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Part - I
CRISIL’s analysis of 21 non-banking finance companies (NBFCs) rated
by it clearly indicates that their business model has strengthened
since FY2000-01, mainly because of their improving resources profile.
Since FY2000-01, these players have diversified their funding avenues,
accessed market borrowings to a much larger extent and brought down
their funding costs. Their business model has strengthened also because
their core profitability* has improved in this period and because they
have kept a strict vigil on their asset quality indicators even as business
volumes have grown.
CRISIL believes that the increasing popularity of innovative borrowing
tools like securitization, the growing number of lenders willing to
lend to NBFCs such as mutual funds and the gains made by NBFCs from
the declining interest rate scenario have increased the robustness of
their resources profile. At the same time when one looks at the decline
in spreads between banks’ investment in government securities
(G-secs) and their cost of deposits (savings, current and term), clearly there is a trend indicating that the banks’ historical
advantage on resources profile vis-ŕ-vis highly rated NBFCs** has gradually diminished. On an incremental basis, highly
rated NBFCs have a better all-inclusive cost of funds
(adjusted for negative carry*** on regulatory investments and
operating cost for raising funds) than banks. The banking
business model, however, continues to have several
advantages over the NBFC one. In CRISIL’s opinion, a further
widening and deepening of the fund industry and
securitization markets will enhance the NBFCs’ business
model provided they maintain critical business volumes and
prevent deterioration in their asset quality.
Enhanced investor base and funding avenues
bolster resources profile
The NBFC business model has strengthened considerably
over the past few years in terms of access to varied funding
sources. The growth of the mutual fund industry and the
emergence of securitization as a borrowing tool have
helped to strengthen the NBFC sector.
The mutual fund industry has grown sharply since FY2000-
01, giving NBFCs an avenue to diversify their wholesale
funding base, which was largely restricted to bank
borrowings earlier. The consolidated assets under
management under debt schemes in the Indian mutual fund
industry have doubled in the last 3 years to Rs. 1106 billion
as at December 31, 2003 from Rs. 557 billion as at December
31, 2000****. The mutual funds sector’s exposure to the NBFC
sector has also more than doubled from Rs. 10.30 billion as
at December 31, 2001 to Rs. 21.46 billion as at December
31, 2003*****.
Next
* Refer to CRISIL’s opinion piece: “Core Profitability of CRISIL rated NBFCs shows sharp growth”. All opinion pieces published by CRISIL can be
obtained for reference from the CRISIL Rating Desk (+91 22 5691 3047).
** NBFCs rated in the high investment grade category and above,
i.e., ‘AA’ and ‘AAA’ rating categories.
*** This refers to the measure of opportunity cost borne by banks because
of regulated investments.
**** Source: Website of Association of Mutual Funds of India (AMFI)
excluding Unit Trust of India-I.
***** CRISIL estimates.
Source: CRISIL
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