Indian Institute of Planning and Management, New

Delhi.

THESIS ON

BUSINESS MODELS OF NBFC`S IN INDIA
INTERNAL GUIDE: PROF. VIJAY KR. BODDU EXTERNAL GUIDE: MR. ASHISH SHARMA.

SUBMITTED TO: PROF. SUMANTA SHARMA DEAN (PROJECTS)

SUBMITTED BY: NAMRATA GUPTA ALUMNI ID NUMBER: DS/08/10-M-227 PGP/SS/2008-10

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Table of Contents
Letter of Approval ………………………………………………………………………7 Letter of Originality …………………………………………………………………….8 Thesis Synopsis ………………………………………………………………………..9 Abstract…………………………………………………………………………………14 Micro Finance Sector and Religare…………………………………………………15 Infrastructure Sector and why IDFC………………………………………………..15 Literature Review ………………………………………………………………..…...17 IDFC Product Structure………………………………………………………………………………..17 Senior Debt Management…………………………………………………………………………..17 Mezzanine products ……………………………………………………………… 17 Proprietary equity………………………………………………………………………………….18 Private Equity…………………………………………………………………………………18 Treasury……………………………………………………………………………..19 Advisory……………………………………………………………………………. 19
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Project Equity…………………………………………………………………………………21 Debt Capital……………………………………………………………………………… 21 Project Development……………………………………………………………….. ……...22 PPP Initiatives…………………………………………………………………… 22 Results…………………………………………………………………………… 23 Key findings……………………………………………………………………… 26 Future Outlook……………………………………………………………………27 Report Card…………………………………………………………………………………29 Approvals and Disbursements……………………………………………………………………..30 Future Outlook and Growth Prospects………………………………………. ………………………………….31 Importance of the business model to Indian Growth……………………………………………………………………………..32 IDFC Strategy…………………………………………………………………………… 32 Recession Strategy………………………………………………………………………........33
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Information gathered on Religare…………………………………………….. .35 Equity and Commodity trading…………………………………………………………............................36 The competitive edge……………………………………………………………………………….36 Online investment portal……………………………………………………………………………...36 Personal finance services…………………………………………………………………………..37 Product offerings…………………………………………………………………………..37 The edge…………………………………………………………………………..37 Loans………………………………………………………………………………38 SME loans………………………………………………………………………………..38 Commercial Vehicle Loans ………………………………………………………………………………………38 Construction Equipment finance ………………………………………………………...........................................38 Loan against Property……………………………………………………………………..……..39 The Religare Edge………………………………………………………………………………..39

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Insurance Solutions…………………………………………………………………..............39 Life Insurance…………………………………………………………………40 General Insurance……………………………………………………………………… 40 Institutional Spectrum………………………………………………………………………..41 Institutional broking………………………………………………………………………….41 The Religare Edge…………………………………………………………………………….41 Investment Banking………………………………………………………………………….42 The Religare Edge………………………………………………………………………….…43 Insurance Advisory…………………………………………………………………….. …43 Our Service Offerings………………………………………………………………………..45 Wealth Spectrum………………………………………………………………46 Portfolio Management Services………………………………………………………………………...46
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The Edge……………………………………………………………………..…46 Arts Initiative…………………………………………………………………….47 The Film Fund………………………………………………………………………………47 Results and Future Outlook…………………………………………………………….....................48 Corporate social Responsibility…………………………………………………………………….50 Primary Research (IDFC) ………………………………………………………52 Religare……………………………………………………………………………55 Recommendation…………………………………………………………………58 Conclusion…………………………………………………………………………61 Response Sheet 1…………………………………………………………..……65 Response Sheet 2………………………………………………………………..68 Response Sheet 3………………………………………………………………..71 Bibliography ……………………………………………………………………………………….72 Appendix …………………………………………………………………………...73

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Letter of Approval Dear Chetan Sharma,

This is to inform that your thesis proposal on “Business Model of NBFCs in India”, to be conducted under the guidance of Mr. Ashish Sharma is hereby approved and the registration number is DS/08/10-M-227

Make it a comprehensive thesis by ensuring that all the objectives as stated by you in your synopsis are met using appropriate research design; a thesis should aim at adding value to the existing knowledge base.

You are required to correspond with your internal guide Prof. Vijay Kr.Boddu at boddu.vijay@iipm.edu Ph.-0124-3917414 by sending at least four response sheets (attached along with this mail) at regular intervals before 15th February 2010 (the last date for thesis submission).

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Letter of originality

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THESIS SYNOPSIS
DETAILS OF THE STUDENT Name Section Phone No Email Address Chetan Sharma (2825) FN-5 9910084918 Chetanpoda2000@gmail.com

Thesis Topic

Analysis of Business Models of Indian NBFC`s – Conservatism or Growth. Finance

Specialization Area

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INTRODUCTION The desired area of research is the working of Indian NBFC`s, their Business Models and the effectiveness of those Models in changing Global Environment. Analysis of the importance of the Capital Adequacy Ratio for leading Indian NBFC`s like IDFC, Religare. A comparative analysis between the conservative approach of PSU NBFC`s and aggressive approach of private players. Effectiveness of these models in diverse economic situations like boom and recession.

RESCERCH OBJECTIVES 1. Through analysis of the business models followed by PSU NBFC`s in India and Private players. 2. Comparative study between the models.
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3. Analyzing the effectiveness of these models in relation to growth and risk. 4. Study of the importance of Capital Adequacy Ratio and reinvestment strategies of NBFC`s. 5. Average growth in Net worth of these companies by following their respective business models.

HYPOTHESIS Conservatism in Business Models of PSU NBFC`s in India should be preferred over an aggressive business Model adopted by private NBFC`s.

RESCERCH METHODOLOGY: Secondary Data: Business models of IDFC and Religare Ltd, Annual reports and expected future earnings. Primary Data: Growth rate indicators and factors affecting growth. Tools Used: Interviews with key personnel’s in IDFC and Religare, Questionnaires. Sampling Method: Focus group Interviews, Systematic and stratified sampling. Sample Size: 6-8
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Target Audience: Investors, Private Equity players, industry players and industrial and commercial infrastructure financing companies.

SCOPE OF WORK: The scope of work lays in the study of the business models of IDFC and Religare and their core areas of competency. Analysis of annual reports of IDFC and Religare, Capital Adequacy ratios and key data inputs regarding future earnings past performances in recession and boom economic scenarios.

JUSTIFICATION OF CHOOSING THE TOPIC: Capital inflows into developing economies like India have many good effects especially when it comes to investing in infrastructure, financing projects and supporting a good economic growth. But this capital infusion should be supported by a capital base from the institutions which are financing projects. Destabilized cash inflows could lead to inflation, exchange rate problems and affect the domestic financial sector. Private NBFC`s follow a business model which has a Capital Adequacy ratio of 1:8 which is too risky and aggressive as compared to a ratio of 1:5 by PSU NBFC`s like IDFC.

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So it is an analysis of how a conservative business model is more appropriate for Indian Financial Sector.

DETAILS OF EXTERNAL GUIDE: Mr.Ashish Sharma. Consultant (IDFC) Currently performing Advisory services for IDFC (Infrastructure Wing), previously has worked as a Senior Analyst for Mckinsey and Company for two and a half years.

Academic Qualification: B.com (H) Graduate form Delhi University, (Hans Raj College) Chartered Accountant (ICAI)

SUMMER TRAINING DETAILS: An analysis of the free float methodology and its importance in calculation of the index. Importance of correlation in calculating future stock values and hedging portfolios.
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An analysis of the business model and advisory function of Religare Securities Ltd.

ABSTRACT History of NBFC`s in India NBFC`s in India are registered companies conducting business activities similar to regular banks. Their banking operations include making loans and advances available to customers, acquisition of marketable securities, leasing of hard assets like automobiles, hire purchase and insurance business. Though they are similar to banks, they differ in a couple of ways.

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They cannot accept demand deposits, they cannot issue checks to customers and deposits with them are not insured by DGIC. Both RBI and SEBI regulate NBFC`s in India. NBFC`s have been around in india for a long time, but have recently gained popularity amongst institutional investors, since they facilitate the finance and loans for rural and semi rural areas where the traditional banks are still to reach.

NBFC`s have also played a huge part in developing small businesses and infrastructure in India, through local presence and strong customer relationships. Basically, There are three categories of NBFC’s:
• • •

Asset Financing Companies (“AFC”) Loan Companies (“LC”) Investment Companies (“IC”)

Micro Finance Sector and Religare: There is a huge need of credit in rural India. Roughly 245 million people need US$ 52 billion of microfinance credit. The customer base covered by the microfinance is expected to reach 49 million people by 2012 growing at a CAGR of 43% with an expected loan portfolio of US$ 6 billion. The key growth drivers in the microfinance sector are: 1. Need for a broader suite of products: products such as investment products, insurance products, retirement planning which can be offered to large consumer base.

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2. Regional Diversification: An NBFC should focus on to the vast regional

boundaries of India to make them effective.
3. Market consolidation and entry of FII`s: The smaller NBFC will get

acquired and large FII`s will come in and build franchising models to accelerate the quality and penetration of mutual funds in rural areas.

Infrastructure Sector and why IDFC: During the boom of 1990`s the Indian Government implemented many policies for Infrastructure development with focus on roads, telecommunications, ports and power. Special purpose vehicles were formed. Most of these were set up as NBFC`s. The government also implemented (PPP) Public private Partnership. During the period of 1996-2006, 233 PPP projects were completed with a total investment of US$69 Billion. The PPP investments grew from US$.6 billion in 1991 to US$17.1 Billion n 2006 representing a CAGR of 25%.
(Source:www.IDFC.com/wwwrbi.org.in)

During the period of 2007-2017, the investment is accepted to accelerate further fueled by the economic growth and the need to catch up this growth by adding the right amount of infrastructure. The amount in of investment would be around US$ 500 Billion. (Source: www.E&Y.com). The government of India is setting up new policies to attract at least 50% of the investment from the private sector. So here the role of NBFC`s like IDFC plays a very important role.

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IDFC Product Structure:
Senior Debt Management: forms the largest component of the company’s portfolio and accounted for 85.6 % of the outstanding disbursements.
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Senior debt financing is provided through loans or in the forms of subscriptions to debentures. Senior debt ranks ahead of other debt obligations of the borrower with respect of security and payment. The financing typically bears fixed rate interest with reprising mechanisms usually effective after 5 years. Additionally senior loans may also be reprised for changes in the credit quality of the borrower. The product is generally much secured and has access to the assets of the projects in case of any default. As on 31 .3 2006 79.3% of our financing were borrowers to special purpose entities. 35.1% of our senior debt financing there is a limited recourse to the sponsors where they undertake to meet construction cost overruns or funding short falls. For 17.8 % of senior debt financing there is no recourse to the sponsors. For 26.7 % of our financing we have negotiated personal and corporate guarantees from one of the sponsors of the projects for the interest and principal payment obligations. Mezzanine products : It comprises of preference capital and subordinated debt.mezzainaine products are layered in a company’s capital structure between the equity and senior debt and act as an additional tier in the capital structure. ‘

These subordinated financing structures have a little more risk than the senior debt but have the potential of earning higher returns. 4.5% of the total outstanding financing. Proprietary equity :
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The portfolio was valued at 653 crores. The overall portfolio IRR for all investments was valued at 37%. Have made equity proprietary investments In infrastructure related companies: Gate way Distripark, Indraprastha gas limited. Power Trading corporation. Public offering companies such as : Bharti- tele ventures Jet- airways National thermal power corporation. ONGC TCS Tata Teleservices (Maharashtra) Short and medium term .2.2% of the outstanding DIS. PRIVATE EQUITY: Mobilizing and managing third party funds through a wholly owned subsidiary, IDFC private equity ltd. The company focuses on long Term private equity investment opportunities and also invests in listed equities in certain circumstances. The objective is to achieve attractive returns by providing equity risk capital to early stage and rapidly growing infrastructure focused companies. IDFC private equity has a panel of highly regarded advisors and an experienced team that leverages the client relationships and domain expertise of IDFC. OTHER PRODUCTS: Guarantees
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The company issues guarantees on behalf of projects to grantee their performance and payment obligations. Our guarantees enhance the ratings of the underlying financial instruments and enable projects to secure financing from a wider spectrum of resources, including borrowings from commercial banks, forgein lenders and debt capital market. They are usually extended by us to secure the performance obligations of borrowers, such as meeting the license requirements in the telecommunication and transportation industry. TAKE OUT FINANCING: Take-out financing is a method of providing finance for longer duration projects (say of 15 years) by banks by sanctioning medium term loans (say 5-7 years). It understands that the loan will be taken out of books of the financing bank within pre-fixed period, by another institution thus preventing any possible asset-liability mismatch. After taking out the loans from the banks, the institution could off-load them to another bank or keep it. Treasury: The funding generally includes funding company`s assets comprising of infrastructure loans , with market borrowings of various maturities and subordinated debt. The borrowings include bonds, debentures, term loans from banks and financial institutions, commercial paper, term money borrowings and certificates of deposits. Subordinated debt for the company is provided by the government which has a term of 50 years maturing in 2047, which has an intrest rate of 25 basis points over the 5 year government bond, and reprises every five years. The bonds of the company are rated LAAA by ICRA and AA+ by CRISIL which are the top in its category.

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The primary objective of the investment policy of the company is to prudently manage the surplus finds so that optimal returns can be achieved. Under the guidance of the ministry of finance the company aims to use its treasury operations to manage their liquidity, provide a steady source of income with minimum risks and increase the overall return on the assets. Through the operations the company maintains its ability to repay its borrowings as and when they mature and make new loans and investments as new opportunities arise. We invest predominantly in fixed income securities and instruments such as mutual funds (Consisting of both debt and equity investments), corporate bonds and bank deposits.

Advisory: IDFC provides a wide range of fee earning advisory services to infrastructure development projects and their sponsors. They are mainly of three types: • • • Government advisory services. Corporate advisory services. Project development and consulting services.

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Project Equity: This product mobilizes and manages third party funds with an objective to deliver and stabilize long term returns by investing in assets, equity, quasi equity and convertibles. The focus here is to create a diversified and a high quality portfolio of operating and green field infrastructure assets and also use financial engineering to strike and appropriate balance between yield and capital appreciation. Debt Capital: We are the lead arranger of appraisal and structure of products, syndicate the debt commitments among other financial institutions and also participate in it. The equity placement business is an extension of our service of assisting companies in structuring their capital by equity financing. This product gives the company income in terms of the fee the company charges for the expertise comments and analysis it does for the company who wants to raise equity. Here is the list of major deals IDFC has undertaken:

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(Data source: idfc.com)

Project Development: Project development and consulting services are provided to our clients though our joint ventures with the states of Karnataka and Uttaranchal to promote investments in infrastructure through public private partnerships. The main joint venture in Karnataka was set up as Infrastructure development corporation (Karnataka) Ltd in 2001 to promote and increase infrastructure projects in these states, using both private capital and professional management with strong public sector support. The same was done with the state of Uttaranchal.

PPP Initiatives:

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PPP refers to Public – Private Partnership. It thus provides an opportunity for private sector participation in financing, designing, construction and operation and maintaince of public sector programs and projects.

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Results:

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(Source: Annual Report (IDFC) 08-09)

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Valuation EPS (Rs)* 7.34

P/E Ratio (x) 20.13

Market Cap (Rs m) 191,562.10

P/BV (x) 3.10

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(Source: India bulls Research)

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(Source: India bulls Research)

Key Findings: Net interest income rose 88.9% to Rs. 1.87 billion led by 46% increase in the loan book to Rs. 204.9 billion. The main contributor was the infrastructure income accounting for about 89% of the income of 1.66 billion. The remaining part of the 210 million was counted by income from treasury operations. The company`s overall spread increased by 30 basis points to 2.2% over the year Noninterest income witnessed a more than two fold rise over the year to Rs.1.3 billion. Income from IDFC-SSKI the investment banking subsidiary of IDFC, accounted for the majority – 48% of the other total income. Followed by advisory and other fees that contributed to 27%. However the latter fell to 10% on year on year basis to Rs.360 million. Income from principal investments multiplied 3.2 times to Rs.160 million Operating expenses jumped 184% on year on year basis to 1.3 billion. Increase in expenses was comprehensive with all components recording high increases. Staff and other expenses witnesses a more than 3 fold rise on year on year basis, while provisions and contingencies increased by around 2.5 times.
(Source: Annual Report IDFC)

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Future Outlook EQUITY RESEARCH May 21, 2008 Newer ventures and is also witnessing higher expenses on account of Consolidation with SSKI.

Further, strong growth in income – both net interest income (89% year on year basis) and other income (more than a two-fold rise) more than compensated for the expenses and resulted in a net profit growth of c.61% year on year basis. The balance sheet showed a healthy growth of c.55% year on year basis as the loan book increased c.46% year on year basis to Rs. 204.9 billion. Gross approvals increased 54% year on year basis to Rs. 203.1 billion. In an important development over the year, IDFC has diversified its loan portfolio across sectors and is moving towards reducing its dependence on any particular sector. Outstanding disbursements to Energy and Transportation have fallen, From 42.4% and 27.3% to 34.3% and 24.2%, respectively. Outstanding disbursements to Telecom & IT and Industrial & Commercial sector have increased from 12.1% and 9.7% to 19.1% and 14.6%, respectively. IDFC’s equity book increased 2.3 times to Rs. 13.5 billion.

(Source: www.Indiabulls.com) (www.e&y.com) (www.idfc.com)

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Report Card:
Attribute Value 25.57 5.68 880.76 10 22.16 12 12.2 Date

PE ratio EPS (Rs) Sales (Rs crore) Face Value (Rs) Net profit margin (%) Last dividend (%) Return on average equity
(Source: www.moneycontrol.com)

11/02/10 Mar, 09 Dec, 09

Mar, 09 28/04/09 Mar, 09

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APPROVALS AND DISBURSEMENTS:

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(Source: Annual Report (IDFC) 08-09)

Future Outlook and Growth Prospects: The change of government’s stance from being a financier to a facilitator suggests that greater number of infrastructure projects would be routed through public-private partnership (PPP) mode in the long run. This would enable players like IDFC who fund infrastructure projects in consortiums. In fact, IDFC finances on an average 25 per cent of the total private sector infrastructure projects in the country. IDFC’s project financing is its core business and energy, transportation, telecom and IT (ETT).

(Source: Business week)

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Importance of the business model to Indian Growth: IDFC was set up in 1997 by the united front government to act as a catalyst for and help bankroll infrastructure projects in the private sector. IDFC is expected to do what institutions like IFCI and IDBI have been doing in the past years and that too without having any bad loans. It had to work its way out of criticisms though most of it was unfair. IDFC estimates that it’s spending on infrastructure projects would go to about $46.5 billion or around 4.7% of India’s GDP. A recent study by Morgan Stanley estimates that china spent nearly $201 billion as compared to India. The gap between India and china in terms of infrastructure specifically roads and power is huge. The major role which IDFC has to play here is to mobilize resources and use them in a very efficient way to get the maximum growth.

IDFC Strategy: The IDFC management team had a two-pronged defense system in place: First, the concept of project finance for infrastructure was then in its infancy in India, and IDFC was the first Indian financial institution to focus on the assessment and funding of projects in areas like roads or ports.

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Second, regulations were in a mess and lending to projects in areas where the basic rules were unclear was bound to be risky.

Recession Strategy: In 2009 in the recession, the company reported a year-on-year growth of 75% in its income from investment banking and broking activities in the September 2009 quarter. Any finance company derives revenue from fund-based activities and non-fund based activities — with the latter source known as other income. At a time when there is hardly any growth in the loan books of lenders, it is the other income that has bolstered the books of finance companies. IDFC’s loan book grew by only 3% in the September 2009 quarter, more or less flat.
(Source: Economic Times and Annual Report 2009)

What also helped the infrastructure projects financier was improvement in spreads. On a rolling 12-month basis, the IDFC`s spreads touched 2.6%, a near all-time high, IDFC’s net interest income rose 44%.
(Source: Economic Times and Annual Report 2009)

Interestingly, a good deal of its credit growth has come from the telecom sector. (IDFC’s outstanding disbursements to the telecom sector increased by 32% in the September 2009 quarter)..
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With interest rates down sharply since last year, the company will find it easy to maintain the current growth momentum in the next two quarters. Further, it will also come on the back of depressed spreads in the corresponding period of last year, when the Indian central bank embarked on a monetary tightening course. Investors seem to have cottoned on to this as reflected in the hike in foreign holding in IDFC, which is now 46.7% compared to less than 40% in March 2009.

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Information gathered on RELIGARE :
1)Methods used: 1) Analysis of secondary data (RELIGARE Website, Articles

in

newspapers,

2) Consultation with Mr.Sachin Thakur (Head NCR, Advisory (Religare)) on the product structure and strategies followed by RELIGARE in usage of those products.

2)Products Religare:
 Retail Spectrum Equity and Commodity Institutional Spectrum  Institutional Broking  Investment  Wealth Spectrum Wealth Advisory

Trading  Online Investment

Services  Portfolio Management  Service. Priority equity client

Portal  personal Financial Services  Mutual Funds

Banking  Merchant Banking  Transaction Advisory

Services  Arts Initiative

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       Insurance Savings Personal Credit Personal Loans Loans against Shares Corporate Finance  Insurance Solutions International Management Service. Advisory Fund

Equity and Commodity Trading: The Company ensures you have a superlative trading experience through • • • A highly process driven, diligent approach Powerful Research & Analytics and One of the "best-in-class" dealing rooms

Further, Religare also has one of the largest retail networks, with its presence in 1837* locations across 498* cities & towns. This means, you can walk into any of these branches and connect to our highly skilled and dedicated relationship managers to get the best services. The Competitive Edge (Strategy) • • • • • Pan India footprint Powerful research and analytics supported by a pool of highly skilled research analysts Ethical business practices Offline/Online delivery models Single window for all investments needs through you unique Customer Relationship Number.

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Online Investment Portal: The Company provides a unique service of availability of all kinds of financial products, services and advisory through the Internet. This is something which makes the company easily accessible and with a big coverage area, both nationally and internationally. The Company also boats of features such as Zero percent brokerage, Interest on cash margin, exposure up to 20 times on your cash margin, etc. on our select product schemes available through our highly sophisticated and customized platform R-ACE (Religare Advanced Client Engine). Personal Finance Services:

Today, more and more people look up to ways and means which can fulfill their financial aspirations such as Savings, Retirement planning, Tax planning & Wealth planning, etc. All this coupled with multiple and cut throat competitive offerings makes it very difficult for an individual to come to a decision and this leads to the search of a partner who can help an individual understand the complex investment instruments and make the best use of them to meet his/her short-term and long-term financial objectives. 1. • • • • • Product Offerings

Mutual Funds Insurance - Life & General Bonds Deposits IPOs
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• Small Savings Instruments 1. • • • • • The Religare Edge

Pan India foot print Dedicated team of trained and skilled advisors Strong pedigree driven by diligent processes and ethical business Wide & varied platter of products & services to choose from Backed by strong & credible research

practices

Loans: Structurally all business are operated through various subsidiaries held through the holding company Religare Enterprises Limited. One such wholly owned subsidiary of REL is Religare Finvest Limited registered with the Reserve Bank of India as a Non-Banking Finance Company (NBFC) and is a Member of CDSL. Religare Finvest Limited offers loans for all your needs. SME loans As businesses grow, so do their needs. Whether it is for new equipment or inventory acquisition, new marketing efforts or pure working capital needs, SME Loans from Religare Consumer Finance can provide the money your company needs to thrive. Commercial Vehicle Loans Transportation is an essential part of any business and its growth, hence now with Religare Consumer Finance you can avail Commercial Vehicle loans for
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both new and used three-wheeler, multi utility vehicle, light and heavy commercial vehicles and high end cranes which includes LCV's, Tractor Trailers, Buses etc. Construction Equipment finance India is growing at a fast pace, to develop its infrastructure with the same pace Religare Consumer Finance offers loans for purchase of new and used Construction Equipments and all earth moving machinery which includes JCB, Excavators, Backhoe/wheel Loaders etc.

Loan against Property Religare Consumer Finance offers the best and hassle free way to en-cash the value of your Residential or Commercial property to finance your personal or business requirements. These loans are available for all types of individuals and companies. The Religare Edge • • • • Tailor made solutions to meet your requirement Quick & hassle free services Easy documentation Competitive rates of Interest Insurance Solutions: Religare with one of the largest retail networks in the country offers a complete range of insurance solutions though its 100% subsidiary company, Religare
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Insurance Broking Limited (RIBL). The company holds a composite broker's license operating in the Life, General and Reinsurance domains. An insurance portfolio is designed from a choice of more than 3000 life and general insurance products & plans from more than 30 companies. This one easy window for any brand of insurance, any kind of cover, offers tailor made insurance solutions with not just the right kind of cover but also the right mix of cover.

Offerings include: Life Insurance • • • Pure Insurance Solutions Investment Linked Plans Guaranteed Saving Plans

General Insurance • • • • Motor Insurance Health Insurance Program Travel Protection Schemes Package Policies for SMEs

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Institutional Spectrum:
Institutional broking: The Religare Edge: • • • • • • • • • Highly skilled, dedicated dealing, research and sales teams Dealing capabilities on the NSE, BSE and in the cash and derivatives segment In-depth, detailed and insightful coverage across 16 diverse sectors and 153 companies that extends to Economic Research Result Expectations Derivative Strategies IPO Research Mutual Fund Research Special reports like impact of credit policy, budget, etc. Logistics, Telecom, Construction and much more
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The sectors covered are FMCG, Hotels, Media, Pharmacy, Auto, Cement, Steel pipes,

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Access to international expertise and global practices established in mature financial markets An international distribution network servicing the needs of institutions & corporate houses through a large global network and with the ability to execute globally

Investment Banking: Our Investment Banking business offered through Religare Capital Markets Limited (RCML), a wholly owned subsidiary of the holding company, Religare Enterprises Limited, deals in merchant banking, transaction advisory and corporate finance servicing the Corporate, Entrepreneurs and Investors. Supported by a dynamic team of professionals with proven track record, our Investment Banking division is backed by in-depth understanding of the regulatory systems. With our expertise, we create customized capital structures that are aligned to the customers, business plan and stakeholder objectives. Through its diligent processes in Investment Banking, Religare wishes to partner with the midcaps, be it for Transaction Advisory services, Private Equity placements, Debt Syndication or even entering the Primary Market, ECB, FCCB, GDR/ADR, etc. Religare's Investment Banking is a one-stop shop for all these services.
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At Religare, our constant endeavor is to forge strong relationships and our innovation and uncompromising ethical standards that have enabled us to develop global distribution & execution capabilities.

The Religare Edge • • • • • • • Excellent track record in deal closing and capital raising End-to-End solution delivery capability and in-depth understanding of the regulatory systems. Global presence with offices operating in nine countries besides India. Pan India presence in 1550 locations across more than 460 cities & towns. Powerful research and analytics supported by a pool of highly skilled Research Analysts Ethical business practices Part of a large diversified Indian trans-national promoter group

Insurance Advisory:
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Indian Institute of Planning and Management, New

Delhi.
Religare Insurance Broking Limited (RIBL), a Religare Enterprises Limited venture is one of India's leading insurance broking firms, with one of the largest retail networks in the country. The company holds a composite broker's license operating in the Life, General and Reinsurance domains. RIBL not only provides customized solutions to individual clients but also to some of the leading corporate houses and institutions across the country. Our team across the country is driven by the core philosophy of creating and delivering value to its customers. Our strengths are a team of passionate professionals, a robust IT infrastructure and strong risk analysis teams adept at identifying & analyzing your risks and providing you with tailor made solutions.

Value Proposition

Presence Strong Domain Expertise Management Flexibility Stability

Pan India foot print Rich domain knowledge and Industry experts

Comprehensive Risk Portfolio Expertise to meet all your Insurance needs Market understanding, proactive and customer centric Part of a large diversified Indian transnational group with presence in over 1550 locations across more than 460 cities & towns in India and globally across 10 countries. Infrastructure Quality Human, technical, physical presence, CRM Best business practices and highest quality
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service Strategic Partnerships Alliance with global and national players to get you the best deals

Our Service Offerings

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Indian Institute of Planning and Management, New

Delhi.
Wealth Spectrum: Wealth Advisory Services:

Religare operates its wealth management business in partnership with Macquarie through the joint venture - Religare Macquarie Wealth Management Limited (A 50:50 joint venture). The JV is a combination of strengths Macquarie's strong global expertise with Religare's strong local insights. Portfolio Management Services Religare offers PMS to address varying investment preferences. As a focused service, PMS pays attention to details, and portfolios are customized to suit the unique requirements of investors. Religare PMS currently extends six portfolio management schemes, viz Monique, Panther, Tortoise, Elephant, Caterpillar and Leo. Each scheme is designed keeping in mind the varying tastes, objectives and risk tolerance of our investors. The Edge: We serve you with a diligent, transparent & process driven approach and ensure that your money gets the care it deserves. • No experts, only expertise.
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Indian Institute of Planning and Management, New

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• •

No hidden profits. Daily disclosures. No charge till you profit.

Arts Initiative: With this vision in mind, Religare Enterprises Limited last year launched Religare Arts Initiative Limited (RAI), a wholly owned subsidiary. So, while most galleries, auction houses and art funds operate art businesses, Religare Art Initiative will conversely leverage business for art. Religare Arts Initiative is committed to the business of arts, the arts as an alternate investment option and is a corporate champion for the cause of Art. The gallery is the first physical manifestation of this initiative. The Film Fund:

Religare and Vistaar bring to you an opportunity to invest and partner with the ever evolving and recession-proof medium of films, through VISTAAR RELIGARE FILM FUND - India's first SEBI-approved venture capital fund in this sector. The Fund would be focusing on identifying right opportunities in the film industry and in turn - produce challenging, entertaining, culturally-relevant cinema as well as growth and returns for all its investors.

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Results and Future Outlook: Mar ' 09 PER SHARE RATIOS Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

Adjusted E P S (Rs.) Adjusted Cash EPS (Rs.) Reported EPS (Rs.) Reported Cash EPS (Rs.) Dividend Per Share Operating Profit Per Share (Rs.) Book Value (Excl Rev Res) Per Share (Rs.) Book Value (Incl Rev Res) Per Share (Rs.) Net Operating Income Per Share (Rs.) Free Reserves Per Share (Rs.)

-2.09 -2.04 -2.09 -2.05 0.00 -0.46 -0.63 -0.63 1.64 80.84

3.08 3.09 3.08 3.09 2.50 3.59 2.15 2.15 4.19 53.24

1.83 1.86 1.83 1.86 1.00 2.25 1.97 1.97 2.39 34.76

0.89 0.89 0.89 0.89 0.00 0.90 1.30 1.30 0.91 0.00

-1.76 -1.76 -1.76 -1.76 0.00 0.70 0.00 0.00 1.11 0.00

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Indian Institute of Planning and Management, New

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PROFITABILITY RATIOS

Operating Margin (%) Gross Profit Margin (%) Net Profit Margin (%) Adjusted Cash Margin (%) Adjusted Return On Net Worth (%) Reported Return On Net Worth (%) Return On long Term Funds (%)

-28.09 -30.58 -58.15 -56.84 -2.29 -2.30 1.53

85.83 85.69 73.49 73.62 4.87 4.87 5.67

94.04 94.03 76.71 77.93 4.09 4.09 4.95

98.43 98.43 97.38 97.38 8.33 8.33 6.23

63.82 63.82 -159.57 -159.57 -24.11 -24.11 9.64

LEVERAGE RATIOS

Long Term Debt / Equity Total Debt/Equity Owners fund as % of total Source Fixed Assets Turnover Ratio

0.03 0.03 96.52 7.42

0.00 0.15 86.45 56.93

0.00 0.01 98.80 1,860.97

0.35 0.35 74.00 6.81

0.00 0.00 100.00 0.00

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Indian Institute of Planning and Management, New

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LIQUIDITY RATIOS

Current Ratio Current Ratio (Inc. ST Loans) Quick Ratio Inventory Turnover Ratio

97.46 97.46 97.38 155.54

2.03 0.25 2.01 882.68

1.35 0.83 1.35 0.00

0.73 0.73 0.73 0.00

0.37 0.37 0.37 0.00

(Source: Religare Annual Report)

Corporate social responsibility: Sponsorship of family home at SOS Children’s Village Approximately 5000 children die every day in India, due to lack of amenities or nutrition. And to rectify this dismal situation, Religare Enterprises Limited has partnered with SOS Children’s Villages of India. At a time when India’s child mortality rate is one of the highest in the world, Religare’s commitment to this initiative is strong and unwavering. SOS Children’s Villages of India creates the right environment for orphaned children, where they are looked after at “homes.” Each village has “homes” with 8-10 children, who stay together like brothers and sisters, and they have a
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Indian Institute of Planning and Management, New

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“mother” who looks after them as her own. The children stay there till they complete their education, giving them and the mother a loving family in return.

Employee Payroll Giving programme in association with Give India The employees’ initiative has already begun with Give India Foundation, where Employees donate a part of their salaries to their pet cause, and contribute towards a better world.

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Indian Institute of Planning and Management, New

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Primary Research: (Interview): The primary research was done on the basis of focus interviews with personnel’s from IDFC and Religare Ltd respectively, and their views on their business models were as follows: IDFC: IDFC is now at a stage where it sees a lot of projects coming its way, being a company which has pioneered the PPP investments in India, with the growth of the economy and the need for infrastructure investments, we have our work cut out to deliver as promised. In terms of urban development with the expected increase in India’s population in urban areas from 26% in 2001 to 36% in 2011, there is intense demand for development infrastructure spending in the short tern to the medium term will be likely in the public sector, we believe that there are select opportunities for private initiatives in urban transportation, solid waste management and industrial water supply. We also expect that the ‘viability gap funding “mechanism announced by the government would provide funding up to 20% for certain projects meeting its criteria, that will increases the private level funding in this
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Indian Institute of Planning and Management, New

Delhi.
area. To assist the development of this sector we are advising a no of government agencies and urban bodies for the PPP initiatives. Power sector is something which we are looking at and we are looking at financing captive power plant projects majorly small and medium hydroelectric projects, select coal and gas based independent power projects. In this we have limited our exposure to large scale independent power projects (300MW).

The company`s strategy, in the last three-four years, has been to find a balanced business model that gives us a combination of different businesses so that we get greater stability of earnings through cycles, and also we get, over a period of time, a better return on our capital. There are also the regulatory constraints and other market-imposed constraints that got attached to our business balance sheet. We were, thus, disproportional in a business that was very capital-intensive, and the return on investments was modest. Given our structure as a non-banking finance company, which imposes limitations on our sources of funding, we have been at a structural competitive disadvantage vis-à-vis the banking competitors whose cost of funds is inevitably lower. This is why in the last three-four years we evolved a strategy to diversify our earning streams away from capital-intensive businesses to capital-light businesses of different characteristics. We are still focused on the infrastructure space, but we are building our domain knowledge to get into the businesses that are less capital intensive.
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Indian Institute of Planning and Management, New

Delhi.
Competing with banks for funding projects is a challenge for us since cost of funds for the banks is relatively low. We may try to convert IDFC into a fullfledged infrastructure-focused commercial bank in the future. IDFC Bank could be a possibility in the years to come. It is a strategic option that makes increasing sense as we become larger. IDFC is still relatively small compared to the overall opportunities available in the country. So, even though the market has moderated and investments in India’s infrastructure sector may have slowed down, that does not necessarily mean that

IDFC will see a disproportionate slowdown. Although we will witness a slowdown inevitably, our market share will surely rise. Also, India’s infrastructure sector is likely to witness a lesser slowdown than the rest of the economy. We remain very focused on lending to infrastructure projects, investing in infrastructure sector, facilitating investments in India’s infrastructure projects, raising capital for infrastructure sector players, providing broad-based financial services for people who are in the infrastructure sector and would, hopefully, be introduce new products for interested investors in the infrastructure sector in the future. This fiscal our business has been larger than that of the last fiscal year in terms of the balance-sheet size. However, the pace of growth of our balance sheet has slowed down considerably due to the current economic scenario. Due to risk aversion, we have not participated in certain projects. Also, infrastructure funding demand has also slowed down in the country. Many investment plans have been delayed. Our NPAs in this fiscal are higher than the last fiscal’s figures, as expected.

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Indian Institute of Planning and Management, New

Delhi.
The next fiscal is expected to be slower than the current fiscal although our market share will witness a modest growth. We are planning to raise money through external commercial borrowing. It will not be a large amount. Although our cost of funding has fallen in recent weeks, it has not fallen by as much as the government securities rates have fallen because the spread of AAA-rated paper over government securities has not fallen. There is no shortage of liquidity and the immediate challenge we face is the volatility of our cost of funds. Alternatively, in the next couple of years, we also see a more significant development in the corporate debt market that will give us more room to manage our business in the way we are today, without becoming a bank. Also, If the process of globalization accelerates and the Indian rupee becomes fully convertible, then we can immediately connect to the world capital markets to meet our future funding needs. Religare: Financial services group Religare Enterprises Ltd intends to enter the banking business, taking advantage of the Rs10,000 crore that its owners will receive when they complete the sale of their stake in Ranbaxy Laboratories Ltd, India’s biggest drug maker, to a Japanese acquirer. The family is also “open to evaluating private equity” as a new line of business as well, Malvinder Mohan Singh, chief executive and managing director the sale of their stake to Japan’s third largest drug firm, Daiichi Sankyo Co. Ltd in a deal that valued Ranbaxy at $8.5 billion (more than Rs36,450 crore) after equity dilution. “At some point of time, I think it is an integral part of a strategy for any financial services business to have a bank,” he said, declining to specify a time frame”.
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Indian Institute of Planning and Management, New

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Religare Capital Markets Ltd, a brokerage and investment banking arm of Religare Enterprises, recently bought London investment banking firm Hichens, Harrison and Co. Plc for about Rs400 crore. Religare Enterprises already has a venture capital unit under Religare Venture Capital Ltd. The banking ambitions of Singh, who runs the group’s business along with younger brother Shivinder Mohan Singh and Religare chief executive Sunil Godhwani, will, however, face several regulatory hurdles. Banking rules in India don’t allow a company to hold more than a 10% stake in a bank and any change in this is unlikely in the near future. India financial services group Religare Enterprises has acquired a majority stake in US and UK-based fund of funds investor Northgate Capital. Reportedly valued at $36m, the deal is the opening salvo in a $1bn spending programme Religare is planning that will see the group invest in asset management firms across the globe. In terms of new horizons Religare is looking forward to new businesses like air travel and concierge services. Corporate Travel, Customized Leisure Travel & Air Charter Services The air charter business is one of the largest non scheduled operators in the country and can boast of one of the best-in-class “owned fleets”, with its hubs in Delhi, Mumbai and Chennai. The fleet is a versatile and young combination of Jets, turbo props and helicopters with a flying range within the Asian continent and the Middle East. The fleet has been carefully chosen keeping in Mind safety, comfort and convenience parameters and is commanded by pilots drawn from the very best in the industry. The travel business is duly accredited

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for complete management of both in-bound and outbound domestic and international travel. Our 360 degree service bouquet encompasses. The entire gamut of activities with single minded client centricity. – Systematic and Process Driven Itinerary Planning – Ticketing – Domestic & International – Hotel Reservations – Chartered Flights – Ground Arrangements – Visa Facilitations

As regarding the capital structure and CAR, The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has opposed the proposed move of Reserve Bank of India (RBI) to make it mandatory for Non-Banking Financial Companies and Non-Deposit Taking Companies to maintain 10% capital adequacy ratio with them. To us it’s a lot of money and in the competition we are in we need to make sure that every penny we have generates a good amount of return. That’s why we focus more on asset creation than keeping the cash with us. Off course we have to abide what the regulators say, but as a profit making organization we need to look at what best we can give to our shareholders.

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Recommendation: Aggressive strategy or the American way of Banking, it’s the new trend in India. Following this and taking a good look at how private banks and NBFC`s in India were functioning RBI cautioned the banks on the pitfalls of "doorstep banking", where banks make their staff and agents visit the client`s homes to get new business. Also the Liquidity ratios and Capital Adequacy ratios with some of the NBFC`s are a concern as they try to squeeze everything out to get an aggressive approach to profit making, without looking at the interests of the investor and the consumer. The federal banks of many countries see this as a hampering factor to something we call as “know your customer” thing, with increase in competition the banks and NBFC`s are ignoring this fact of the business. I personally after analyzing the data and factors of marketing and promotion by various companies see that aggressiveness for selling and increasing revenues is hampering the fundamentals of capital structure and creating a trust for tha banking industry in the market The RBI guidelines on "know your customer" primarily deal with money laundering. Aggressive marketing for business development should, by all accounts, have no apparent conflict with normal banking practices. A brief look at the probable relationship between aggressive marketing, and the high level of non-performing assets (NPA) in the banking sector may help us understand the reasons behind the unstated and unspoken concerns of the RBI. Banks in India, especially the nationalized entities, never considered `marketing' an essential tool for business. It mostly remained the domain of the foreign banks. The American banks especially thrived on marketing, and made it an art form. It was since 1994, only when the new generation, technology-driven private sector banks came into operation that marketing received a boost. A performance driven approach to the business of banking, the desire to grow at a fast pace, the pressure to grab a market share from the existing players and the urgency to shore up the balance-sheet before a public issue took the battle for business right to the doorstep of the foreign banks.

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The war for market share was spearheaded by the new generation bankers recruited from non-banking finance companies (NBFC), foreign banks, broking houses and business schools. The staid, traditional, conservative banker became passé. The demand for front- and back-office staff, apart from those required for marketing or managing `relationships', forced the headhunters and the HR managers to look at unconventional (read nonbanking) sources. Inevitably, there had to be some compromises. The recruitment of these `bankers', therefore, came at a price. The personnel recruited were mostly non-bankers. Few realized there was more to banking than what was written in the textbooks, or taught in the classrooms. The resultant impact was subtle, essentially on the attitude and the approach to handling transactions, but more on business generation. Those in a hurry hardly spared time to know their customers, or build relationships. Coupled with their drive to generate the maximum business in the shortest possible time, these hard-sell bankers also had a different mindset, which was `deal' based, in contrast to that of a conservative, traditional banker. The `deal' based approach, and aggressive marketing to generate business extended, unfortunately, to loans and advances. Generating fee business (that is, non-fund based business) without offering little or no fund-based facilities is extremely difficult at the best of times. Fee business, therefore, normally follows fund-based facilities. In order to lure away the top customers (often from foreign banks), increase non-interest income, improve spreads, lower the overall cost of funds and improve profitability, these banks went after selected customers with bouquets of offers, which included fund-based facilities. It goes without saying that in such situations, a banker could hardly impose total and strict financial discipline on his clients — either at the time of the initial assessment or during the life of an advance. In trying to beat the foreign banks at their own game, the new generation banks burnt their fingers badly. In their zeal they failed to appreciate the fact that the foreign banks had a highly developed system of risk management in place, and that they were quite adept at exiting accounts at the first hint of trouble. The consequence of the approach should hardly come as a surprise. Some new-generation banks are now going through painful restructuring, primarily provoked by unusually high levels of NPAs accumulated over an unusually short period of time. This was the advice of RBI on the strategy of private NBFC` working in India

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"Distribute your loans rather than concentrate them in a few hands. Large loans to a single borrower or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank, and when this is the relation between a bank and its customers, it is not difficult to decide which in the end will suffer..."
Source: www.cnbc.com

The basic principles of sound banking practice have remained unchanged and valid for well over a century. As the custodian of other people's money, a banker must understand and appreciate the significance of these words. The diversification of businesses and concentration of fundamentals in terms of marketing and usage of funds in comparison with the base of revenues in order to sustain the growth and provide security to investors should be the main concern for the management of private NBFC`s.

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Conclusion: Through the analysis of various data and the models for both the companies, IDFC and Religare we come to a conclusion that the businesses targeted by both the companies are different in aspects and that both have a business model suiting to that. By analyzing the secondary data and performance charts of both the companies we can say that both companies have done fairly well in terms of profits, growth and increasing their business size in the previous year. IDFC focusing on their core business of financing and consulting has been a major factor for development of Indian infrastructure industry, whereas Religare has been a company which has revitalized the microfinance industry by taking reach and convenience to another level. When we take a close look at the models, we see that the models are perfect according to the business they engage themselves perfectly in the business they look forward to as Religare having its core business of microfinance products needs to have marketing and selling expenses and moreover it needs to be aggressive to churn in more profits to take care of its expenses and along with that grow at a healthier rate. Growth and risk are two components of strategies companies select for themselves. Comparably the risk factor for Religare s more in their capital structure due to its strategy and business structure, whereas IDFC supports a more robust capital structure which involves less risk and since IDFC is supported by the Government of India in terms of its stake and structure, the risk factor for IDFC would always be lower when compared to a private company like Religare.
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Indian Institute of Planning and Management, New

Delh

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