue
continue to be
industry is with their
available even
struggling to business
after
get a complete operations
consolidation on
clarity on this in a smooth
a pro rata asset
framework and, manner, we
basis. The asset
27 No. DNBR (CDS)-2016 dated 10
Notification 037/CGM March 2016

21
common format.
It will be
interesting to see
how this
segment of
NBFCs kicks-off
in the market.

Liberalising
foreign
investment
in the NBFC
sector
Harmonisation
of provisions of
the regulations
for foreign
direct
investment
Investment
(FDI) in an
expect the Promotion Board
NBFC with the
RBI to come (FIPB) for
RBI-NBFC
up with some bringing in
directions is
clarifications foreign
another
which will important area investment.
encourage which is finally
entities to gaining some
come forward traction. Similarly,
to register undertaking
themselves The finance investment
with the RBI. minister in his activity by an
Budget speech NBFC having
Introduction of on 29 February foreign
account 2016 announced investment
aggregator the requires
NBFCs governments approval from
As another step intention to the FIPB. This
towards the aim permit FDI in all is because,
of financial financial under the FDI
inclusion, the activities which norms, the only
RBI released a are regulated by head under
draft regulatory an Indian which NBFC
framework on regulator under activities are
account the automatic covered under
aggregator route. For automatic route is
NBFCs. Such example, once leasing and
NBFCs will the commodity finance.
perform the broking license However, the
function of is approved by term finance
consolidating all the Securities has not been
financial defined. Based
and Exchange
information of a on its general
Board of India
person across meaning, while
(SEBI), that
banks, insurance lending activity
company will
companies, would get
not require any
mutual funds covered,
further approval
etc., in a common investment
from the Foreign
format. It will activity
enable the does not
common man to specifically get
easily access all covered. Once
his accounts the above-
across financial mentioned
institutions in a change is
notified, it financial
would be institutio
interesting to n
see if NBFCs
are permitted to
undertake
investment
activities
without the
FIPBs
approval.

Securitisation
and
Reconstruction
of Financial
Assets and
Enforcement of
for
Security
SARFAES
Interest Act,
I benefits.
2002,
However,
(SARFAESI
the
Act) coverage
correspond
Though banks
ing
and public
amendmen
financial
t in the
institutions enjoy
SARFAES
the SARFAESI
I Act is
Acts benefits,
still yet to
the NBFCs were
be
kept outside the
introduced.
purview of this
This appears to
framework. This
be a mere
put undue
omission and
hardship in
hopefully, the
recovery of bad
relevant
loans by NBFCs.
amendment
Both the Thorat
Committee and would be
the Nachiket Mor incorporated in
Committee the SARFAESI
recognised this Act soon.
and
recommended Coverage of
that NBFCs be NBFCs under
given access to the SARFAESI
benefits under Act would go a
the SARFAESI long way
Act. towards
creating a level
In his playing field
Budget for NBFCs
speech in with banks.
2015, the
finance Simpl
minister ificati
announce on of
d that the
NBFCs NBF
would be C
considere
applic
d as an
ation
proce
eligible
ss simpler and the to proactively
To make the number of provide
process of documents regulatory
registration of required to be support to the
new NBFCs submitted will segment and also
smoother and be reduced to a to ensure
hassle free, RBI minimum. financial
Governor, Dr stability in the
Raghuram Conclusion long run. We
Rajan, The NBFC hope that the
announced in segment is a forthcoming
the sixth bi- catalyst to the changes in the
monthly policy economic pipeline will
for 201516, the development of further
RBIs intention the country. strengthen the
to simplify and The RBI is robustness of the
rationalise the constantly NBFC sector and
process of striving to allow them
registering new bring necessary to operate in
NBFCs. The changes in the an enabling
new application NBFC regulatory
forms will be regulatory space environment.
22
Recent trends in funding
sources for NBFCs
NBFCs have
been
increasing
market Figure 11: Exposure of SCBs,
NBFCs have emerged as AMCs and Insurance
borrowings, companies to NBFCs (in billion
the largest net receiver of
and we expect INR)
funds from the rest of the
this trend to
financial system.
continue in
According to the Financial
201617 as 2500
Stability Report, 2015,
the spread
scheduled commercial
between
banks (SCBs) have the market 2000
highest exposure to NBFCs borrowings
at 1,927 billion INR, and bank
followed by asset borrowings
management companies 1500
stands high at
managing mutual funds 11.5%. Even
(AMC-MFs) at 1,376 though banks 1000
billion INR and insurance are not able to
companies at 1,064 billion pass down the
INR (as of September 500
lower interest
2015). The graph below rates, they
shows the general trend of will still 0
exposure to NBFCs from
Mar '12 Mar '13 Mar '14 Mar '15 Sep '15
March 2012 to September
2015.
SCBs AMC Insurance Companies

On close inspection, we see


that the higher-rated, large Source: Financial Stability
Report, December 2015
continue to be since benign interest worth alone Asia),
the largest source NBFCs rate individ transac picking
of funding for were environment to uals tions up a
NBFCs. hesitant strengthen (HNIs) of this significa
However, the to lock their liquidity to nature nt
growing reliance in long- profile. NBFCs the minority
of NBFCs on term directly most stake in
bank funding funding Considering . This recent Centru
requires , the funding will act being m
additional expecti restraints, a as an Group.
safeguards to be ng a regulatory another invest
introduced by fall in architecture source ment
RBI to contain interest may be of from Over
systemic risks. rates. considered in the NBFC Jaspal time,
The future which funding Bindra the
Interestingly, trend is permits large- and (Stand industr
the funding changi ticket deposits also act ard y also
structure is ng from high net as a Charte deman
also changing toward wealth red ded
from short- s more manage group that
term long- ment s ex- NBFC
borrowings to term instrum execut s be
long-term borrow ent for ive given
borrowings. ings as HNIs. directo access
Over the last few NBFCs We r and to
years, the will have chief refinan
proportion of take already execut cing
short-term advanta seen ive schem
borrowings has ge of some officer es
been increasing the stand- for from
the National gover nt and and for Howeve
Bank for nment Refinance liquidit NBFC r, this
Agriculture and ackno Agency Bank y to -MFIs would
Rural wledg (MUDRA NBFC- may depend
Development ed the Bank), which microfi come on the
(NABARD), dema may become a nance down share of
National nd prominent instituti by 1 funding
Housing Bank and source of ons 4% NBFC-
(NHB), Small set up funding (NBFC accord MFIs
Industries the s- ing to receive
Development Micro MFIs). ICRA2 from
8
Bank of India Units The MUDR
(SIDBI), etc. Devel cost of estima A Bank.
The opme funding tes.
and ncy and str e for Sector, ICRA

Refi (MUDRA) Refi on the rating feature,


28 Micr
nan Bank nan g micr 2015.
o Units
ce Dedicated cer: pos ofina
Development
Age Regulator A itiv nce
23
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ASS )
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25
26

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www.pwc.in
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