India Finance Report

India Finance Report

News: The India Finance Report 2023 (IFR 2023) was recently released.

About IFR 2023:
• The India Finance Report 2023 (IFR 2023) is the first flagship publication of the Centre for Advanced Financial Research and Learning (CAFRAL).
• CAFRAL is a not-for-profit organisation set up in 2011 as an independent body by the Reserve Bank of India (RBI) to promote research and learning in banking and finance.
• The IFR 2023, with “Connecting the Last Mile” as its theme, provides an in-depth assessment of nonbanking financial companies (NBFCs) in India.

What are NBFCs? Are they regulated?
• Non-Banking Financial Companies (NBFCs) in India are companies registered under the Companies Act of 1956 that provide banking services without holding a bank license.
• They offer a variety of services such as loans and advances, saving and investment plans, credit facilities, insurance, acquisition of shares, and more.
• Yes, NBFCs are regulated in India. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III-B) and the directions issued by it.

Key Findings of Report:
• NBFC credit growth: The NBFC sector witnessed a recovery in credit growth in FY23, reaching 13.5 per cent, after a slowdown in FY22 due to the COVID-19 pandemic and the liquidity crisis. The growth was driven by segments such as retail loans, gold loans, microfinance and infrastructure finance.
• NBFC profitability and asset quality: The NBFC sector improved its profitability and asset quality in FY23, aided by lower cost of funds, higher fee income, better collection efficiency and regulatory forbearance. The sector’s return on assets (RoA) increased to 2.1 per cent and gross non-performing assets (GNPA) ratio declined to 5.8 per cent in FY23.
• NBFC digital transformation: The NBFC sector embraced digital transformation in FY23, leveraging technologies such as artificial intelligence, machine learning, blockchain and cloud computing to enhance customer experience, operational efficiency, risk management and innovation. The sector also collaborated with FinTechs and platforms to expand its reach and offerings.
• NBFC regulatory and policy developments: Risks such as the introduction of a risk-based supervision
framework, the revision of the NBFC classification and registration criteria, the implementation of the colending model with banks, and the announcement of the NBFC resolution framework. These developments aimed to strengthen the oversight, governance, resilience and stability of the sector.

Risks identified in the Report:
• Systemic risks from rising bank financing for NBFCs: The report warns of systemic risks from the increasing inter-linkages between NBFCs and the banking sector. Banks mostly lend to bigger NBFCs, leading to increased cross-lending within the sector.
• Risk of repeating past mistakes: The report cautions against repeating past mistakes that led to monetary shocks and caught businesses off-guard.
• Concerns over delinquencies: There are concerns over delinquencies in the NBFC sector. However, public sector banks have assured the government that small loans do not pose a systemic risk.
• Impact of the COVID-19 pandemic: The pandemic has had a significant impact on the NBFC sector, leading to challenges in extending credit.

Examples of NBFC Crisis in India