Report on Trend and Progress of Banking in India 2014-15

Report on Trend and Progress of Banking in India 2014-15Report on Trend and Progress of Banking in India 2014-15, submitted to Central Government in terms of Section 36(2) of the Banking Regulation Act, 1949 REPORT ON TREND AND PROGRESS OF BANKING IN INDIA 2014-15 RESERVE BANK OF INDIA© Reserve Bank of India All rights reserved. Reproduction is permitted provided an acknowledgment of the source is made. This publication can also be accessed through Internet at http://www.rbi.org.in Published by Financial Stability Unit, Reserve Bank of India, Mumbai 400 001 and designed and printed at Jayant Printery, 352/54, Girgaum Road, Murlidhar Compound, Near Thakurdwar Post Offi ce, Mumbai - 400 002.Report on Trend and Progress of Banking in India 2014-15 Contents Page No. List of Select Abbreviations i Chapter I : Perspective and Policy Environment 1-5 Introduction 1 De-stressing the banking sector 2 Reforming the public sector banks 2 Improving monetary policy transmission 2 Strengthening the liquidity standards of banks 3 Monitoring the build-up of leverage in the banking system 3 Dealing with the concern of too-big-to-fail 3 Convergence with the international accounting standards 4 Minimising the regulatory arbitrage between banks and non-banks 4 Reviving the licensing and expansion of urban co-operative banks 4 Making the banking sector more inclusive 5 Chapter II : Operations and Performance of Scheduled Commercial Banks 6-13 Consolidated operations 6 CASA deposits 6 Credit-deposit ratio 6 Maturity profi le of liabilities and assets 7 Off-balance sheet operations 7 Financial performance of the SCBs 7 Priority sector credit 8 Retail credit 9 Credit to sensitive sectors 9 Ownership pattern of SCBs 9 Regional rural banks (RRBs) 10 Local area banks 10 Customer service 11 Technological developments in scheduled commercial banks 11 Growth in automated teller machines (ATMs) 11 Population group-wise distribution of ATMs 12 Off-site ATMs 12 White label ATMs 12 Debit cards and credit cards 12 Prepaid payment instruments 12 Financial inclusion initiatives 13Contents Page No. Chapter III : Developments in Co-operative Banking 14-21 Urban co-operative banks 14 Performance of UCBs 14 Asset quality 15 Developments with regard to UCBs 15 Scheduled UCBs 17 Priority sector advances of UCBs 18 Rural co-operative banks 18 Short term rural credit – StCBs and DCCBs 19 Primary agricultural credit societies (PACS) 20 Long term rural credit – SCARDBs 21 Long term rural credit – PCARDBs 21 Chapter IV : Non-Banking Financial Institutions 22-28 Introduction 22 All India fi nancial institutions (AIFIs) 22 Financial performance 22 Balance sheet of AIFIs 22 Financial indicators 23 Non-banking fi nancial companies (NBFCs) 24 Deposit-taking NBFCs (NBFCs-D) 24 Financial indicators 25 Asset quality of NBFCs-D 25 Non-deposit taking systemically important NBFCs (NBFCs-ND-SI) 25 Financial performance 25 Financial indicators 26 Primary dealers 27 Financial performance of standalone primary dealers 27 Overall assessment 28Report on Trend and Progress of Banking in India 2014-15 Page No. List of Charts 2.1 Movement in assets, credit and deposit growth of the SCBs 6 2.2 Growth in CASA deposits of the SCBs 6 2.3 Trends in outstanding C-D ratio, bank-group wise – position as on March 31 6 2.4 Trend in maturity profi le of assets and liabilities 7 2.5 Maturity profi le of select liabilities / assets of the SCBs 7 2.6 Composition and growth of off-balance sheet liabilities of SCBs 7 2.7 Growth of select items of income and expenditure 8 2.8 Financial performance of SCBs 8 2.9 Trend in growth in priority sector and total credit 9 2.10 Growth in retail loans 9 2.11 Share of lending to sensitive sectors 9 2.12 Bank-group wise share in total assets and profi ts of banking sector – position as on March 31 10 2.13 Financial performance of RRBs 10 2.14 Return on assets and net interest margin of LABs 11 2.15 Bank-group wise break-up of major types of complaint: 2014-15 11 2.16 Growth and composition of ATMs 11 2.17 Geographical distribution of ATMs 12 2.18 Share of off-site ATMs 12 2.19 Issuance of debit and credit cards 12 2.20 Progress of pre-paid instruments (value) 13 2.21 Progress of banking outlets and basic savings bank deposit accounts (BSBDA) 13 3.1 Structure of co-operative credit institutions in india – position as on March 31, 2015 14 3.2 Total number and growth in assets of UCBs 14 3.3 Select indicators of profi tability of UCBs 15 3.4 Income and expenses of UCBs – variation in per cent 15 3.5 Non-performing advances of UCBs 15 3.6 Growth in assets, NPAs and provisions 15 3.7 Distribution of UCBs based on deposit Size – position as on March 31 16 3.8 Distribution of UCBs based on size of advances – position as on March 31 16 3.9 Share of UCBs in rating category A – number and business size 16 3.10 SLR and non-SLR investments – variations in per cent 17 3.11 Scheduled and non-scheduled UCBs-share in total assets-position as on March 31 17Contents Page No. 3.12 Profi tability indicators of UCBs 17 3.13 Percentage distribution of credit to select priority sectors by UCBs 18 3.14 Priority sector advances by UCBs to weaker sections 18 3.15 Select balance sheet indicators of StCBs 19 3.16 Growth in credit outstanding from PACS 20 3.17 Group-wise share in membership of PACS and overall borrower member ratio 20 3.18 Percentage of PACS in profi t and loss - all India 20 3.19 Percentage of PACS in profi t and loss - regional level as on March 31, 2014 20 3.20 Percentage contributions of components to variation in total liabilities – PCARDBs 21 3.21 Percentage contributions of components to variation in total assets – PCARDBs 21 4.1 Capital to risk (weighted) assets ratio (CRAR) of AIFIs - position as on March 31 23 4.2 Average return on assets of AIFIs 23 4.3 Net NPAs/net loans of AIFIs – position as on March 31 24 4.4 Select fi nancial parameters of NBFCs-D – position as on March 31 25 4.5 Gross NPA and net NPA of NBFCs-D 25 4.6 Comparative growth (y-o-y) in credit extended by banks and NBFCs 26 4.7 Financial performance of NBFCs-ND-SI - position as on March 31 26 4.8 NPA ratios of NBFCs-ND-SI – position as on March 31 26 4.9 Financial performance of standalone PDs 27 4.10 Capital and risk weighted asset position of standalone PDs – position as on March 31 27 List of Tables 2.1 ROA and ROE of SCBs – bank-group-wise 8 3.1 A PROFILE OF RURAL CO-Operatives (As on March 31, 2014) 18 3.2 Soundness indicators of rural co-operative banks (short-term) 19 3.3 Soundness indicators of rural co-operative banks (long-term) 21 4.1 Liabilities and assets of AIFIs (as at end-March) 22 4.2 Financial performance of select all India fi nancial institutions 23 4.3 Consolidated balance sheet of NBFCs-D – position as on March 31 24 4.4 Consolidated balance sheet of NBFCs-ND-SI – position as on March 31 25 The detailed data on balance sheets as well as income and expenditure of SCBs are available in the ‘Statistical Tables Relating to Banks in India 2014-15’ (www.rbi.org.in)List of Select Abbreviations AFC Asset Finance Company NBFC-ND-SI Non-Banking Financial Company – Non-Deposit Taking – Systemically AIFI All India Financial Institution Important ATM Automated Teller Machine NBFC-MFI Non-Banking Financial Company – BC Business Correspondent Micro Finance Institution BCBS Basel Committee on Banking NBFC-IFC Non-Banking Financial Company – Supervision Infrastructure Finance Company BSBDA Basic Savings Bank Deposit Account NBFI Non-Banking Financial Institution CASA Current Account and Saving Account NHB National Housing Bank CRAR Capital to Risk-Weighted Assets Ratio NIM Net Interest Margin DCCB District Central Co-operative Bank NPA Non-Performing Advances PACS Primary Agricultural Credit Society D-SIB Domestic Systemically Important Bank PCARDB Primary Co-operative Agriculture and Rural Development Bank ECB External Commercial Borrowing PD Primary Dealer EME Emerging Market Economy PMJDY Pradhan Mantri Jan Dhan Yojana EXIM Bank Export Import Bank of India PPI Pre-paid Payment Instrument FB Foreign Bank PSB Public Sector Bank FI Financial Institution PVB Private Sector Bank FIP Financial Inclusion Plan RoA Return on Asset FSB Financial Stability Board RoE Return on Equity GNPA Gross Non-Performing Advances RNBC Residual Non-Banking Financial G-SIB Global Systemically Important Bank Company IFRS International Financial Reporting RRB Regional Rural Bank Standards RWA Risk Weighted Asset JLF Joint Lenders’ Forum SCB Scheduled Commercial Bank KPI Key Performance Indicator SCARDB State Co-operative Agriculture and KYC Know Your Customer Rural Development Bank LAB Local Area Bank SIDBI Small Industries Development Bank of India LC Loan Company SMA Special Mention Account LCR Liquidity Coverage Ratio SFB Small Finance Bank LRE Leverage Ratio Exposure StCB State Co-operative Bank NABARD National Bank for Agriculture and Rural Development SLCC State Level Coordination Committee SLR Statutory Liquidity Ratio NBFC Non-Banking Financial Company TLAC Total Loss Absorbing Capacity NBFC-D Non-Banking Financial Company - Deposit Taking UCB Urban Co-operative Bank iReport on Trend and Progress of Banking in India 2014-15 Chapter I Perspective and Policy Environment Introduction Banks (LABs) recorded an improvement in their profi tability. 1.1 The risks to global fi nancial stability continued to remain at elevated levels, with global growth 1.4 The operations of urban and rural credit witnessing a fragile and multi-paced pattern of cooperatives, another major segment of the Indian recovery. In the meanwhile, the global macro-fi nancial fi nancial landscape, are fraught with concerns arising risks shifted from advanced to emerging economies out of multiple regulatory control and governance. with the latter facing pressures from weakening There has been a steady progress towards resolving prospects of growth, falling commodity prices and these concerns by instituting appropriate regulatory strengthening of the dollar.1 Within the emerging changes, a process which continued even in 2014-15. world, however, the Indian economy appeared quite These measures have by and large helped in improving resilient, given a modest recovery in the economy, the fi nancial performance of these institutions during declining infl ation and buoyant capital fl ows that the recent years; the improvement, however, has been helped in maintaining the external sector balance. slow-paced and limited to certain segments of the cooperative system. Illustratively, while there has 1.2 The performance of the Indian banking sector been a turnaround in the fi nancial stability indicators during the year, however, remained subdued. First, of the state level short-term co-operative credit the banking sector experienced a slowdown in balance institutions, asset quality concerns remain for the sheet growth in 2014-15, a trend that had set in since long-term institutions. 2011-12. The slowdown was most notable in the case of bank credit, which dipped to a single-digit fi gure 1.5 Finally, the balance sheet and financial during the year. Second, while profi ts of the banking performance of non-banking fi nancial companies sector turned around from an absolute decline in the (NBFCs), which play a vital role in catering to various previous year, this positive growth was on account of niche demands in fi nancial services, were at variance a decline in the growth of operating expenses rather with the commercial banking sector in some respects than a rise in the growth of income of the banks. while mirroring the sector in other respects in 2014- Third, notwithstanding the increase in profi t growth, 15. The growth in credit from NBFCs was higher than the return on assets (RoA), a common indicator of the bank credit and this also showed an increasing fi nancial viability, did not show any improvement in trend on a year-on-year basis. However, like commercial 2014-15. In particular, the profi tability of public sector banks, the asset quality of NBFCs also deteriorated. banks (PSBs) diminished with their RoA declining 1.6 In sum, the operations of the banking sector signifi cantly in recent years. Fourth, the deterioration and the NBFC sector for the year 2014-15, exhibited in the asset quality of banks in general, and PSBs in several weak spots. However, when compared with particular, continued during the year with rise in the global banking trends in profi tability, asset quality volume and proportion of stressed assets. and capital positions, the Indian banking sector did 1.3 The other constituents of the banking sector, not appear to be an exceptional under-performer. namely Regional Rural Banks (RRBs) witnessed Furthermore, the regulatory steps initiated in 2014-15 deceleration in profi t growth. However, Local Area as well as in the earlier years are expected to address 1 Global Financial Stability Report – April 2015, IMF. 1Chapter I Perspective and Policy Environment many of the short-term concerns affl icting the sector, several immediate concerns relating to profi tability, while paving way for medium to long-term reforms asset quality and many long-standing issues about in this sector. capital positions and governance. 1.7 Some of the major regulatory steps taken 1.10 A need was, thus, felt to initiate certain reform during the year and the perspectives about how these measures for PSBs. Accordingly, the government announced regulatory reforms relating to PSBs as part steps would help in reforming the Indian banking of ‘Indradhanush’ (a seven-point action plan) package sector are as follows:2 in August 2015. This included a number of De-stressing the banking sector recommendations made by the Committee to Review 1.8 As decline in asset quality has been a key area the Governance of Boards of Banks in India (Chairman: of concern for the banking sector in general and PSBs Dr. P. J. Nayak) in May 2014. in particular, several regulatory measures to de-stress 1.11 The salient reforms under this package banks’ balance sheets have been taken in the recent involved a restructuring of the appointment process years, including in the year 2014-15. The basic of whole-time directors and non-executive chairmen Framework for Revitalising Distressed Assets in the of the PSBs while the bifurcation of the post of Economy was released by the Reserve Bank in January Chairman and Managing Director of PSBs into 2014. Following this, several regulatory steps were executive Managing Director and non-executive taken which were aimed at instituting a mechanism Chairman was done in December 2014. Both these steps would imbibe professionalism in the operation for rectifi cation, restructuring and recovery of stressed of banks’ boards and improve their effi ciency in the assets. These involved the preparation of a corrective decision making process. action plan by the Joint Lenders’ Forum (JLF) for distressed assets, periodic refi nancing and fi xing a 1.12 A fresh plan for recapitalisation was also longer repayment schedule for long-term projects as introduced as part of the seven-point plan with the part of fl exible structuring, extension of the date of proposed capital infusion in PSBs, following a commencement of commercial operations in the case performance and need-based approach to the tune of of project loans to infrastructure sector without these `700 billion till 2019. This capital support would be vital for PSBs in light of their weakening capital loans being labelled as non-performing advances positions and would enable them to adopt the Basel (NPAs) subject to certain conditions, strategic III framework. Furthermore, a framework for restructuring of debt involving the provision to accountability for PSBs was also introduced based on convert debt into equity, issuance of guidelines about Key Performance Indicators (KPI) that measured the classifi cation of wilful defaulters and non-cooperative performance of these banks using quantitative and borrowers, among others. qualitative indicators. This would improve the overall Reforming the public sector banks (PSBs) functioning of PSBs and make them more accountable to their stakeholders. 1.9 The PSBs have contributed signifi cantly to expand the outreach of Indian banking geographically Improving monetary policy transmission and sectorally. Furthermore, they have been 1.13 In 2014-15, following the recommendations instrumental in providing credit support to the of the Expert Committee to Revise and Strengthen mammoth infrastructural needs of the country. the Monetary Policy Framework (Chairman: Dr. Urjit However, the PSBs have been presently affected by 2 For a detailed chronology of policy measures relating to the banking sector, see the RBI Annual Report – 2014-15. 2Report on Trend and Progress of Banking in India 2014-15 R. Patel), the Reserve Bank adopted a fl exible infl ation measure of leverage in the form of an indicative targeting approach in monetary policy formulation, Leverage Ratio of 4.5 per cent as part of a parallel run aimed at making it more transparent and predictable. till the fi nal norms for the same are prescribed by the However, some of the structural rigidities within the BCBS. This ratio is expected to supplement the risk- credit market tend to impede the transmission of the based CRAR in monitoring excessive risk-taking and monetary policy. The stickiness of the base rate build-up of on and off-balance sheet leverage by banks. system itself has been identifi ed as an impediment Dealing with the concern of too-big-to-fail to an effective transmission. Hence, in 2014-15, the 1.16 The Financial Stability Board (FSB) has issued Reserve Bank allowed banks to revisit their base rate the final Total Loss-Absorbing Capacity (TLAC) methodology on a more frequent basis and also standard for global systemically important banks encouraged them to use marginal cost of funds instead (G-SIBs) on November 9, 2015 as part of its reforms of average cost of funds to calculate the base rate. agenda to deal with ‘too-big-to-fail’ for banks. The Going forward, banks will be encouraged to move to standard has been designed to ensure that the G-SIBs marginal cost pricing and then to using market would have sufficient loss-absorbing and benchmarks. recapitalisation capacity available for implementing Strengthening the liquidity standards of banks an orderly resolution that minimises impact on fi nancial stability, maintains the continuity of critical 1.14 While the Indian banks are in the process of functions, and avoids exposing public funds to loss. migrating to capital standards as prescribed under the Basel III framework, the implementation of liquidity 1.17 The standard would be implemented in all standards marks the second important step in FSB jurisdictions. G-SIBs would be required to meet implementing the package of reforms suggested by the TLAC requirement alongside the minimum the Basel Committee on Banking Supervision (BCBS). regulatory requirements set out in the Basel III Following the fi nal guidelines from the Reserve Bank, framework. They would be required to meet a the liquidity coverage ratio (LCR) was made operational minimum TLAC requirement of at least 16 per cent as part of the Basel III framework on liquidity of the resolution group’s risk-weighted assets (RWAs) standards on January 1, 2015. The compliance to this (TLAC RWA Minimum) from January 1, 2019 and at ratio has been made easier for banks as a part of their least 18 per cent from January 1, 2022. Minimum Statutory Liquidity Ratio (SLR) investments has been TLAC must also be at least 6 per cent of the Basel III deemed eligible to be classifi ed as high quality liquid leverage ratio denominator (TLAC Leverage Ratio assets. Furthermore, the Reserve Bank also prescribed Exposure (LRE) Minimum) from January 1, 2019, and liquidity monitoring tools and liquidity disclosures at least 6.75 per cent from January 1, 2022. G-SIBs for strengthening the liquidity management by banks. headquartered in emerging market economies (EMEs) would be required to meet the 16 per cent RWA and Monitoring the build-up of leverage in the banking 6 per cent LRE Minimum TLAC requirement no later system than January 1, 2025, and the 18 per cent RWA and 1.15 India has been in the forefront in terms of 6.75 per cent LRE Minimum TLAC requirement no adopting capital adequacy norms as per the Basel III later than January 1, 2028. This conformance period framework and has in fact stipulated a higher Capital will be accelerated if, in the next fi ve years, the to Risk-Weighted Assets Ratio (CRAR) than what is aggregate amount of the EME’s fi nancial and non- recommended by the BCBS. In January 2015, it also fi nancial corporate debt securities or bonds outstanding introduced a simple, back-stop, non-risk based exceeds 55 per cent of the EME’s GDP. Monitoring of 3Chapter I Perspective and Policy Environment implementation of the TLAC standard would be done in India as they are well regulated and do not by the FSB and a review of the technical implementation undertake any complex fi nancial transactions. would be done by the end of 2019. 1.21 In 2014-15, the regulations governing NBFCs 1.18 Though there are 17 G-SIBs operating in India, were further strengthened to minimise the scope for none of these is headquartered in India. The regulatory arbitrage between these institutions and identifi cation of Domestic-Systemically Important banks. Accordingly, a calibrated strengthening of the Banks (D-SIBs) and designing an additional capital norms for provisioning and asset classifi cation was charge for these institutions would be an important prescribed for NBFCs. Furthermore, like commercial step in preserving systemic stability of the Indian banks, the NBFCs were directed to disclose their large banking sector. While the framework for regulatory credits and create a special sub-category of assets as treatment of G-SIBs has been designed by the FSB, the Special Mention Accounts (SMAs) to detect incipient Reserve Bank has framed the guidelines for the D-SIBs. signs of stress in their loan books. Along with the Accordingly, the list of D-SIBs was released in August regulatory requirements to step up the capital base 2015 highlighting the names of the two largest banks, and seek credit rating for any further deposit one each from the public and private sector. This list mobilisation for deposit taking NBFCs, these recent would be updated each year in August and the measures would place the entire non-banking sector identifi ed banks have to meet the additional Tier I on a sound regulatory footing. capital requirements. Reviving the licensing and expansion of urban co- Convergence with the international accounting operative banks standards 1.22 Urban Co-operative Banks (UCBs) have played 1.19 An important component of the ongoing an important role in extending fi nancial inclusion in global reforms for the banking sector is the accounting India since their inception in the early 20th century reforms such that banks prepare their financial and more so, after they were brought under the statements in a standardised and internationally purview of the Banking Regulation Act (as applicable acceptable manner. The issue of convergence of the to co-operative societies) in 1966. However, given the current accounting framework under the Indian rapid growth of these banks and increasing concerns Accounting Standards with the International Financial about their fi nancial soundness, the Reserve Bank Reporting Standards (IFRS) has been under initiated the process of voluntary consolidation of consideration since 2006. Towards this objective, a these institutions in 2005. This process was aimed at roadmap was proposed by the Reserve Bank for encouraging the growth of fi nancially stronger UCBs implementing IFRS which would enable both the and non-disruptive exit of the weaker ones. Scheduled Commercial Banks (SCBs) and the NBFCs Consequently, the issuance of fresh licenses to the to migrate to the IFRS from 2018-19 onwards. UCBs was also put on hold. Minimising the regulatory arbitrage between banks 1.23 However, with a considerable progress made and non-banks regarding the consolidation of this sector, the issue 1.20 A major component of the reforms envisaged of licensing was revisited by two recent committees: by the FSB relates to treatment of shadow banking the Expert Committee on Licensing of New UCBs sector. In the Indian context, NBFCs are considered (Chairman: Shri Y. H. Malegam) and the High Powered as shadow banks. However, the concerns that affl ict Committee on UCBs (Chairman: Shri R. Gandhi). The shadow banks in other countries do not exist much latter has suggested the timing and terms for 4Report on Trend and Progress of Banking in India 2014-15 licensing of new UCBs taking into account the 2014 identifi ed on the basis of their business plan to concerns relating to financial stability, financial achieve fi nancial inclusion; 10 differential licenses inclusion, existing legal framework and business for payments banks and 11 licenses for SFBs catering considerations of individual UCBs. The Committee to small payments/fi nance needs in the economy; has suggested that a UCB with business size of `200 revising the priority sector guidelines with a specifi c billion or more may be eligible to convert to a focus on small and marginal farmers and micro- commercial bank. Further, smaller UCBs can enterprises and further simplifi cation of the Know- voluntarily convert to Small Finance Banks (SFBs) Your-Customer (KYC) guidelines for low risk customers. irrespective of the threshold limit, provided they Further, to work out a medium-term (five year) fulfill all the eligibility criteria and given the measureable action plan for fi nancial inclusion, the availability of licencing window to the SFBs. Reserve Bank has constituted a Committee on Medium-term Path on Financial Inclusion (Chairman: Making the banking sector more inclusive Shri Deepak Mohanty). 1.24 Financial inclusion ranks high in the list of 1.26 To conclude, a competitive, sound and priorities of the Reserve Bank. Accordingly, banks inclusive banking system is sine-qua-non for a were encouraged by the Reserve Bank to pursue Board- growing economy like India that aspires to be globally approved three-year Financial Inclusion Plans (FIP) competitive. Despite the fact that the year 2014-15 since 2010. With the inception of the Pradhan Mantri posed several challenges for the Indian banking sector, Jan Dhan Yojana (PMJDY) in August 2014, the various proactive and forward-looking policy Government of India has accorded top priority to the measures were taken. These policies would enable pursuit of fi nancial inclusion. banks to face the challenges relating to asset quality 1.25 Many of the measures taken by the Reserve and profi tability in the short-term and would also Bank in 2014-15 have reaffi rmed its commitment to support them to meet the diverse and largely unmet fi nancial inclusion. The salient ones among these needs of banking services, while successfully were: the licensing of two universal banks in August competing with global players, in the long-term. 5Chapter II Operations and Performance of Scheduled Commercial Banks Chapter II Operations and Performance of Scheduled Commercial Banks Consolidated operations1 Chart 2.1: Movement in assets, credit and deposit growth of the SCBs 25 2.1 The slowdown in growth in the balance sheets of banks witnessed since 2011-12 continued during 20 2014-15. The moderation in assets growth of 15 scheduled commercial banks (SCBs) was mainly nt e c attributed to tepid growth in loans and advances to Per 10 below 10 per cent (Chart 2.1). Growth in investments also slowed down marginally. The decline in credit 5 growth refl ected the slowdown in industrial growth, 0 poor earnings growth reported by the corporates, risk 2010-11 2011-12 2012-13 2013-14 2014-15 aversion on the part of banks in the background of Assetsgrowth Creditgrowth Depositgrowth rising bad loans and governance related issues. Source: Annual accounts of banks and RBI staff calculations. Further, with the availability of alternative sources, Chart 2.2: Growth in CASA deposits of the SCBs corporates also switched part of their fi nancing needs 20 to other sources such as external commercial 16 borrowings (ECBs), corporate bonds and commercial papers. On the liabilities side, growth in deposits and 12 nt borrowings also declined signifi cantly. Bank-group er ce wise, public sector banks (PSBs) witnessed deceleration P 8 in credit growth in 2014-15; private sector banks 4 (PVBs) and foreign banks (FBs), however, indicated higher credit growth. 0 PSBs PVBs FBs AllSCBs CASA deposits 2013-14 2014-15 2.2 Growth in current account and saving account Source: Annual accounts of banks and RBI staff calculations. (CASA) deposits moderated due to decline in saving Chart 2.3: Trends in outstanding C-D ratio, bank-group wise – deposits which in turn got refl ected in deceleration position as on March 31 in overall deposit growth (Chart 2.2). Bank-group wise, 100 PSBs recorded decline in CASA deposits while PVBs 80 and FBs recorded higher growth during 2014-15. Credit-deposit ratio 60 nt e c 2.3 Credit-Deposit (C-D) ratio of the SCBs stood Per 40 at around 78 per cent, same as that of previous year. 20 Among the bank-groups, the C-D ratio of the private sector banks improved marginally with the other 0 PSBs PVBs FBs AllSCBs constituents recording a decline (Chart 2.3). 2013 2014 2015 1 Including overseas operations. Source: Annual accounts of banks and RBI staff calculations. 6Report on Trend and Progress of Banking in India 2014-15 Maturity profi le of liabilities and assets Chart 2.4: Trend in maturity profi le of assets and liabilities 2.4 The maturity profi le of liabilities of the SCBs 60 witnessed an improvement during 2014-15 as the 50 proportion of short-term liabilities declined and that 40 of long-term liabilities increased. On the assets side, nt share of long-term assets declined and the share of erce 30 P short-term assets increased marginally (Chart 2.4). 20 This can be seen in the light of risk aversion on the 10 part of banks in the backdrop of rising share of non- 0 performing loans. The proportion of long-term loans 2012-13 2013-14 2014-15 Shareofshort-termassets Shareof longterm-assets and advances declined to 27.3 per cent in 2014-15 Shareofshort-termliabilities Shareof long term liabilities from 28.9 per cent in the previous year (Chart 2.5). Note: Short-term is maturity upto 1 year while long-term is maturity of 2.5 The PSBs, however, had 52 per cent of their more than 3 years. Source: Annual accounts of banks and RBI staff calculations. investments in more than 5 year maturity bracket during 2014-15 while investments of the PVBs and Chart 2.5: Maturity profi le of select liabilities / assets of the SCBs FBs in that tenor, aggregated 30.4 per cent and 5.6 per 100 cent, respectively. 80 Off-balance sheet operations nt 60 e c 2.6 Off-balance sheet liabilities (notional) of per 40 n i banks showed some resilience on the back of a hare 20 S lukewarm growth in the previous year and the 0 deceleration in the growth of balance sheet operations 2013-14 2014-15 2013-14 2014-15 2013-14 2014-15 2013-14 2014-15 Deposits Borrowings Loansand Investments of the banks. This was mainly driven by contingent advances liabilities on account of outstanding forward exchange Upto1year Over 3 years and up to 5 years Over 1 yearand up to 3 years Over 5 years contracts, which has the largest share in off-balance sheet operations of banks (Chart 2.6). Bank group-wise Source: Annual accounts of banks and RBI staff calculations. analysis revealed that, off-balance sheet exposure Chart 2.6: Composition and growth of (notional) as percentage of on-balance sheet liabilities off-balance sheet liabilities of SCBs remained signifi cantly higher for foreign banks as 100 20 compared with other bank groups, due to their higher 80 10 exposure to forward contracts, guarantees and nt nt ce 60 ce acceptance/endorsements. per 0 per in 40 in Financial performance of the SCBs Share 20 -10 Growth 2.7 Both interest earnings and interest expended 0 -20 2012-13 2013-14 2014-15 recorded a lower growth during 2014-15 as compared Forwardexchangecontract Guarantees to the previous year. Interest earnings refl ected the Acceptancesande-ndorsements impact of slower credit growth. However, decline in Growthin offbalancesheet(notional)(RHS) interest income was marginally higher than interest Growthin balancesheet (RHS) expended. As a result, net interest income grew less Source: Annual accounts of banks and RBI staff calculations. 7Chapter II Operations and Performance of Scheduled Commercial Banks than the previous year despite an improvement in Chart 2.7: Growth of select items of income and expenditure the operating expenses (through reduction in the 35 30 growth of wage bill). Also, the pace of increase in 25 20 provisions and contingencies due to delinquent loans 15 10 declined sharply. This led to an increase in net profi ts nt 5 at the aggregate level by 10.1 per cent during 2014-15 erce -50 P -10 a y 2 ns e . e8 aa t r g ia ( nCin th es Fa rt o er a lt sl o t2d w.e m7c i)l n a.in rg g e t i h nin e ( n Ntre Iet Mn p d )r o aifi n n t dts h d seu p rr rei en c aeg dn t h t ( de p i ap fs fr ete , rv ebi no ou t ch es -15 Interestincome Non-interestincome Interestexpended Operatingexpenses Provisionsand contingencies Net profit between return and cost of funds) witnessed marginal 2013-14 2014-15 decline (Chart 2.8). Source: Annual accounts of banks and staff calculations. 2.9 During 2014-15, return on assets (RoA) Chart 2.8: Financial performance of SCBs remained at the same level as previous year, however, 10 4 return on equity (RoE) dipped marginally (Table 2.1). 8 At the bank-group level, the RoA of PSBs declined 3 though that of PVBs and FBs showed an improvement. 6 nt 2 ent e c Priority sector credit erc 4 Per P 1 2.10 Following the overall trend, credit growth to 2 priority sector also declined during 2014-15 (Chart 0 0 2.9) and this decline was spread over all the sub- 2011-12 2012-13 2013-14 2014-15 Costof funds Return onfunds sectors with growth in credit to agriculture declining NIM(RHS) Spread(RHS) to 12.6 per cent from 30.2 per cent in the previous Notes: Cost of Funds= (Interest paid on deposits + Interest paid on year. Credit to priority sectors by PSBs, PVBs and FBs borrowings) / (Average of current and previous year’s deposits + borrowings). was 38.2 per cent, 43.2 per cent and 32.2 per cent (of Return on Funds = (Interest earned on advances + Interest earned on adjusted net bank credit (ANBC)/credit equivalent of investments) / ( Average of current and previous year’s advances + investments). off-balance sheet exposure, whichever is higher) Net Interst Margin = Net Interest Income / Average total Assets. Spread = Difference between return and cost of funds. respectively, during the year. Thus, PSBs indicated a Source: Annual accounts of banks and RBI staff calculations. Table 2.1: ROA and ROE of SCBs – Bank-group wise (per cent) Sr. Bank group Return on assets Return on equity no 2013-14 2014-15 2013-14 2014-15 1 Public sector banks 0.50 0.46 8.47 7.76 1.1 Nationalised banks* 0.45 0.37 7.76 6.44 1.2 State Bank group 0.63 0.66 10.03 10.56 2 Private sector banks 1.65 1.68 16.22 15.74 3 Foreign banks 1.54 1.87 9.03 10.24 4 All SCBs 0.81 0.81 10.68 10.42 Notes: Return on Assets = Net profi t/Average total assets. Return on Equity = Net profi t/Average total equity. * : Nationalised banks include IDBI Bank Ltd. Source: Annual accounts of banks and RBI staff calculations. 8Report on Trend and Progress of Banking in India 2014-15 shortfall from the overall target of 40 per cent.2 Within Chart 2.9: Trend in growth in priority sector and total credit priority sector credit, both PSBs (16.5 per cent) and 30 PVBs (14.8 per cent) had a shortfall in advances to 25 agricultural sector against the target of 18 per cent. 20 Retail credit nt e 2.11 Retail loan portfolio of the banks continued Perc 15 to grow at around 20 per cent during 2014-15 even 10 though there was deceleration in the total credit 5 growth of banks. Housing loans (constituted around 0 half of the total outstanding retail loans) and credit 2011-12 2012-13 2013-14 2014-15 card receivables grew by more than 20 per cent. Auto- Totalcredit Prioritysectorcredit loans also recorded a recovery (Chart 2.10). Source: RBI Supervisory Returns and RBI staff calculations. Credit to sensitive sectors Chart 2.10: Growth in retail loans 2.12 Capital market, real estate market and 24 commodities market have been classifi ed as sensitive 22 sectors as fl uctuations in prices of underlying assets 20 in these sectors could adversly affect the asset quality ent 18 c of banks. In 2014-15, sensitive sectors accounted for Per 16 18.5 per cent of the total loans and advances of banks. 14 Within these sensitive sectors, more than 90 per cent 12 comprised lending to real estate market. However, in 10 2011-12 2012-13 2013-14 2014-15 line with overall trend, credit growth to sensitive Totalretailloans Auto loans sectors also witnessed a decline on account of lower Creditcardreceivables Housingloans growth in lending to real estate market.3 Neverthless, Personal loans lending to capital market recorded higher growth Source: RBI Supervisory Returns. during 2014-15. At the bank group level, in both the Chart 2.11: Share of lending to sensitive sectors sectors, FBs’ exposure was highest followed by PVBs (Chart 2.11). Ownership pattern of SCBs 2.13 The banking sector in the country remained predominantly in the public sector with the PSBs accounting for 72.1 per cent of total banking sector assets, notwithstanding a gradual decline in their share in recent years. However, despite substantive share in total assets, the PSBs accounted for only 42.1 per cent in total profi ts during 2014-15, with the PVBs Source: Annual accounts of banks and RBI staff calculations. 2 For foreign banks, priority sector target is 32 percent of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher. 3 Please refer to Table 9 of Statistical Tables Relating to Banks in India, 2014-15. 9Chapter II Operations and Performance of Scheduled Commercial Banks surpassing the PSBs in the share of total banking Chart 2.12: Bank-group wise share in total assets and profi ts of banking sector – position as on March 31 sector profi ts (Chart 2.12). 80 2.14 The Government of India continued to have 70 more than the stipulated 51 per cent shareholding in 60 all the public sector banks, despite decline in the stake 50 in some of them in recent years. The maximum nt ce 40 foreign shareholding in the case of PSBs was around er P 30 17 per cent as at end-march 2015 (20 per cent is 20 regulatory maximum prescribed by the Reserve Bank). 10 In case of the PVBs, the maximum non-resident 0 shareholding was 73.4 per cent (74 per cent is Assets Assets Assets 2013 2014 2015 regulatory maximum prescribed by the Reserve PSBs PVBs FBs Bank).4 Source: Annual accounts of banks. Regional rural banks (RRBs) 2.15 The number of RRBs declined to 56 from 57 during the year 2014-15 due to amalgamation. Following the trend in line with SCBs, the loans and advances of RRBs also recorded a deceleration in growth to 11.7 per cent during 2014-15 as against 15.2 Chart 2.13: Financial performance of RRBs per cent in the previous year. Investments also recorded a slower growth. On the liabilities side, 3.5 1.0 deposit growth remained fl at at around 14 per cent. 0.8 2.16 During 2014-15, both interest income and 3.0 interest expended of RRBs recorded a lower growth nt 0.6 nt e e c c as compared to previous year with the former Per Per 0.4 registering a larger decline in growth. This led to 2.5 marginal decline in net interest margin (NIM). Further, 0.2 RRBs witnessed sharp deceleration in profi ts growth 2.0 0.0 to 1.9 per cent in 2014-15 as against 18.5 per cent in 2010-11 2011-12 2012-13 2013-14 2014-15 the previous year. This resulted in decline in RoA of RoA(RHS) NIM RRBs during the year (Chart 2.13). Source: NABARD. Local area banks 2.17 Local Area Banks (LABs) were established in 1996 as local banks in the private sector with jurisdiction over two or three contiguous districts to enable the mobilisation of rural savings by local institutions and make them available for investments in the local areas. Presently, four LABs are in 4 See Table 15 of Statistical Tables Relating to Banks in India, 2014-15. 10Report on Trend and Progress of Banking in India 2014-15 operation. Out of these, Capital Local Area Bank Ltd. Chart 2.14: Return on assets and net interest margin of LABs accounted for 72.9 per cent of the total assets of LABs as at end-March 2015. 2.18 Assets of the LABs grew by 22.2 per cent during 2014-15 while net interest income grew by 16.4 per cent. However, RoA witnessed a marginal decline as compared to previous year (Chart 2.14). 2.19 With the Capital Local Area Bank Ltd. getting the Reserve Bank’s ‘in-principle’ approval for the license for Small Finance Bank (SFB), share of the LABs in the total banking assets will get further reduced. Customer service Source: RBI supervisory returns. 2.20 PSBs accounted for more than 70 per cent of the complaints received during 2014-15 and in all Chart 2.15: Bank-group wise break-up of major complaint types: 2014-15 major categories, the share of PSBs was more than 60 per cent. However, the PVBs accounted for more than Non-observanceoffairpracticescode 25 per cent of complaints relating to ATMs, credit/ FailureoncommitmenttoBCSBIcode debit cards and non-observance of fair practices code (Chart 2.15). Pension Technological Developments in Scheduled ATM/credit/debitcards Commercial Banks Loans/advances(general&housing) Growth in automated teller machines (ATMs) Depositaccount 0 50 100 2.21 The banks increased their penetration further Percent with the total number of ATMs reaching 0.18 million PSBs PVBs FBs in 2015. However, there was a decline in growth of Source: RBI. ATMs of both PSBs as well as PVBs. PSBs recorded a growth of 16.7 per cent during 2014-15 maintaining Chart 2.16: Growth and composition of ATMs a share of around 70 per cent in total number of ATMs. FBs continued to record a negative growth in number 100 of ATMs (Chart 2.16). 50 nt e c er P 0 2012-13 2013-14 2014-15 -50 Shareofpublicsectorbanks Shareofprivatesectorbanks Shareofforeignbanks Growthin ATMs of PSBs Growthin ATMs of PVBs Growthin ATMs of FBs Source: RBI. 11Chapter II Operations and Performance of Scheduled Commercial Banks Population group-wise distribution of ATMs Chart 2.17: Geographical distribution of ATMs 2.22 In recent years, the shares of ATMs in rural 40 and semi-urban area have been rising, though urban 35 and metropolitan centres still dominate. In 2015, 30 about 44 per cent of the ATMs were located in rural nt 25 e and semi-urban centres (Chart 2.17). c er 20 p n Off-site ATMs ei 15 ar h S 10 2.23 The share of off-site ATMs in total ATMs increased to 50.9 per cent as at end-March 2015 from 5 47.9 per cent in the previous year. The increase in 0 Rural Semi-urban Urban Metropolitan share of off-site ATMs of public sector banks played 2013 2014 2015 a major role, which increased to 45.7 per cent in 2015 Source: RBI. from 40.3 per cent in 2014. The share of private sector and foreign banks was already more than 60 per cent Chart 2.18: Share of off-site ATMs (Chart 2.18). 90 White label ATMs 80 2.24 Looking at the effi ciency and cost-effectiveness 70 60 of off-site ATMs, non-bank entities were allowed to own and operate ATMs called ‘White Label ATMs cent 50 er 40 (WLA)’ by the Reserve Bank in 2012. As on October P 30 31, 2015, 10,983 WLAs were installed. 20 Debit cards and credit cards 10 0 2.25 Issuance of debit cards is much higher as 2013 2014 2015 compared to credit cards and they remain a preferred PSBs PVBs FBs mode of transactions. In 2012, there were 6.3 credit Source: RBI. cards for every 100 debit cards, which declined to 3.8 in 2015 (Chart 2.19). PSBs maintained a lead over PVBs and FBs in issuing debit cards. As on March 31, 2015 Chart 2.19: Issuance of debit and credit cards approximately 83 per cent of the debit cards were issued by PSBs, while around 80 per cent of the credit cards were issued by the PVBs (57.2 per cent) and FBs (22.4 per cent). Prepaid payment instruments 2.26 Pre-paid payment instruments (PPIs) are payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. In the past few years, PPIs have emerged Source: RBI. 12Report on Trend and Progress of Banking in India 2014-15 as an easy alternative to cash for performing day to Chart 2.20: Progress of pre-paid instruments (value) day small value payment transactions. Value of PPIs 120 has increased from `79.2 billion in 2012-13 to `213.4 billion in 2014-15. Among the PPI instruments, PPI 100 card has been the most popular one (Chart 2.20), with 80 non-bank PPIs having fuelled most of this growth. n o Financial inclusion initiatives billi 60 ` 40 2.27 The Reserve Bank continued its efforts towards universal fi nancial inclusion. Given the boost 20 provided by the Pradhan Mantri Jan Dhan Yojana 0 Mobile wallet PPIcards Papervouchers (PMJDY) during the period, considerable banking 2013-14 2014-15 penetration has occurred, particularly in rural areas. Source: RBI. However, signifi cant numbers of banking outlets operate in branchless mode through business correspondents (BCs)/facilitators (Chart 2.21). Dominance of BCs in the rural areas can be gauged from the fact that almost 91 per cent of the banking outlets were operating in branchless mode as on Chart 2.21: Progress of banking outlets and basic savings bank March 31, 2015. deposit accounts (BSBDA) 2.28 As on December 9, 2015, 195.2 million 600 300 accounts have been opened and 166.7 million RuPay d n d sce hb ei mt c ea wrd as s lh aa uv ne c hb ee de on n i 2ss 8u the d A uu gn ud ste ,r 2 P 01M 4J wDY it. h T th he e thousa 400 200 million o fab cje ilc it ti iv ee ss , pof r op vr io dv ii nd gi n bg a u sin ci v be ar nsa kl i na gc c ae css c ot uo n b ta sn wki in thg Number in 200 100 Numberin overdraft facility and RuPay Debit card to all 0 0 households, conducting fi nancial literacy programmes, 2010 2011 2012 2013 2014 2015 creation of credit guarantee fund, micro-insurance BSBDAthroughbranches(RHS) BSBDAthroughBCs (RHS) and unorganised sector pension schemes. The Bankingoutletsinvillages–branches(LHS) Bankingoutletsinvillages–branchlessmode(LHS) objectives are expected to be achieved in two phases over a period of four years up to August 2018. Banks Source: RBI. are also permitted to avail of Reserve Bank’s scheme for subsidy on rural ATMs. The objectives of the fi nancial inclusion plan (FIP), spearheaded by the Reserve Bank and PMJDY are congruent to each other. 2.29 To further strengthen the fi nancial inclusion efforts and increase the penetration of insurance and 2015, 92.6 million benefi ciaries have been enrolled pension coverage in the country, the Government of under the Pradhan Mantri Suraksha Bima Yojana and India has launched some social security and insurance 29.2 million have been enrolled under Pradhan schemes, i.e., Pradhan Mantri Jeevan Jyoti Bima Mantri Jeevan Jyoti Bima Yojana. Further, 1.3 million Yojana, Pradhan Mantri Suraksha Bima Yojana and account holders have been enrolled under Atal Atal Pension Yojana in May 2015. As on December 16, Pension Yojana. 13Chapter III Developments in Co-operative Banking Chapter III Developments in Co-operative Banking 3.1 As at end-March 2015, India’s co-operative Chart 3.1: Structure of co-operative credit institutions in india – position as on March 31, 2015 banking sector comprised of 1,579 Urban Co-operative Banks (UCBs) and 94,178 Rural Co-operative Credit Multi State (29) Institutions, including short-term and long-term Scheduled UCBs Single State (50) credit institutions (Chart 3.1). During 2014-15, the Urban (21) Co- UCBs witnessed a moderation in their asset growth operatives Multi State (1,579) Non-Scheduled (22) and an increase in their net profi ts. During 2013-14, UCBs (1,529) Credit Single State the balance sheets of all rural co-operative banks, Co- (1,507) operatives except the short-term State Co-operative Banks (95,757) Long Term SCARDBs PCARDBs (StCBs), witnessed either deceleration or reversal in Rural (734) (20) (714) Co- growth. The state level short term and long-term rural operatives (94,178) Short Term StCBs DCCBs PACS co-operatives witnessed a decline in net profi ts. (93,444) (32) (370) (93,042) Urban co-operative banks DCCBs: District Central Co-operative Banks; PACS: Primary Agricultural Credit Societies; SCARDBs: State Co-operative Agriculture and Rural 3.2 The consolidation of the UCBs continued as Development Banks; PCARDBs: Primary Co-operative Agriculture and Rural Development Banks. the number of UCBs came down from 1,606 in 2013 Notes: 1. Figures in parentheses indicate the number of institutions at end-March 2015 for UCBs and at end- March 2014 for rural to 1,579 in 2015 (Chart 3.1). The Reserve Bank had co-operatives. ordered closure of six UCBs in September 2014 on 2. For rural co-operatives, the number of co-operatives refers to reporting co-operatives. account of charges of money laundering. Source: RBI. Performance of UCBs 3.3 Growth in assets of UCBs witnessed Chart 3.2: Total number and growth in assets of UCBs moderation during 2014-15 as compared to the 20 1700 previous year (Chart 3.2). Slowdown in growth of assets was led by lower growth in ‘other assets’ of nt) 16 e 1650 UCBs. Loan & advances grew by about 12 per cent and c er Bs contributed signifi cantly to the total increase in assets (p 12 UC s in 2014-15. nasset 8 1600 mberof i h u owt 1550 N Gr 4 0 1500 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 No.of UCBs(RHS) Rateof growth ofassetsofUCBs Note: Data for 2014-15 are provisional. Source: RBI supervisory returns and staff calculations. 14Report on Trend and Progress of Banking in India 2014-15 Chart 3.3: Select indicators of profi tability of UCBs Chart 3.4: Income and expenses of UCBs – variation in per cent 9.9 25 23.2 10 8.9 18.8 20 8 7.2 16.1 15.1 nt 15 13.2 12.413.8 13.0 Perce 6 cent 10 10.7 10.4 4 3.2 3.1 3.0 Per 5 2 0.8 0.8 0.8 0 Interest/ Other Interestpaid Operating Other 0 discount income expenses operating Returnonassets Returnon equity Netinterestmargin received expenses 2012-13 2013-14 2014-15 2013-14 2014-15 Source: RBI supervisory returns and staff calculations. Source: RBI supervisory returns and staff calculations. 3.4 The UCBs performed well in terms of return Chart 3.5: Non-performing advances of UCBs on equity (RoE). Net interest margin (NIM), however, 80 8 marginally moderated (Chart 3.3). There was a 7 deceleration in growth of both interest income and 60 6 interest expense while the growth in other income a 1n 5 d (C o hth are tr 3o .p 4e ).rating expenses increased during 2014- Percent 40 45 Percent 3 Asset quality 20 2 3.5 The gross non-performing advances (GNPAs) 1 ratio witnessed an increase in 2014-15 over the 0 0 2012-13 2013-14 2014-15 previous year (Chart 3.5) with the GNPA ratio rising Provisioningcoverageratio GrossNPA ratio (RHS) to 6.0 per cent at end-March 2015 from 5.7 per cent at end-March 2014. Net NPA ratio also increased from Source: RBI supervisory returns and staff calculations. 2.2 per cent to 2.7 per cent during the same period. At end-March 2015, provisions grew at a lower rate Chart 3.6: Growth in assets, NPAs and provisions than the increase in gross NPAs (Chart 3.6) resulting 20 in a lower provisioning coverage ratio as compared to the previous years. 15 10 Developments with regard to UCBs 3.6 The High Powered Committee on Urban nt 5 e c Co-operative Banks (Chairman: Shri R. Gandhi) Per 0 recommended, inter alia, that the UCBs registered -5 under Multi-state Co-operative Societies Act, 2002 and -10 with business size (deposits plus advances) of `200 2012-13 2013-14 2014-15 billion or more may be considered for conversion into -15 Growthin grossNPAs Growthin provisioning Growthintotalassets commercial banks while UCBs of smaller size willing to convert to small fi nance banks (SFBs) can apply to Source: RBI supervisory returns and staff calculations. 15Chapter III Developments in Co-operative Banking Chart 3.7: Distribution of UCBs based on Chart 3.8: Distribution of UCBs based on deposit size-position as on March 31 size of advances - position as on March 31 (` billion) (` billion) 25 30 25 20 20 Percent 11 05 Percent 15 10 5 5 0 0 0 -0.1 0.1- 0.25- 0.5-1 1-2.5 2.5-5 5to10 10and 0-0.1 0.1- 0.25- 0.5-1 1-2.5 2.5-5 5to10 10 and 0.25 0.5 above 0.25 0.5 above 2012-13 2013-14 2014-15 2012-13 2013-14 2014-15 Source: RBI supervisory returns and staff calculations. Source: RBI supervisory returns and staff calculations. the Reserve Bank for conversion if they fulfi ll all the 3.8 The share of UCBs in the best rated category eligibility criteria and the selection process prescribed under the CAMELS model, ‘A’, increased from 24.7 per cent in 2013-14 to 28.4 per cent in 2014-15. However, by the Reserve Bank and if the licensing window for the share of banking business under this category SFBs1 is open. In line with the committee’s observation recorded a decline during 2014-15 (Chart 3.9). on the growing deposits and advances of the UCBs, it is noteworthy that while the number of UCBs have Chart 3.9: Share of UCBs in rating category A - number and business size fallen due to the mergers and amalgamations, the (position as on March 31) number of Tier II UCBs have been on the rise (from 412 at end March 2013 to 442 at end-March 2014 and further to 447 at end-March 2015).2 3.7 There has been a perceptible increase in the size of deposits and advances of UCBs (Charts 3.7 and 3.8). The capital base of the scheduled UCBs has also been increasing and six of the UCBs in 2014 qualifi ed as per the minimum paid-up equity capital criteria for becoming small finance banks in 2014. The number of such UCBs stood at eight as at end-March, 2015. Source: RBI staff calculations. 1 This Committee was constituted on Jan 30, 2015 by the Reserve Bank and the Committee submitted its report on July 30, 2015. The Committee also made the following recommendations:- (cid:129) Licenses may be issued to fi nancially sound and well-managed co-operative credit societies having a good track record of minimum 5 years which satisfy the regulatory prescriptions set by the Reserve Bank as licensing conditions. (cid:129) A Board of Management (BoM) should be put in place in addition to Board of Directors (BoD), as mandatory licensing condition for licensing of new UCBs and expansion of existing ones. 2 Tier-I UCBs were defi ned as UCBs with: (cid:129) Deposit base below `1 billion operating in a single district. (cid:129) Deposit base below `1 billion operating in more than one district provided the branches were in contiguous districts, and deposits and advances of branches in one district separately constituted at least 95 per cent of the total deposits and advances, respectively, of the bank. (cid:129) Deposit base below `1 billion, whose branches were originally in a single district but subsequently became multi-district due to re-organisation of the district. All other UCBs are defi ned as Tier-II UCBs. 16Report on Trend and Progress of Banking in India 2014-15 3.9 The credit to deposit ratio has remained fl at Chart 3.10: SLR and non-SLR investments – variations in per cent during the year. However, the investment to deposit ratio for all UCBs, has declined for two consecutive years (39.2 per cent in 2013 to 36.3 per cent in 2014 and further to 34.7 per cent in 2015). The SLR investment has witnessed a moderation while the non-SLR investments have witnessed an improved position over the previous year (Chart 3.10). Scheduled UCBs 3.10 There were 50 scheduled UCBs at end-March 2015 and their share in total assets of all UCBs increased, albeit marginally, over the years (Chart Source: RBI supervisory returns and staff calculations. 3.11). 3.11 The balance sheet of scheduled UCBs Chart 3.11: Scheduled and non-scheduled UCBs-share in total expanded by 12 per cent in 2014-15 as against 15 per assets-position as on March 31 cent in 2013-14. While growth in deposits and loans and advances contributed the most in balance sheet expansion in 2013-14, the slow-down in 2014-15 was led by lower growth in other assets and liabilities. 3.12 Expenditure growth remained relatively higher than growth in income in 2014-15. Contribution of interest expenses to expenditure growth fell from 81.4 to 77.7 per cent in 2014-15. 3.13 The profi tability indicators of scheduled UCBs remained stable during the period 2013-15 (Chart 3.12). Source: RBI supervisory returns and staff calculations. Chart 3.12: Profi tability indicators of UCBs-by type 12 10.7 10 9.0 8.9 8.8 8 ent 6 c er P 4 3.4 3.4 2.7 2.5 2 0.7 0.7 0.9 1.0 0 2013-14 2014-15 2013-14 2014-15 ScheduledUCBs Non-scheduledUCBs Returnonassets Returnon equity Netinterestmargin Source: RBI supervisory returns and staff calculations. 17Chapter III Developments in Co-operative Banking Priority sector advances of UCBs Chart 3.13: Percentage distribution of credit to select priority sectors by UCBs 3.14 Priority sector advances of UCBs have 2.5 increased from 48.9 per cent in 2013-14 to 49.4 per 2.9 cent of their total advances during the period 2014-15. 10.2 2015 2014 10.3 3.8 Credit to small enterprises and housing of the UCBs 10.8 increased from the 2013 levels and continues to 2013 dominate the priority sector advances of these 1.6 7.6 co-operatives with an urban focus. Advances to the 2.2 23.5 agricultural sector continued to decline (Chart 3.13). 23.1 23.3 However, the percentage of priority sector advances directed toward weaker sections (micro credit and Agriculture Microandsmallenterprises Microcredit Housingloans micro and small enterprises) have improved during Source: RBI. 2014 - 2015, indicating enhanced commitment to Chart 3.14: Priority sector advances by UCBs to weaker sections fi nancial inclusion (Chart 3.14). 5 Rural co-operative banks 4 3.15 The share of short-term credit co-operatives, comprising StCBs, District Central Co-operative Banks 3 nt e (DCCBs) and Primary Agricultural Credit Societies c er P 2 (PACS), stood at about 93 per cent of the total assets of the rural co-operative credit institutions as on 1 March 31, 2014 while the long-term credit co- 0 operatives accounted for the remaining (Table 3.1). Agriculture Microand Micro Education Housing small credit loans loans enterprises 2012-13 2013-14 2014-15 Source: RBI. Table 3.1: A profi le of rural co-operatives (as on March 31, 2014) (` billion) Item Short-term Long-term StCBs DCCBs PACs SCARDBs PCARDBs 1 2 3 4 5 6 A. Number of Cooperatives 32 370 93042 20 714 B. Balance Sheet Indicators i. Owned Funds (Capital +Reserve) 129.9 273.7 189.2 68.7 53.0 ii. Deposits 1043.7 2368.9 819.0 15.4 7.4 iii. Borrowings 610.0 726.9 958.4 157.5 144.4 iv. Loans and Advances 1031.2 2030.03 1300.5* 204.0 128.9 v. Total Liabilities/Assets 1904.1 3734.6 2124.3+ 310.3 279.7 C. Financial Performance i. Institutions in Profi ts a. Number 26 331 43327 8 372 b. Amount of Profi t 9.8 15.2 110.5 1.6 2.7 ii. Institutions in Loss a. Number 6 36 37662 11 340 b. Amount of Loss 0.9 3.5 91.2 5.1 5.1 iii. Overall Profi ts (+)/Loss (-) 8.9 11.7 19.3 -3.5 -2.4 D. Non-performing Assets i. Amount 57.0 209.0 296.3++ 72.6 48.1 ii. As percentage of Loans Outstanding 5.5 10.3 22.8 35.6 37.3 E. Recovery of Loans to Demand Ratio (Per cent) 82.5 78.3 NA 33.3 43.9 Note: * Loans & advances outstanding, + working capital, ++ total overdues, NA= not available Source: NABARD and NAFSCOB. 18Report on Trend and Progress of Banking in India 2014-15 Short term rural credit – StCBs and DCCBs Chart 3.15: Select balance sheet indicators of StCBs 3.16 The balance sheet of both state and district 2500 14 13.1 13.3 co-operatives expanded during 2013-14, however, the 11.7 12 2000 expansion slowed down in 2013-14 for the DCCBs 10.2 10 (Chart 3.15). This moderation has been on account of n 1500 8 nt a fall in reserves. Income of StCBs in 2013-14 grew by `billio 1000 6 Perce 9.7 per cent as against an increase of 13 per cent in 4 their expenditure during the same period. Major 500 2 component that contributed to the variation in 0 0 expenditure was a steep increase in provisioning and 2012-13 2013-14 2012-13 2013-14 contingencies. The growth in net profi ts of DCCBs has Deposits Credit Investments Growthintotalassets/liabilities(RHS) decelerated sharply during 2013-14 on account of Source: NABARD. growth in both interest and non-interest expenses. The NPAs of DCCBs increased during the year 2013-14. In terms of fi nancial stability indicators, the StCBs outperformed the DCCBs (Table 3.2). 3.17 During 2013-14, the NPA ratio of StCBs fell across all regions except the southern region. The southern region showed an increase in NPA ratio (4.3 to 5.4 per cent) although the recovery ratio for the region increased as well. during the year. During 2013-14, the recovery ratio 3.18 At the district level, the DCCBs in the southern fell at the district level across all regions except region saw a marginal increase in NPA ratio in 2013-14 western (71.4 to 75.2 per cent) and central regions and the recovery ratio at the district level also declined (63.5 to 70.8 per cent). Table 3.2: Soundness indicators of rural co-operative banks (short-term) ( `billion) Item StCBs DCCBs As at Percentage As at Percentage end-March Variation end-March Variation 2013 2014P 2012-13 2013-14P 2013 2014P 2012-13 2013-14P 1 2 3 4 5 6 7 8 9 A. Total NPAs (i+ii+iii) 56.3 57.0 4.1 1.2 180.5 209.0 12.1 15.8 i. Sub-standard 20.6 20.7 28.7 0.5 78.7 100.2 25.0 27.3 (36.6) (36.3) (43.6) (47.9) ii. Doubtful 19.9 26.1 -17.1 31.2 76.2 86.9 7.3 14.0 (35.4) (45.9) (42.2) (42.6) iii. Loss 15.8 10.2 5.3 -35.4 25.6 21.9 -5.2 -14.4 (28.1) (17.9) (14.2) (10.5) B. NPA-to-Loans Ratio (%) 6.1 5.5 9.9 10.3 C. Recovery-to-Demand Ratio (%) (as on 30 June of previous year) 94.8 82.5 80.0 78.3 P : Provisional. Notes: 1. Figures in parentheses are percentages to total NPAs. 2. Due to conversion of fi gures in ` billion the total fi gures may not add up to exact total. Source: NABARD. 19Chapter III Developments in Co-operative Banking Chart 3.16: Growth in credit outstanding from PACS Chart 3.17: Group-wise share in membership of PACS and overall borrower member ratio 50 40 nt 30 e c Per 20 10 0 2011-12 2012-13 2013-14 Scheduledcaste Scheduledtribes Smallfarmers Ruralartisans Others&marginalfarmers Borrower memberratio Source: NAFSCOB. Source: NAFSCOB. Primary agricultural credit societies (PACS) Chart 3.18: Percentage of PACS in profi t and loss – all India 3.19 After witnessing a growth in credit outstanding 60 in 2012-13, the rate of credit growth of PACS slowed 49.2 down in 2013-14 (Chart 3.16). 50 45.6 46.6 39.4 40.6 40.5 3.20 The overall borrower to member ratio, which 40 nt is a useful indicator of access to credit from PACS, ce 30 er continued to fall from 2011-12 levels. Farmers – small P 20 and marginal–remain the majority members of the PACS and also have the highest borrower to member 10 ratio among all groups. The borrower-member ratio 0 2011-12 2012-13 2013-14 has declined over the previous three years S Percentageof PACSinloss (Chart 3.17). Note: Data pertains to reporting PACS only. 3.21 During 2013-14, the percentage of loss-making Source: NAFSCOB. PACS remained stable and the percentage of PACS Chart 3.19: Percentage of PACS in profi t and loss – making profi ts increased marginally to 46.6 per cent regional level as on March 31, 2014 (Chart 3.18). The eastern region, followed by the 70 65.2 north-eastern region, continue to remain the weakest 60 54.6 54.0 performing region with the loss-making PACS 50.0 51.5 50 45.0 outnumbering the profi t-making PACS (Chart 3.19). nt 40 38.0 e The northern and the central region continue to Perc 30 27.4 30.6 26.7 22.5 remain the strongest as the number of profi t-making 20 16.4 PACS are much higher than that of the loss-making 10 PACS. 0 Northern Central Western Southern Eastern North region region region region region eastern region S Percentageof PACSinloss Note: Data pertains to reporting PACS only. Source: NAFSCOB. 20Report on Trend and Progress of Banking in India 2014-15 Long term rural credit – state co-operative agriculture Chart 3.20: Percentage contributions of components to variation in total liabilities - PCARDBs and rural development banks (SCARDBs) 3.22 Balance sheet growth for SCARDBs decelerated 2013-14 -26.1 from eight per cent in 2012-13 to about one per cent -3.2 16.5 in 2013-14. The growth in reserves and loans and 37.1 -44.5 advances has been outweighed by negative growth in 2012-13 12.8 ‘other liabilities’ and ‘other assets’. Among expenses, 1.8 the share of operating expenses has fallen on account 3.8 165.0 of fall in non-wage expenses that has off-set the 36.8 increase in the wage expenses. Long term rural credit – primary co-operative Capital Reserves Deposits Borrowings Otherliabilities agriculture and rural development banks (PCARDBs) Source: NABARD. 3.23 The balance sheet contraction in 2013-14 as Chart 3.21: Percentage contributions of components opposed to balance sheet expansion during 2012-13, to variation in total assets – PCARDBs was broad based on account of fall in ‘other liabilities’, loans and advances and ‘other assets’ 2013-14 5.6 -2.9 24.3 (Charts 3.20 and 3.21). 6.2 14.1 3.24 In 2013-14, income of PCARDBs increased at 37.0 a higher rate than their expenditure. The NPA ratio 2012-13 of SCARBDs declined marginally while that of PCARDBs remained almost stable in 2013-14. 42.7 However, the recovery ratio for both SCARDBs and 72.9 PCARDBs has shown improvement (Table 3.3). Cashandbankbalances Investments Loansandadvances Otherassets Source: NABARD. Table 3.3: Soundness indicators of rural co-operative banks (long-term) (` billion) Item SCARDBs PCARDBs As at Percentage As at Percentage end-March Variation end-March Variation 2013 2014P 2012-13 2013-14P 2013 2014P 2012-13 2013-14P 1 2 3 4 5 6 7 8 9 A. Total NPAs (i+ii+iii) 67.5 72.6 4.9 7.5 49.8 48.1 7.7 -3.4 i. Sub-standard 28.2 31.0 -4.9 10.3 23.2 22.1 10.6 - 4.7 (41.7) (42.8) (46.6) (46.0) ii. Doubtful 38.1 41.4 10.5 8.7 26.2 25.6 5.0 -2.2 (56.4) (57.0) (52.6) (53.3) iii. Loss 1.2 0.1 602.2 -91.7 0.43 0.37 27.7 -14.0 (1.8) (0.2) (0.9) (0.8) B. NPA-to-Loans Ratio (%) 36 35.6 37.7 37.3 C. Recovery-to-Demand Ratio (%) (as on 30 June of previous year) 32.3 33.3 41.7 44.0 P : Provisional. Notes: 1. Figures in parentheses are percentages to total NPAs. 2. Due to conversion of fi gures in ` billion the total fi gures may not add up to exact total. Source: NABARD. 21Chapter IV Non-Banking Financial Institutions Chapter IV Non-Banking Financial Institutions Introduction advances posted a growth of 11.3 per cent while deposits and borrowings increased by 17 and 9.7 per 4.1 All India Financial Institutions (AIFIs), Non- cent, respectively during 2014-15. AIFIs, during the Banking Financial Companies (NBFCs) and Primary year, raised short-term funds mainly by floating Dealers (PDs) form three important segments of the commercial papers, which are capped under the Non-Banking Financial Institutions (NBFIs) sector in umbrella limit1. India that are regulated and supervised by the Reserve Bank. AIFIs constitute institutional mechanism entrusted with providing sector-specifi c long-term fi nancing. NBFCs comprising mostly private sector Table 4.1: Liabilities and assets of AIFIs ( `million) institutions, provide a variety of fi nancial services Item 2014 2015 Percentage including equipment leasing, hire purchase, loans, Variation and investments. Primary dealers (PDs) play a crucial Liabilities role in fostering both the primary and secondary 1. Capital 93594 109594 17.1 government securities markets. The operational and (2.06) (2.21) 2. Reserves 520298 566533 8.9 fi nancial performance of NBFIs sector is presented in (11.45) (11.44) 3. Bonds and Debentures 1141801 1059890 -7.2 this chapter. (25.13) (21.41) 4. Deposits 1865420 2183064 17.0 All India fi nancial institutions (AIFIs) (41.05) (44.09) 5. Borrowings 659456 723318 9.7 4.2 Currently, the four AIFIs regulated and (14.51) (14.61) 6. Other Liabilities 263486 308423 17.0 supervised by the Reserve Bank are Export-Import (5.80) (6.23) Bank of India (EXIM Bank), National Bank for Total Liabilities or Assets 4544054 4950822 9.0 Agriculture and Rural Development (NABARD), Assets 1. Cash and Bank Balances 73364 78213 6.7 National Housing Bank (NHB) and Small Industries (1.61) (1.58) Development Bank of India (SIDBI). They play a 2. Investments 243345 256028 5.2 (5.36) (5.17) salutary role in the fi nancial markets through credit 3. Loans and Advances 3911090 4352598 11.3 extension and refi nancing operation activities and (86.07) (87.92) 4. Bills Discounted/ Rediscounted 58385 21067 -64.0 cater to the long-term fi nancing needs of the industrial (1.28) (0.43) 5. Fixed Assets 6253 6586 5.3 sector. (0.14) (0.13) 6. Other Assets 251617 236330 -6.1 Financial performance (5.54) (4.77) Notes: i. Data pertain to four FIs, viz., EXIM Bank, NABARD, NHB and Balance sheet of AIFIs SIDBI. Data for EXIM Bank, NABARD and SIDBI for end March, while end June for NHB. 4.3 The consolidated balance sheet of the AIFIs ii. Figures in parentheses are percentages to total liabilities or expanded by 9 per cent during 2014-15 refl ecting assets. Source: Audited OSMOS Returns of EXIM Bank, NABARD and SIDBI for moderation from double-digit expansion in the end-March 2014 and 2015, respectively. Audited OSMOS Returns of NHB end June 2014 and 2015, previous couple of years (Table 4.1). Loans and respectively. 1 AIFIs are allowed to mobilise resources within the overall ‘umbrella limit’, which is linked to the net owned funds (NOF) of the FI concerned as per its latest audited balance sheet. The umbrella limit is applicable for fi ve instruments viz., term deposits, term money borrowings, certifi cates of deposits (CDs), commercial papers (CPs) and inter-corporate deposits. 22Report on Trend and Progress of Banking in India 2014-15 Table 4.2: Financial performance of all India fi nancial institutions (` million) 2013-14 2014-15 Variation Amount Percentage A) Income (a+ b) 325765 350113 24348 7.5 a) Interest Income 308887 333694 24807 8.0 (94.82) (95.31) b) Non-Interest Income 16878 16419 - 459 - 2.7 (5.18) (4.69) B) Expenditure (a+ b) 236803 262646 25843 10.9 a) Interest Expenditure 219322 243332 24010 10.9 (92.62) (92.65) b) Operating Expenses 17480 19314 1834 10.5 (7.38) (7.35) of which Wage Bill 12257 13624 1367 11.1 C) Profi t Operating Profi t (Profi t Before Tax) 61330 78339 17009 27.7 Net Profi t (Profi t After Tax) 41751 52930 11179 26.7 Note: (i) Figures in parentheses are percentages to total income/expenditure. (ii) Absolute fi gures rounded-off. Source: 1. Audited OSMOS Returns of EXIM Bank, NABARD and SIDBI for end March 2014 and 2015, respectively. 2. Audited OSMOS Returns of NHB for end June 2014 and 2015, respectively. Financial indicators Chart 4.1: Capital to risk (weighted) assets ratio (CRAR) of AIFIs - position as on March 31 4.4 AIFIs posted modest growth in income during 2014-15 owing to low growth in interest income and decline in non-interest income even while income from bill discounting/ rediscounting shrunk substantially (Table 4.2). However, AIFIs fared better on the profi tability front as both their operating profi t and net profi t increased signifi cantly during the year. 4.5 AIFIs maintained capital in excess of the stipulated norm and their capital adequacy position comparatively improved during the year (Chart 4.1). 4.6 On the whole, the FIs enjoyed higher returns Source: RBI supervisory returns. on their assets during the year barring EXIM Bank Chart 4.2: Average return on assets of AIFIs whose return on assets was marginally lower (Chart 4.2). Note: Data for NHB for end-June. Source: RBI supervisory returns. 23Chapter IV Non-Banking Financial Institutions 4.7 The asset quality of FIs deteriorated marginally Chart 4.3: Net NPAs/net loans of AIFIs – position as on March 31 and net non-performing advances (NPAs) as percentage to loans increased from 0.19 per cent in 2013-14 to 0.26 per cent in 2014-15 (Chart 4.3). Nevertheless, the stressed asset position of these four FIs remained comparatively better than that of the commercial banks and other NBFCs. Non-banking fi nancial companies (NBFCs) 4.8 Based on their liability structure, the NBFCs are classifi ed into two broad categories: (a) Deposit taking NBFCs, and (b) Non-deposit taking NBFCs. As on March 31, 2015, there were 11,842 NBFCs Note: Data for NHB for end-June. Source: RBI supervisory returns. registered with the Reserve Bank; out of which 220 were deposit-taking (NBFCs-D) and 11,622 were non- Financial performance deposit taking (NBFCs-ND) entities. The two existing Balance sheet of deposit-taking NBFCs residual Non-Banking Finance Companies (RNBCs)2 4.11 The balance sheet of NBFCs-D expanded by are in the process of winding up their businesses. 2.1 per cent during the year (Table 4.3). Loans and 4.9 The role of NBFC sector in the Indian fi nancial advances, which constituted close to three-fourth of system has become critical in terms of its size, spread and niche areas of operations. Many of the larger Table 4.3: Consolidated balance sheet of NBFCs-D (as on March 31) NBFCs have grown bigger and become more connected ( ` billion) with other fi nancial entities, necessitating periodical Items 2014 2015 P Percentage Variation review of the regulatory framework for this sector. During the year, the Reserve Bank, with a view to 1. Share Capital 33 32 -0.7 2. Reserves and Surplus 274 276 0.9 addressing the regulatory gaps, arbitrage and risks 3. Public Deposits 260 275 5.8 associated with NBFCs, initiated a host of measures 4. Debentures 417 408 -2.1 to strengthen regulation and supervision of NBFCs 5. Bank Borrowings 520 551 5.8 6. Borrowings from FIs 16 16 2.6 and harmonise their regulations with those of the 7. Inter-Corporate Borrowings 1 2 32.7 banks in a phased manner as also to foster fi nancial 8. Commercial Paper 93 78 -16.6 stability. 9. Borrowings from Government 38 38 -1.0 10. Subordinated Debts 79 78 -2.2 Deposit-taking NBFCs (NBFCs-D) 11. Other Borrowings 153 170 11.1 4.10 The Reserve Bank, as part of deliberate policy, Total Liabilities/Assets 1885 1925 2.1 has been discouraging the NBFCs from engaging in 1. Loans and Advances 1585 1601 1.0 2. Hire Purchase and Lease Assets 46 39 -14.8 deposit mobilisation activities, with a view to 3. Investments 58 77 32.8 protecting depositors’ interests as also fostering 4. Other Assets 195 205 5.1 fi nancial stability. The regulations for the NBFCs-D P: Provisional. have been strengthened so that only the sound and Note: Absolute fi gures rounded-off. Percentage variation is based on precise numbers. well-functioning entities remain in business. Source: Quarterly returns of NBFCs-D. 2 RNBCs in the process of winding up are: Peerless General Finance and Investment Ltd. and Sahara India Financial Corporation Ltd. (SIFCL). 24Report on Trend and Progress of Banking in India 2014-15 their assets, rose marginally whereas investment Chart 4.4: Select fi nancial parameters of NBFCs-D – position as on March 31 activities of NBFCs-D witnessed a sharp rise during 300 the year. On the liability side, the expansion was 246 250 217 mainly in terms of public deposits, and bank 200 n borrowings. Borrowings from banks still constituted billio 150 the largest source of funding for NBFCs-D. Mobilisation ` 100 50 59 43 45 43 of funds through debentures, which constituted the 50 17 24 1519 15 17 28 0 second biggest source of funding, declined during the Fy d ie e na c alr i n. n cB e ido a r ls r iho naw dr ipi cn l ayg t odt ruh srr io nu gg th h ec o ym eam r.ercial papers also Income Interestpayment peratingexpenses Othersexpenses Taxprovisions Profitbefore tax Profitaftertax O 2014 2015P 4.12 As compared to the previous year, growth in Source: RBI supervisory returns. profi tability declined during 2014-15 which inter alia Chart 4.5: Gross NPA and net NPA of NBFCs-D may be attributed to increased interest payment 5 burden and higher operating expenses (Chart 4.4). 4.1 Asset quality of NBFCs-D 4 3.6 3.5 3.1 4.13 Asset quality of NBFCs-D deteriorated as both 3 nt e gross and net NPAs increased during 2014-15 (Chart c Per 2 1.5 1.7 4.5). Category-wise, deterioration in asset quality was 1.3 1.1 1.0 1.1 more in respect of the Asset Finance Companies 1 0.7 0.7 (AFCs) as compared to the Loan Companies (LCs)3. 0 2013-14 2014-15P 2013-14 2014-15P Non-deposit taking systemically important NBFCs Gross NPA ratio (%) Net NPA ratio (%) (NBFCs-ND-SI) AFCs LCs AllNBFCs-D Source: RBI supervisory returns. Financial performance Table 4.4: Consolidated balance sheet of 4.14 Non-deposit taking NBFCs with an asset size NBFCs-ND-SI-position as on March 31 ( ` billion) of `1 billion or more were being classified as Item 2014 2015 P Variation systemically important NBFCs (NBFCs-ND-SI) till (Per cent) November 2014. Since then, an upward revision in 1 2 3 4 the asset size criterion for classifying NBFCs-ND-SI4 1. Share Capital 638 685 7.4 2. Reserves and Surplus 2311 2613 13.1 has been effected, which now stands at `5 billion. 3. Total Borrowings 8669 10177 17.4 4. Current Liabilities and Provisions 608 691 13.6 During 2014-15, the balance sheet of NBFCs-ND-SI Total Liabilities/ Total Assets 12226 14166 15.9 expanded signifi cantly on the back of marked growth 1. Loans and Advances 8273 9555 15.5 2. Hire Purchase Assets 895 985 10.1 in disbursement of loans and advances on the asset 3. Investments 1888 2267 20.1 4. Other Assets 1170 1359 16.2 side and sharp rise in borrowings on the liability side P: Provisional. (Table 4.4). Note: Data presented here pertain to 418 entities, which have consistently reported data for end March 2014 and 2015 respectively and accounted for more than 95 per cent of the total assets of the NBFCs-ND-SI sector. Source: Monthly returns of NBFCs-ND-SI (`1 billion and above). 3 Asset fi nance company (AFC): AFC is a non-bank fi nancial company, carrying on the principal business of fi nancing of physical assets. Investment company. Loan company (LC): LC is non-bank fi nancial company, carrying on the principal business of providing loans or advances for any activity other than its own but does not include AFC. 4 For the sake of comparability, however, in the present analysis, old defi nition of NBFCs-ND-SI has been considered. 25Chapter IV Non-Banking Financial Institutions 4.15 Loans and advances extended by NBFCs-ND- Chart 4.6: Comparative growth (y-o-y) in credit extended by banks and NBFCs SI posted signifi cant growth at 15.5 per cent during 2014-15, in contrast to the slowdown in commercial bank’s non-food credit during the same period (Chart 4.6). Strong growth in credit extended by the NBFC - Infrastructure fi nance companies (IFCs), microfi nance companies and loan companies contributed to sturdy growth in the loan portfolio of NBFCs-ND-SI. Among the sectors, infrastructure, medium and large-scale industries, and the transport sectors contributed to strong growth in credit off-take of the NBFCs-ND-SI. 4.16 During 2014-15, NBFCs-ND-SI raised funds mainly through debentures and commercial papers. Note: Data pertains to NBFCs-ND-SI with asset size of `1 billion and above. Source: RBI. Borrowings from banks, which earlier constituted the main source of funding, has been progressively Chart 4.7: Financial performance of NBFCs-ND-SI - reduced. A notable feature is the rising exposure of position as on March 31 mutual funds to the fi nancial instruments fl oated mainly by the NBFC-IFCs, LCs and NBFC-Micro Finance Institutions (NBFC-MFIs). Financial indicators 4.17 Profi tability of the NBFCs-ND-SI improved signifi cantly as at end-March 2015 (Chart 4.7). Net profi t as a ratio to total income remained in double- digits and higher than last year’s level. 4.18 Nevertheless, asset quality of systemically important NBFCs continued to deteriorate and the P: Provisional. NPA ratio rose marginally compared to the previous Source: RBI supervisory returns. year (Chart 4.8). Amongst the NBFCs-ND-SI, LCs Chart 4.8: NPA ratios of NBFCs-ND-SI – position as on March 31 accounted for the major chunk of NPAs followed by 5 NBFC-IFCs and AFCs as at end-March 2015. The asset 4.3 4.3 quality of the NBFC-MFIs witnessed some 4 improvement albeit it still remained at an elevated 3.0 3.1 3 level. ent 2.5 2.6 c Per 2 1.7 1.8 1 0 GrossNPA NetNPA GrossNPA NetNPA togross tonet tototal tototal advances advances assets assets 2014 2015P P: Provisional. Source: RBI supervisory returns. 26Report on Trend and Progress of Banking in India 2014-15 4.19 NPAs of the NBFCs-ND-SI sector were Chart 4.9: Financial performance of standalone PDs primarily concentrated in infrastructure sector, 25 24.1 transport operator segment, and medium and large 20.4 20.4 scale industries. However, the systemically important 20 16.6 NBFCs remained well-capitalised. The capital 15 n a thd ee q mu aa ncy d ar ta et dio l eo vf et lh oe fs e 1 5e n peti rt i ce es n r te .mained far above `billio 10 7.7 8.59.4 6.1 5.6 5.6 5 2.7 Primary dealers (PDs) 2.5 1.6 0.6 0 4.20 As on March 31, 2015, 20 Primary Dealers Interest Trading Other Interest Other Profit Profit & profits Income expenses before after tax (PDs) were operating in Indian fi nancial market. Of Discount tax these, 13 were bank-PDs while seven were standalone 2013-14 2014-15P PDs. All the PDs achieved a higher success ratio (bids P: Provisional. Source: RBI supervisory returns. accepted to bidding commitment) than the previous year and this remained way above the mandated ratio of 40 per cent during 2014-15. In the auctions of dated securities, the share of the PDs (bids accepted to the securities issued) increased marginally during 2014-15 to 51.8 per cent. Devolvement pressure on the PDs remained comparatively lower during the year. Partial devolvement on the PDs took place on two instances involving `52.7 billion during 2014-15 as compared to 12 instances for `174.5 billion during 2013-14. Financial performance of standalone primary Chart 4.10: Capital and risk weighted asset position of dealers (PDs) standalone PDs – position as on March 31 4.21 All the seven standalone PDs posted profi t during 2014-15. Profitability increased due to softening of yields during the year. (Chart 4.9). 4.22 Standalone PDs held more risk-weighted assets during the year (Chart 4.10). The capital adequacy position of the PDs declined during the year to 39.6 per cent from 48.7 per cent as at end of March 2014. However, their capital adequacy position was well above the regulatory stipulation of 15 per cent. The PDs were able to meet all their primary and secondary market regulatory requirements during the Source: RBI Supervisory Returns. period. 27Chapter 4 Non-Banking Financial Institutions Overall assessment and `20 million by March 2017, rating requirement for all unrated deposit-taking AFCs by March 31, 2016 4.23 The dynamics of the NBFCs sector is refl ective for being eligible for acceptance of public deposits, of its evolving role in niche areas of specialised fi xing of threshold of `5 billion for all the NBFCs-ND services. Operationally, the sector remained relatively for being considered systemically important, and stronger vis-à-vis the commercial banks in terms of harmonisation of the asset classifi cation norms for capital adequacy and profi tability. There has also been NBFCs-ND-SI and NBFCs-D in line with that of banks, certain amount of consolidation in the NBFCs space, in a phased manner. The entire regulatory framework with some larger-sized NBFCs having grown bigger was revised with a view to transforming over time to and becoming well-connected with other fi nancial an activity-based regulation of NBFCs while ensuring entities, which has fi nancial stability implications. that NBFCs having low risk profi les would be lightly Asset quality of the entire NBFIs sector also suffered regulated. deterioration in recent years. 4.24 In order to address the issue of recovery of 4.25 Notwithstanding such interventions, bringing bad loans, bigger NBFCs, with an asset size of `5 the credit intermediation activities of a number of billion and above, have been proposed to be brought small entities, organised and unorganised, which under the SARFAESI Act, 20025. With a view to address operate as shadow banking entities outside regulatory the regulatory gaps and arbitrage owing to oversight, within the regulatory jurisdiction remains differentiated regulation for the NBFCs vis-à-vis a challenge. The Reserve Bank has been, from time commercial banks and risks associated with NBFCs, to time, through its outreach, sensitisation programmes the Reserve Bank has revised regulatory framework. and public notices, sensitising public not to fall prey The revised regulatory framework, put in place in to such entities. To deal with delinquent and November 2014, aimed at addressing gaps in unauthorised entities, State Level Coordination regulations of NBFCs and harmonising regulation with Committee (SLCC) was reconstituted in May 2014 that of the commercial banks. Some of the important with active state level intervention to facilitate regular changes inter alia include raising of net owned funds sharing of market intelligence and effective (NOF) for the NBFCs to `10 million by March 2016 coordinated timely action. 5 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 28