India’s Financial Sector.. (Part II)

NBFI comprises of All India financial institutions (AIFIs), Non-banking finance companies
(NBFCs) and primary dealers (PDs). AIFI, currently only four in operations, largely provide long term sector specific financing. NBFCs specialize in meeting the financing needs of niche areas such as hire/purchase, commercial vehicles etc. NBFCs are categorized into two types – deposit-taking NBFCs (NBFCs-D), which are allowed to accept deposit from public and non-deposit taking NBFCs (NBFCs-ND).

Even though NBFC-ND pose less systemic risk since these can not accept deposit from public, it is put into category of systemically important (NBFCs-ND-SI) if its total assets is more than Rs 500 crore. Currently, there are 202 NBFC-D and 11,480 NBFC-ND, of which 209 are NBFC-ND-SI. PDs form the last group of financing institutions, which act as market maker for government bonds and thus, serve the financing needs of the government. There are 21 PDs, of which 14 are affiliated to banks, hence not reported separately.
In terms of size of different institutions, SCBs have a total balance sheet size of Rs 120 lakh crore with total advances of Rs 74 lakh crore at the end of FY15, as per RBI figures. Rural financing institutions (RFIs) together have a total balance sheet size of nearly Rs 13 lakh crore and loans/advances of Rs 7.5 lakh crore. (Yet, their share in rural financing is only about 30%,the rest being provided by SCBs through their rural network). RFIs comprise of RRBs, Short term credit institutions (StCB, DCCB, PACs) and long term credit institutions, (SCARDBs and PCARDBs). Within this, share of long term institutions is very low at just 5% which is actually a serious lacuna as this is essential to increase the productivity and longer term prosperity of rural india. AIFI had a balance sheet of Rs 5.6 lakh crore with advances of Rs 4.8 lakh crore. NBFC-D and NBFC-ND-SI together have a balance sheet of Rs 16.7 lakh crore with advances of Rs 12.8 lakh crore.
Despite a plethora of financial institutions, SCBS account for more than 75% of funds managed reflecting their criticality to the financial sector. In terms of profitability, while SCBs and NBFIs are profitable, some of the RFIs face significant stress. Half of long term institutions and nearly 40% of PACs made losses in the last reported year although RRBs, StCBs and DCCBs are doing reasonably well with only about 10% of them in losses. Clearly, operating at such a primary level has put stress on their operations. The weak health has also led to closing down of about 4,000 PACs over last two years.
Yet, RFIs play an important role in meeting the objective of financial inclusion as more than 60% of their credit flows to small farmers. Despite the inefficiencies, these institutions cannot be wished away although there is scope to improve efficiency, through may be, an umbrella organisation for supervising their operations.
(Image courtesy of Stuart Miles at

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