6.1 Non-banking financial companies (NBFCs) encompass an extremely heterogeneous group of intermediaries. They differ in various attributes, such as, size, nature of incorporation and regulation, as well as the basic functionality of financial intermediation. Notwithstanding their diversity, NBFCs are characterised by their ability to provide niche financial services in the Indian economy. Because of their relative organisational flexibility leading to a better response mechanism, they are often able to provide tailor-made services relatively faster than banks and financial institutions. This enables them to build up a clientele that ranges from small borrowers to established corporates. While NBFCs have often been leaders in financial innovations, which are capable of enhancing the functional efficiency of the financial system, instances of unsustainability, often on account of high rates of interest on their deposits and periodic bankruptcies, underscore the need for reinforcing their financial viability. The regulatory challenge is, thus, to design a supervisory framework that is able to ensure financial stability without dampening the very spirit of maneuverability and innovativeness that sustains the sector.

6.2 NBFCs proliferated by the early 1990s. This rapid expansion was driven by the scope created by the process of financial liberalisation in fresh avenues of operations in areas, such as, hire purchase, housing, equipment leasing and investment. The business of asset reconstruction has recently emerged as a greenfield within this sector following the passage of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

6.3 In view of their rapid growth and in response to certain disconcerting developments, the Reserve Bank strengthened the supervisory framework in January 1998, consequent to amendments to the Reserve Bank of India Act, 1934 in March 1997. In supervisory terms, fiscal 2002-03 saw the completion of the process of compulsory registration of NBFCs, existing at the point of the amendment of the Reserve Bank of India Act, 1934 with the Reserve Bank. Besides, a system of asset-liability management has also been put in place. In the interest of greater transparency, the Reserve Bank also instituted a system of balance sheet disclosures, effective March 2003.

6.4 The health of the NBFCs continues to show a distinct improvement in recent years facilitated by prudential nurturing. Most of the reporting NBFCs recorded a capital to risk-weighted assets ratio (CRAR) of at least the stipulated minimum of 12 per cent, with almost three-fourth reporting a CRAR of above 30 per cent. Similarly, the non-performing assets of NBFCs, in both gross and net terms, as a percentage of credit exposure, have been declining in recent years. Nevertheless, the NBFCs, as a sector, recorded losses for the second year in succession during 2001-02.

2. Non-Banking Financial Entities Regulated by the Reserve Bank

6.5 Non-banking financial entities which were either partially or wholly regulated / supervised by the Reserve Bank include the following:

• NBFCs, comprising equipment leasing, hire purchase finance, loan, investment and residuary non-banking companies;
• mutual benefit financial companies**, i.e., nidhi companies;
• mutual benefit companies**, i.e., potential nidhi companies; and,
• miscellaneous non-banking companies, i.e., chit fund companies (to the extent of their deposit-taking activity) (Table VI.1).

6.6 Certain types of financial companies, viz., insurance companies, housing finance companies, stock broking companies, chit fund companies, companies notified as 'nidhis' under Section 620A of the Companies Act, 1956 and companies engaged in merchant banking activities (subject to certain conditions), however, have been exempted from the Reserve Bank’s registration as they are regulated by other agencies.

3. Registration

6.7 The Reserve Bank of India (Amendment) Act, 1997 made it obligatory for NBFCs to apply to the Reserve Bank for a certificate of registration (CoR). The minimum net owned fund¹ (NOF) for registration, was stipulated at Rs.25 lakh for the then existing NBFCs and Rs.2 crore for new NBFCs seeking grant of CoR on or after April 21, 1999. The three-year period provided in the Reserve Bank of India (Amendment) Act, 1997 for the NBFCs to attain the minimum NOF necessary for registration expired on January 9, 2000.

The further three-year period granted by the Reserve Bank, at its discretion, also came to a close on January 9, 2003. The Reserve Bank approved about one-third of the applications received, permitting only 710 NBFCs to accept / hold public deposits² as at end-June 2003 (Table VI.2). All NBFCs holding public deposits whose CoRs have been either rejected or cancelled have to continue repaying the deposits on due dates and dispose off their financial assets within three years from the date of application / cancellation of the certificate or convert themselves into non-banking non-financial companies. Thus, there has been a fall in the number of operating NBFCs reflecting mergers, closures and cancellation of licenses. Besides, the number of public deposit-accepting companies also came down because of conversion to non-public deposit-accepting activities.

4. Supervision

6.8 The Reserve Bank has been strengthening the supervisory framework for NBFCs to ensure sound and healthy functioning and to avoid excessive risk taking. The degree of supervisory oversight is based on the following three criteria, viz., a) size of the NBFC, b) the type of activity performed, and c) the acceptance (or otherwise) of public deposits. The NBFC supervisory framework rests on a four-pronged strategy encompassing the following, viz., a) on-site inspection, based on the CAMELS methodology, b) off-site monitoring supported by state-of-the art technology, c) market intelligence, and d) exception reports of statutory auditors of NBFCs.

6.9 The Reserve Bank inspected a total of 918 registered NBFCs, including 255 public deposit-accepting companies during 2002-03 (July-June). The Reserve Bank also conducted 685 snap scrutiny exercises relating to NBFCs.

6.10 Notwithstanding the differences between banks and NBFCs, there are areas of operational convergence due to their engagement in similar types of activities in the broad product space of deposit mobilisation and lending. A critical issue is the desirable degree of regulatory convergence between banks and NBFCs in view of the complex set of similarities and differences in their functions (Box VI.1). It is in this context, that the Reserve Bank's regulatory framework for NBFCs, by and large, follows the regulations for banks but also differs in a number of cases (Table VI.3). The regulations are relatively more stringent in case of public deposit-accepting companies in order to protect depositors’ interest. Since NBFCs are not directly part of the process of credit creation, reserve requirements apply exclusively to banks. Finally, as NBFCs have sometimes promised unsustainable returns to investors - often to small depositors - there is a ceiling on rates offered on NBFC deposits to avoid such past experience.

5. Policy Developments

6.11 The Reserve Bank introduced a number of measures to enhance the regulatory and supervisory standards of NBFCs during 2002-03, especially in order to bring them at par with commercial banks, in select operations, over a period of time. Regulatory measures adopted during the year include aligning interest rates in this sector with the rates prevalent in the rest of the economy, tightening prudential norms, standardising operating procedures and harmonising supervisory directions with the requirements of the amended Companies Act, in respect of, inter alia, registration, reporting requirements and constitution of audit committees.

6.12 In view of the softening of interest rates in the financial markets, the maximum rate of interest that NBFCs (including nidhi companies and chit fund companies) could pay on their public deposits was reduced from 12.5 per cent per annum to 11.0 per cent per annum with effect from March 4, 2003. Similarly, the minimum rate of interest payable by RNBCs was reduced from 4.0 per cent to 3.5 per cent per annum on daily deposit schemes, and from 6.0 per cent to 5.0 per cent per annum on other types of deposits. In order to ensure that rates on non-resident Indian (NRI) deposits are uniform in the entire financial system, NBFCs, including RNBCs, have been directed that interest payable on such deposits accepted by them would be the same as that payable by scheduled commercial banks (SCBs), i.e., 25 basis points above the London Inter-Bank Offer Rate (LIBOR) / SWAP rate for US dollars of corresponding maturity.

6.13 The asset-liability management (ALM) guidelines for NBFCs, issued in June 2001, became fully operational from March 31, 2002. A system of half-yearly reporting has been put in place in this regard beginning September 30, 2002 in respect of NBFCs with public deposits of Rs.20 crore and above, or an asset size of Rs.100 crore and above, within a month of close of the relevant half-year.

6.14 All NBFCs were directed to invariably hold their investments in Government securities in either of the following ways: a) the Constituents' Subsidiary General Ledger Account (CSGL) with a SCB, or the Stock Holding Corporation of India Limited (SHCIL), or b) in a dematerialised account with depositories, [e.g., the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL)] through a depository participant registered with the Securities and Exchange Board of India (SEBI).

6.15 NBFC deposits are not covered under any insurance scheme. In the interest of transparency and public awareness, NBFCs were instructed to include a clause in any advertisement / statement issued by them for inviting public deposits that the deposits placed with them are not insured.

6.16 The exposure of NBFCs to the capital market has important ramifications for their depositors' interest. The NBFCs, holding public deposits of Rs.50 crore and above and RNBCs having aggregate liabilities to the depositors of Rs.50 crore and above as on March 31, 2002 or thereafter, have been directed to furnish to the Reserve Bank, information relating to their exposure to the capital market, at quarterly intervals, within a month of the close of the relevant quarter.

6.17 The basic philosophy of regulatory guidelines is to protect depositors’ interest and not to discourage the basic function of genuine risk taking. Accordingly, venture capital fund companies and the stock broking companies, which do not hold public deposits as defined under the Reserve Bank regulations and possess a certificate of registration from the SEBI, have been exempted from the core provisions of sections of the Reserve Bank of India Act, 1934 relating to CoR requirements, maintenance of liquid assets and creation of reserve fund.

6.18 In order to avoid disproportionately large exposures to any mutual fund, investments of RNBCs in mutual funds are subject to certain restrictions. In view of the bifurcation of the Unit Trust of India (UTI) and the fact that mutual fund activities of UTI presently fall under the purview of the SEBI (Mutual Funds) Regulations, 1996, the dispensation to RNBCs to invest in the units of UTI up to the entire sub-limit of 10 per cent of the aggregate liabilities to the depositors, was withdrawn. The permission to the RNBCs to invest in the mutual funds, including the UTI, would, however, continue within the ceiling of 10 per cent of the aggregate liabilities. The sub-ceiling of 2 per cent of such liabilities for any one mutual fund is now extended to the investments in the units of UTI.

6.19 The regulatory framework for PDs reflects their unique position in the financial markets. While they are essentially non-bank financial intermediaries operating in the money and government securities markets, PDs also channelise central bank liquidity to banks so that their lendings to banks in the call money market are reckoned as part of inter-bank liabilities. Besides being investors, along with banks in the money and government securities markets, PDs also perform a market-making function, in course of which they are allowed access to the Reserve Bank's liquidity window in the form of the Liquidity Adjustment Facility and assured liquidity support in consonance with their commitments in primary auctions. In consonance with their special role in financial markets, the Reserve Bank has instituted a regulatory framework for primary dealers which reflects their functional similarities as well as differences with banks (Table VI.4). In view of their essential function as dealers in money market instruments and government securities, PDs, unlike banks, are not subject to several regulations in respect of asset classification, income recognition, non-performing assets, provisioning and exposure norms. The scale, scope and regulation of the primary dealer network in the Indian case is, more or less, in consonance with cross-country experiences (Table VI.5).

6.20 PDs have been brought under the purview of the Board for Financial Supervision (BFS) in 2002-03 in view of their growing systemic importance in terms of the following attributes: (a) their large number, (b) highly leveraged portfolios with short-term funds, (c) substantial share in the Government securities market, and (d) a significant position in the money market, comparable with banks. The Reserve Bank also undertakes on-site inspection of each PD besides the off-site supervision through prescribed periodic returns.

6.21 In January 2002, PDs were advised to follow a prudent dividend distribution policy. This is expected to build up sufficient reserves (even in excess of regulatory requirements), which can act as a cushion against any adverse interest rate movements in the future. The financial strength of the PDs is being monitored at regular intervals.

6.22 With a view to enlarging the funding avenues for their operations, PDs were allowed to avail of FCNR(B) loans from banks within an overall limit of 25 per cent of their NOF to supplement their funding sources. The foreign exchange risk on such loans would need to be hedged at all times at least to the extent of 50 per cent of exposure.

6.23 Following representations received from some PDs, the Reserve Bank issued operational guidelines enabling them to undertake Portfolio Management Services (PMS) for entities other than those regulated by the Reserve Bank. Besides compliance with the above operational guidelines, the PMS undertaken by PDs, requires prior approval of the Reserve Bank and registration with the SEBI.

6.24 Several countries have set up asset reconstruction companies (ARCs) - in both the public and private sectors, specialising in recovery and liquidation of banks' non-performing assets (Table VI.6). This reinforces the earlier experiment of rapid asset disposition attempted in Mexico, Philippines, Spain and the USA. The Committee on Banking Sector Reforms (Chairman: Shri M. Narasimham) recommended the transfer of sticky assets to an asset reconstruction company. The recent SARFAESI Act provides for sale of financial assets by banks/FIs to securitisation companies (SCs)/ reconstruction companies (RCs).⁴

6.25 The basic operation of asset reconstruction is easily captured by a simple hypothetical example (Table VI.7). A bank could sell its non-performing assets to an ARC at a commission / discount (say, marked to collateral valuation), which is charged to the profit and loss account in return for bonds issued by the ARC, without loss of generality, to clean up their balance sheet. The ARC, which buys the asset, with bonds issued to the bank (or the public) can make a profit if it is able to reconstruct it or dispose it off at a higher price.

6.26 The Reserve Bank issued guidelines and directions to SCs and RCs seeking registration from it under Section 3 of the SARFAESI Act, 2002 (Box VI.2). The Reserve Bank has so far received 15 applications from SCs / RCs for the issue of CoR. An external Advisory Committee on the registration of SCs / RCs has been constituted to screen applications and advise the Reserve Bank on the registration of these companies. Two applications have been approved so far for grant of CoR to commence the business of SCs / RCs subject to certain conditions. Two asset reconstruction companies, viz., Asset Reconstruction Company (India) Limited and Asset Care Enterprises Limited, have been issued certificates of registration to commence the business of securitisation and asset-reconstruction.

6.27 In pursuance of the recommendations of the Expert Group for Designing a Supervisory Framework for Non-Banking Financial Companies (Chairman: Shri P.R. Khanna), the Reserve Bank stipulated that, effective March 31, 2003 onwards, all NBFCs (irrespective of whether they hold public deposits or not) should attach a schedule to the balance sheet containing some additional prescribed particulars (Box VI.3). These requirements are applicable to the NBFCs in the category of equipment leasing, hire purchase finance, loan and investment and RNBCs.

6.28 Mutual Benefit Financial Companies (nidhis) have been exempted from the core provisions of the Reserve Bank of India Act, 1934 and directions except those relating to the ceiling on interest rates, maintenance of register of deposits, issue of deposit receipt to depositors, and submission of annual return on deposits. However, as part of the implementation of the recommendations of an Expert Group (Chairman: Shri Sabanayagam), the Central Government has prescribed certain prudential norms for the MBFCs, such as, entry point norms, NOF to deposits ratio, stipulated liquid asset requirement, acceptance of deposits and its methodology (as in the case of NBFCs prescribed by the Reserve Bank), and prudential norms in July 2001. These norms were further amended in April 2002. These measures are expected to strengthen the functioning of these companies. The Central Government notified, on September 29, 2003, that interest rate payable on deposits accepted by these companies would be the same as NBFCs. With the above prescriptions, the entire regulation of these companies has been taken over by the DCA.

6.29 The NBFCs working on the lines of nidhi companies are categorised as Mutual Benefit Companies (MBCs) by the Reserve Bank and as potential nidhi companies by the DCA. Such companies are defined as those desirous of nidhi status under section 620A of the Companies Act, 1956. It may be pertinent to note that there were 206 companies (as on January 9, 2003) whose applications were awaiting notification as nidhis by DCA. However, a large number of MBCs awaiting nidhi status, including the companies mentioned above, applied to the Reserve Bank for grant of CoR as NBFCs.

Keeping in view that the six-year period provided in the Reserve Bank Act to attain the minimum NOF expired on January 9, 2003, the Reserve Bank has to decide all the pending applications of all NBFCs based on their individual merits and fulfillment of eligibility criteria. In view of the fact that the regulation of all nidhis and potential nidhis has been taken over by DCA and as the Government concurred with the Reserve Bank's proposal to exempt from the Reserve Bank Regulations only those potential nidhis which were existing on January 9, 1997 and have applied to DCA for nidhi status on or before January 9, 2003, the Reserve Bank is dealing with the pending applications for grant of CoR on the above basis. The companies which have not applied to DCA for nidhi status, or which do not comply with DCA regulations and those whose application for nidhi status have been rejected by DCA would be dealt with as NBFCs.

6. Business Profile of the NBFC Sector

6.30 The business profile of the NBFC sector as at end-March 2002 broadly reflected long-term trends (Chart VI.1 and Table VI.8). Public deposits worked out to about one-third of total assets of the NBFCs; in case of RNBCs, the share was substantially higher at almost two-third, especially as two of the leading RNBCs account for the bulk of the total NBFC public deposits. The share of public deposits in the case of NBFCs (other than RNBCs) declined sharply during 2001-02; there was a marginal decline in the case of RNBCs as well. Net owned funds of NBFCs also continued to decline in line with long-term trends. The net owned funds of RNBCs, however, turned positive for the first time reflecting a turnaround by one of the leading companies in the sector.

6.31 RNBCs continued to hold a substantial part of the NBFC public deposits, with their share continuing to increase in line with long-term trends (Chart VI.2 and Table VI.9). There was a shift in the composition of deposit mobilisation by the other categories of NBFCs during 2001-02. In contrast to the previous year, public deposits with equipment leasing companies declined sharply while those of investment and loan companies increased.

6.32 The Reserve Bank publishes quarterly data on broad liquidity (L₃) encompassing the monetary and liquid liabilities of the banking sector, post office bank, FIs and NBFCs based on the recommendations of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman: Dr. Y.V. Reddy). In view of the data lags, the Working Group recommended that estimates of NBFC public deposits could be generated on the basis of returns received from all NBFCs with public deposits of Rs.20 crore and above. The share of public deposits of all NBFCs continued to stagnate at around 1.0 per cent of L₃. Based on such lead data, NBFC public deposits recorded a marginal growth of 0.8 per cent during 2002-03 (Chart VI.3).

7. Region-wise Composition of Deposits held by NBFCs

6.33 One of the distinguishing features of the NBFCs is their localised operations. The NBFCs in the Eastern Region continued to dominate the public deposits of registered and unregistered NBFCs as at end-March 2002, essentially because a leading RNBC is based in Kolkata (Table VI.10). The share of the Eastern Region, however, has been declining in recent years while that of the Central Region has been rising, reflecting, inter alia, the rapid expansion of a Lucknow-based RNBC. The NBFCs in four metropolitan centres of Mumbai, New Delhi, Kolkata and Chennai continued to account for the bulk of public deposits as at end-March 2002.

8. Interest and Maturity Pattern of Public Deposits with NBFCs

6.34 The interest rate structure of NBFCs (excluding RNBCs) continued to soften during 2001-02, reflecting the recent 350 basis point cut in the ceiling for deposit rates (Chart VI.4 and Table VI.11). This was in consonance with easy liquidity conditions emanating from strong capital flows on the supply side and poor credit off-take on the demand side. The share of deposits in the interest rate range of 10-12 per cent, close to the regulatory cap of 12.5 per cent, jumped sharply during 2001-02. While there has been a gradual repayment of the high-cost deposits accepted by NBFCs, the overhang of deposits, contracted at 14.0 per cent and above⁵ - remained substantial at about a fifth of total deposits. This high interest rate, by and large, also reflects the risk premium NBFCs typically pay vis-à-vis bank deposits. At the same time, higher deposit rates further affect their commercial viability in a scenario of falling interest rates.

6.35 As a financial sub-sector, NBFCs are a combination of heterogeneous entities. The maturity profile of public deposits held by NBFCs continued to shorten, especially with the repayment of high-cost deposits raised earlier (Table VI.12). The share of public deposits with a maturity of over three years, in particular, declined fairly monotonically, partly reflecting the reluctance of depositors to enter into long-term commitments when interest rates are at historic lows. The increase in public deposits with maturity between 2 to 3 years during 2001-02 was counterbalanced by a decline in most other maturity buckets.

6.36 The ceiling rate offered on public deposits by NBFCs has come down by 500 basis points since March 2000. As a result, the spread between bank and NBFC deposits has narrowed in recent years (Table VI.13). This is in line with the regulatory guidelines and trends in risk premium.

9. Asset Profile of NBFCs

6.37 Notwithstanding their large number, the NBFC sector continues to be dominated by a few large companies. Twenty NBFCs in the asset range of Rs.500 crore and above continued to account for the bulk of the total assets, with their share increasing further during 2001-02 (Table VI.14). Most of the NBFCs possessed an asset size of below Rs.10 crore. While smaller NBFCs often specialise in addressing local credit needs, their large number continues to pose a regulatory challenge for the Reserve Bank.

6.38 The major portion of the assets of NBFCs (excluding RNBCs) continued to be in the form of their specialised areas of hire purchase and equipment leasing. During 2001-02, there was a shift in the portfolio allocation in favour of loans and inter-corporate deposits from equipment leasing, partly reflecting, inter alia, the slowdown in economic activity and changes in taxation (Table VI.15).

6.39 The source-wise profile of borrowings by NBFCs (excluding RNBCs), more or less, remained the same as at end-March 2001 and 2002 (Table VI.16). Banks have emerged as a major source of credit for NBFCs, accounting for almost a third of their borrowings - commercial bank funding jumped by 20.8 per cent during 2001-02 on top of a 16.2 per cent rise during 2000-01 - partly driven by easy liquidity conditions. The decline in inter-corporate borrowing was compensated by an increase in other sources, such as, securitised paper and bank loans.

6.40 Lead data on the performance of major NBFCs (other than RNBCs) holding public deposits of Rs. 20 crore and above (accounting for three-fourth of sectoral assets) are now available for 2002-03, based on returns instituted on the basis of the Working Group on Money Supply (Chairman: Dr. Y. V. Reddy). The structure of assets and liabilities of major NBFCs during 2001-02 and 2002-03 reveals a decline in public deposits (Table VI.17). This was compensated by a larger recourse to bank loans, partly driven by the softening of bank lending rates. In terms of deployment of funds, investments in corporate paper and other assets recorded an increase in contrast to a decline in the equipment leasing business, in line with sectoral trends. Partly in response to the pickup in industrial activity, loans and advances rebounded in 2002-03.

6.41 The NBFCs, as a sector, recorded losses for the second year in succession during 2001-02, as the decline in expenditure could not keep pace with the drop in both fund-based and fee-based income (Chart VI.5 and Table VI.18). The decline in fund income was particularly steep in recent years. Total expenditure fell less sharply as operating expenditure and tax provisions have tended to be sticky. Operating costs of NBFCs, however, continue to be higher than those of banks and financial institutions.

6.42 With a view to reinforcing financial stability, the Reserve Bank's supervisory framework lays special emphasis on the sufficiency of NOF of NBFCs to restrict excessive leveraging. The ratio of public deposits to the NOF, a measure of the ability to meet its commitments out of its own resources, did not experience any significant change during 2001-02 (Table VI.19). A major concern continues to be that the NOF for a large number of the reporting NBFCs (excluding RNBCs) - holding almost a fifth of public deposits as at end-March 2002 - was negative.

6.43 Beside the adequacy of net owned funds, capital adequacy norms⁶, made mandatory for NBFCs in 1998, are a second line of defence to strengthen financial stability. Of the reporting companies, about three-fourths possess a CRAR of above 30.0 per cent, far in excess of minimum statutory stipulations as at end-March 2002 and 2001 (Table VI.20).

6.44 The gross and net non-performing assets of reporting NBFCs has experienced a steady decline in recent years (TableVI.21).

6.45 The primary dealer (PD) system has now been in operation for the last eight years. During 2002-03, PDs continued to strengthen their performance in the government securities market (Table VI.22). All PDs recorded a profit during 2002-03 (Appendix Table VI.1). The share of government securities in total assets experienced a sharp rise during the last two years, reflecting an increased interest in building up the government securities portfolio in the wake of the sustained rally in gilt prices for the preceding two years.

The absorption of primary issues of government paper was, however, marginally lower, reflecting a more aggressive bidding by other investors. While call money borrowings remained a steady source of finance, the average daily utilisation of liquidity support by the PDs was well below the utilisation limit during 2001-02, especially as call rates typically ruled below the Bank Rate.

6.46 PDs' performance, in terms of both return on average net worth and return on average assets, has been lower during 2002-03 as compared with the performance of 2001-02. This was driven by two factors:

• Although the yields continued to soften, during the year, there was a slowdown in the trend giving lower mark-to-market values and trading margins. The 10-year and 20-year yields fell by about 115 and 123 basis points, respectively, during 2002-03 as compared to 287 and 311 basis points, respectively, in the previous year.
• While exiting the position on triggering of stop-loss limits when the yields saw reversals on military action in the Middle East and border tensions, PDs lost a part of their accruals during the year.

6.47 PDs continued to maintain capital to risk weighted assets ratios far in excess of the minimum capital of 15 per cent of aggregate risk-weighted assets, including credit risk and market risk (Appendix Table VI.2). The market risk capital is maintained at the higher end of that estimated under standardised model and the value-at-risk (VaR) method.

6.48 Aggregate CRAR for the PDs fell from 38.4 per cent as at end-March, 2002 to 29.7 per cent as at end-March 2003. This was largely due to higher market risk factoring in the volatilies in VaR measure, in the wake of the Iraq war threat (early 2003) and tension at the Indian borders (May 2002). However, the consistent rise in the share of Government securities in the total assets indicate the reduction in the risk profile of the balance sheet.