Non-banking financial sector seeing consolidation

The non-banking financial sector was seeing consolidation, with companies placed comfortably on the capital front, said a Reserve Bank of India (RBI) report on banking in India, 2011-12.

Currently, the sector comprises a heterogeneous group of institutions, which caters to a wide range of financial requirements. Major intermediaries include financial institutions, non-banking financial companies (NBFCs) and primary dealers.

According to the report, the combined balance sheets of financial institutions expanded in 2011-12. On the liabilities side, deposits and bonds & debentures were the major sources of borrowings. On the assets side, at Rs 2.5 lakh crore, loans and advances continued to be the largest component, contributing more than four-fifths of the total assets of financial institutions in 2011.

The report added non-performing assets (NPAs) of financial institutions had risen substantially during the year. “The financial assistance sanctioned and disbursed by financial institutions increased in 2011-12, due to an increase in sanctions and disbursements by investment institutions (LIC and GIC) and specified financial institutions (IVCF and TFCI),” said RBI.

The central bank said commercial papers were the major source of funds for financial institutions. It added resources mobilised by financial institutions in 2011-12 were considerably higher than in the previous year. In 2011-12, there was a significant increase in resources raised by financial institutions through commercial paper — these accounted for about 70 per cent of the total resources mobilised from the money market

Till June-end, the number of NBFCs registered with RBI declined to 12,385. RBI said a similar trend was observed in the case of deposit-taking NBFCs, primarily due to the cancellation of certificates of registration and their exits from deposit-taking activities. “Despite the decline in the number of NBFCs, their total assets, as well as net owned funds, registered an increase in 2011-12, while public deposits recorded a decline,” RBI said.

In 2011-12, two new categories of NBFCs, infrastructure debt funds and microfinance institutions, were created and brought under a separate regulatory framework. In September, a new category of NBFCs, factors, was introduced.

RBI said as of March-end, asset finance companies held the largest share in the total assets of deposit-taking NBFCs. The balance sheets of these NBFCs expanded rose 10.8 per cent in 2011-12.

Only large deposit-taking NBFCs were able to raise resources through deposits. “A sharp increase was discernible in the share of deposit-taking NBFCs, with a deposit size of Rs 500 million or more, accounting for about 93.2 per cent of total deposits at the end of March. However, only seven deposit-taking NBFCs belonged to this category, accounting for about 3.6 per cent of the total number of deposit-taking NBFCs,” it said.

The share of residuary non-banking companies in the total assets of NBFCs showed a decline, RBI said. Net owned funds of residuary non-banking companies, however, remained at the about 2011-12 levels.

In 2011-12, there was a significant increase in the ratio of gross NPAs to total advances of deposit-taking NBFCs. This, according to RBI was a deviation from recent trends. The ratio of gross NPAs to the total advances of deposit-taking NBFCs stood at 2.1 per cent for 2012 (provisional), compared with 0.7 per cent in 2011.

The RBI report added the systemically important non-deposit taking NBFCs segment continued to rely on bank finances for resources. The financial performance of this sector deteriorated marginally, as reflected in the decline in net profit during 2011-12.

“Non-banking financial institutions, as a segment, continue to be better placed, in terms of capital adequacy, with a high capital-to-risk-weighted-asset ratio, compared to the minimum regulatory requirement,” RBI said.