Team Name: Beatles College: IIFT Delhi Finance Challenge

Classification: Public
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Title – Executive summary and Comparative analysis Comparative Analysis of NBFC,SFB and Commercial Banks
Roadmap: We believe that ABC Fincorp which is an NBFC- Regulatory NBFC Small Finance Scheduled Commercial Bank
ND-SI as of now should first transition into a Small Finance Requirement Bank
Bank (SFB) and then proceed towards conversion into a
Universal Scheduled Commercial Bank CRAR 15% of RWA (Risk weighted assets) 15% of RWA The CRAR needs to maintained at 9% for a SCB

Capital Structure
Small Finance Universal Tier 1 Capital 10% 7.5% 7%

Requirements
NBFC-ND-SI
Bank Bank Maintenance
Year 0 Year 3 Year 8
 Managing Capital Structure : Capital inflow via savings, Leverage Ratio No prescribed limit 3.5% Lleverage requirement of 4% for DSIB and 3.5%
Fixed and Term deposits to form major chunk of capital for all other banks
structure
 Asset Diversification Strategy :Increase of Current Liquid Min. Paid up Capital Rs 2 Crores minimum  Net owned Rs 200 Crores Minimum paid up capital of Rs 500 Crores
fund required
assets via higher cash balance and higher investment in
non- current assets
 Risk Management Strategy : Change Risk weightage based Provision for 0.40% of outstanding As per RBI 0.25% for SME, 1% for CRE and 0.40% for others
on past and potential defaults for prudential reasons Standard Asset prudential norms
ensuring BASEL III norms are followed
 Benchmarking :Benchmark against different industry peer Target under Priority No Priority Sector  lending obligation 75% 40% of their Adjusted Credit to priority sector.
Sector Lending

Asset -Diversification
leaders based on their ROA, and buffer level against RBI

Requirement
recommended threshold
Credit concentration • NBFC can't lend more than 15% in • At least 50% of • Can lend a maximum of 20% of its eligible
Comparative ROA trend Analysis norms a single borrower and not more its loan capita base to a single borrower. The board
than 25% in a single group of portfolio can allow additional 5%.
2 borrowers of its Net Owned Fund should contain • Banks can lend a maximum of 25%  of its
Return on Assets (ROA)

(NOF) loans of up to capital base to a group of borrower

1.5 • Can't invest in more than 15% of Rs 25 Lakhs 
another company of its NOF.
1
0.5
Liquidity Coverage NBFCs more than Rs.10000 Cr Asset 100% LCR Banks don't need to maintain a Liquidity
Requirement

0 Ratio size shall maintain a liquidity buffer in Coverage Ratio separately as SLR  takes care of
Operational

2014 2015 2016 2017 2018 2019 2020 2021 terms of LCR  that
-0.5
CRR No requirement 4% of NDTL Banks need to maintain 4% of NDTL in CRR
Yearly trend
NBFC-ND-SI Small Finance Bank Commercial Bank SLR No requirement 22% of NDTL Minimum 22%  of NDTL as SLR required
*Source: RBI Reports and Bulletin, CARE report 2020 The trend of ROA (Return on assets) indicate that small finance banks (SFB) are able to maintain similar ROA figures as
Classification: Public compared to NBFC-ND-SI despite higher asset sizes suggesting higher growth potential of SFB in recent times
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Title: Roadmap and Strategies towards Conversion to Bank
Conversion to Small Finance Bank Conversion to Universal Bank

Advantages for conversion

  Advantages for conversion • Reduction in PSL lending targets from 75% of NBC to 40% Strategies Ahead
• ROA for NBFC-ND-SI and SFB have been similar in past 5
• Reduction in CAR obligations from 15% RWA to 9% • Identify sectors specially in rural and semi-urban
years with SFB showing more stable and better trend 
• ABC already has the minimum paid up capital requirement for areas with enough cash generation potential for
• Conversion to SFB will help provide capital in form of
conversion to SFB providing diversified and personalized loans
deposits from consumers
• Larger pool of customers for getting deposits leading to higher since based on RBI , World Bank reports Semi –
• Lower Cost of capital via deposits leading to higher
profitability Urban areas would be the next engines of
Strategies for Conversion growth in India
  Strategies for Conversion • Increase lending to low risk clients with good track records and • Devise pathway to ensure the next iteration of
• Improve performance metrics for next 5 years as backing of large corporate houses as guarantor for 50% of loan BASEL norms are being satisfied with additional
required by RBI guidelines portfolio buffer to ensure simultaneous clearance of RBI
• • Develop roadmap to diversify deposit and asset mix to for improved guidelines
Increase Net worth and paid up capital to act as buffer
for improved risk management  credit concentration index

Year 0 Year 3 Year 7 Year 9 Long term planning (10+ years)

Balance Sheet Projections Risk Framework
Balance Sheet# of a private bank (In Crores) Projected* Balance Sheet of a ABC bank (In Crores)
Asset Liability and Shareholder Equity ``Asset Liability and Shareholder Equity As an NBFC-ND-SI
• Improve internal risk-management systems to handle larger
Current Asset Liabilities   Current Asset   Liabilities   volumes of credit and diversified products. 
Balance with other banks Balance with other banks and • Analyze insights from Risk based Internal audits and implement
and money at call and money at call and short recommendations of working committee
short notice 212324 Borrowings 827575 notice 10921.76 Borrowings 38543.07 • Developed improved risk sharing agreements with trading banks

Cash and balances with Deposits from

RBI 272616 Deposits from customers 4159044 Cash and balances with RBI 14023.12 customers 193701.3 As a Small Finance Bank
• Ensure effective working of Chief Risk officer (CRO) and Risk
Non Current Assets Other Liabilities 236229 Non Current Assets   Other Liabilities 11002.01
Management Committee board (RMCB)
Loans and advances 3625155 Shareholder Equity 609291 Loans and advances 186474.7 Shareholder Equity   • Improve Risk profiling methodology to reduce bad debts
Investment 1293031 Shareholder Equity 26866 Investment 66512.36 Shareholder Equity 1251.244 and defaulting
Fixed Assets 38243 Reserve and Surplus 582425 Fixed Assets 1967.186 Reserve and Surplus 27125.58
As a Small Finance Bank
Other Assets 390770   Other Assets 20100.86   • Measure and monitor risk of not reaching goals as part of
Total shareholder equity Total shareholder proactive risk management strategy
 Total Assets 5832139 and Liabilities 6441430 Total Assets 300000 equity and liabilities 300000 • Improve quantitative risk assessment methodologies via taking into
account uncertainties by making use of Monte-Carlo simulations
with multiple risk parameters
(#Consolidated Balance Sheet of Private sector banks for FY 2019-21 as per RBI) (*Projection based on consolidated balance sheet of private sector banks)
Classification: Public
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THANK
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