Final Report On NBFC

A Comparative Study Of NBFC in India 2010
Table of Contents
EXECUTIVE SUMMARY ..............................................................
.................................................... 3 CHAPTER-1 INTRODUCTION ..
................................................................................
....................... 4 1.1 Types Of NBFC‘s ....................................
................................................................................
..... 5 1.2 Regulations of NBFC‘s ................................................
................................................................. 6 1.3 Guidelin
es for new deposits ............................................................
.............................................. 8 1.4 Responsibilities ..........
................................................................................
................................. 11 1.5 Current Scenario ......................
................................................................................
................... 12 CHAPTER-2 Literature review .............................
............................................................................ 14
2.1 Importance Of NBFC‘s .........................................................
...................................................... 15 2.2 Role of NBFC‘s .....
................................................................................
..................................... 16 2.3 On Global Crisis ..................
................................................................................
....................... 17 CHAPTER-3RESEARCH METHODOLOGY .......................
........................................................ 18 3.1 RESEARCH DESIGN
................................................................................
................................ 19 3.2 Objective ..............................
................................................................................
....................... 19 3.3 SCOPE OF THE STUDY ..............................
............................................................................. 19
3.4 data collection ...........................................................
.................................................................. 19 3.4.1 PRIM
ARY DATA .......................................................................
........................................ 19 3.4.2 SECONDARY DATA ...............
................................................................................
.......... 19 3.5 Field Work Plan ..............................................
............................................................................ 20
CHAPTER-4MAJOR PLAYERS AND SELECTED COMPANY FOR STUDY ........................ 2
1 4.1 LIC HOUSING FINANCe.......................................................
................................................... 24 4.1.1 Housing Finance Ind
ustry ..........................................................................
.......................... 24 4.1.2 Indian Housing Finance scenario ............
............................................................................. 25
4.1.3 LIC Housing Finance .....................................................
...................................................... 26 4.1.4 Financial Perfor
mance ..........................................................................
............................... 28 4.1.5 Macro Economic Analysis ...............
................................................................................
.... 33 4.2 Reliance Capital: ..................................................
....................................................................... 38 4.2.1
Indian Economy: ...............................................................
................................................... 38 4.2.2 Reliance Capital ..
................................................................................
................................. 39 4.2.3 Financial Performance ...............
................................................................................
.......... 41 4.2.4 Macro Economic Analysis ....................................
............................................................... 44 4.3 Shriram t
ransport finance ...............................................................
............................................. 47 ALLIANCE BUSINESS SCHOOL | 1
4.3.1 ECONOMIC OVERVIEW ........................................................
.......................................... 47 4.3.2 COMMERCIAL VEHICLE INDUSTRY
OVERVIEW ..................................................... 47 4.3.3 Shriram
Transport Finance...............................................................
.................................... 48 4.3.5 Financial Performance ............
................................................................................
............. 49 4.3.4 SWOTANALYSIS.............................................
.................................................................. 52 4.4idfc ..
................................................................................
............................................................. 56 4.4.1 Global Fi
nancial and Economic Crisis.....................................................
............................ 56 4.4.2 Infrastructure Development Finance .......
............................................................................. 57
4.4.3 Financial Performance ...................................................
...................................................... 59 4.4.5 Macro Economic A
nalysis ........................................................................
........................... 63 CHAPTER-5 INDIAN BANKS V/S NBFC’S .................
.................................................................. 65 5.1 Top 5
Banks and NBFCs with highest profitability .....................................
........................... 67 5.3 Banking versus NBFC regulatory arbitrage in I
ndia............................................................... 68 CHAPTER-6
Porter’s five forces ............................................................
.......................................... 70 CHAPTER-7 FINDINGS & MANAGERIAL IM
PLICATIONS................................................... 74 7.1 findings ..
................................................................................
..................................................... 75 7.1.1 Disbursements - S
harp fall during the crisis ....................................................
.................... 75 7.1.2 Cost of Funding...................................
................................................................................
. 77 7.1.3 Asset Quality .......................................................
................................................................. 77 CHAPTER-8 R
ECOMMENDATIONS AND CONCUSION ...................................................
...... 79 8.1 Recommendation: ..................................................
................................................................. 80 8.2 Conclus
ion ............................................................................
.................................................. 80 REFERENCES ...............
................................................................................
..................................... 82
ALLIANCE BUSINESS SCHOOL |
2
EXECUTIVE SUMMARY
The study presents a comparative study of NBFC’s in India. There are almost 13000
registered NBFC’s in India. The study is aimed to provide an holistic view of the
NBFC Industry. NBFC fulfills the financial gap by providing loan at a lower rate
of interest. The major players of each field 1) Housing Finance Industry: LIC H
ousing Finance. 2) Infrastructure Finance Industry: IDFC 3) Asset Financing: Shr
iram Transport Finance 4) Composite: Reliance Capital The study also compared th
e Indian Banks v/s NBFC. It was found that at even at the time of the economic s
lowdown NBFC was more profitable. Porters Five forces was also used to analyse t
he industry and to find the competitiveness in the industry. The industry is not
tightly regulated as there are many regulatory bodies. Hence, there was an impo
rtant need to study the NBFC as the industry plays an important role in the fina
ncial Services market of INDIA.
It is encouraging that the NBFC sector‘s importance is finally being acknowledged
across FS market constituents as well as the regulator. However, the importance
attached to the sector is often transcending into misplaced exuberance. Over sim
plified and vague drivers for NBFC valuations such as strategic fit and customer
base, can never substitute dispassionate business analytics. A rational assessm
ent of the intrinsic values of NBFCs factoring issues such as past performance,
structural weaknesses of the sector (for instance funding disadvantages), along
with an identification of real capabilities are essential to ensure that the equ
ilibrium between price paid and value realized is reached to the extent possible
. In the absence of this, India is sure to witness the re-opening of the NBFC ho
rror story albeit with a new chapter on the erosion of NBFC investment values af
fecting investors across categories
.
3
CHAPTER-1
INTRODUCTION
4
A Non-Banking Financial Company (NBFC) is a company registered under the Compani
es Act, 1956 and is engaged in the business of loans and advances, acquisition o
f shares/stock/bonds/debentures/securities issued by Government or local authori
ty or other securities of like marketable nature, leasing, hire-purchase, insura
nce business, chit business but does not include any institution whose principal
business is that of agriculture activity, industrial activity, sale/purchase/co
nstruction of immovable property. A non-banking institution which is a company a
nd which has its principal business of receiving deposits under any scheme or ar
rangement or any other manner, or lending in any manner is also a non-banking fi
nancial company (Residuary non-banking company). NBFCs are doing functions akin
to that of banks; however there are a few differences: (i)an NBFC cannot accept
demand deposits; (ii) an NBFC is not a part of the payment and settlement system
and as such an NBFC cannot issue cheques drawn on itself; and (iii) deposit ins
urance facility of Deposit Insurance and Credit Guarantee Corporation is not ava
ilable for NBFC depositors unlike in case of banks.
1.1 TYPES OF NBFC’S
Originally, NBFCs registered with RBI were classified as: (i)equipment leasing c
ompany; (ii) hire-purchase company; (iii) loan company; (iv) investment company.
However, with effect from December 6, 2006 the above NBFCs registered with RBI
have been reclassified as (i) Asset Finance Company (AFC) (ii) Investment Compan
y (IC) (iii) Loan Company (LC)
ALLIANCE BUSINESS SCHOOL | INTRODUCTION
5
1.2 REGULATIONS OF NBFC’S
In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC
should be registered with RBI to commence or carry on any business of non-bankin
g financial institution as defined in clause (a) of Section 45 I of the RBI Act,
1934. However, to obviate dual regulation, certain categories of NBFCs which ar
e regulated by other regulators are exempted from the requirement of registratio
n with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking co
mpanies registered with SEBI, Insurance Company holding a valid Certificate of R
egistration issued by IRDA, Nidhi companies as notified under Section 620A of th
e Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of t
he Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housi
ng Bank. A company incorporated under the Companies Act, 1956 and desirous of co
mmencing business of non-banking financial institution as defined under Section
45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh
(raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit
its application online by accessing RBI‘s secured website https://secweb.rbi.org.i
n/COSMOS/rbilogin.do (the applicant companies do not need to log on to the COSMO
S application and hence user ids for these companies are not required). The comp
any has to click on ―CLICK for Company Registration on the login page. A window sho
wing the Excel application forms available for download would be displayed. The
company can then download suitable application form (i.e. NBFC or SC/RC) from th
e above website, key in the data and upload the application form. The company ma
y note to indicate the name of the correct Regional Office in the field ―C-8 of the
―Annx-Identification Particulars worksheet of the Excel application form. The comp
any would then get a Company Application Reference Number for the CoR applicatio
n filed on-line. Thereafter, the company has to submit the hard copy of the appl
ication form (indicating the Company Application Reference Number of its on-line
application), along with the supporting documents, to the concerned Regional Of
fice. The company can then check the status of the application based on the ackn
owledgement number. The Bank would issue Certificate of Registration after satis
fying itself that the conditions as enumerated in Section 45-IA of the RBI Act,
1934 are satisfied.
ALLIANCE BUSINESS SCHOOL | INTRODUCTION 6
All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a
valid Certificate of Registration with authorisation to accept Public Deposits
can accept/hold public deposits. NBFCs authorised to accept/hold public deposits
besides having minimum stipulated Net Owned Fund (NOF) should also comply with
the Directions such as investing part of the funds in liquid assets, maintain re
serves, rating etc. issued by the Bank. Yes, there is a ceiling on acceptance of
Public Deposits. An NBFC maintaining required NOF/Capital to Risk Assets Ratio
(CRAR) and complying with the prudential norms can accept public deposits as fol
lows: Category of NBFC having minimum NOF of Rs 200 lakhs AFC* maintaining CRAR
of 15% without credit rating Ceiling on public deposit 1.5 times of NOF or Rs 10
crore whichever is less AFC with CRAR of 12% and having minimum investment grad
e credit rating LC/IC** with CRAR of 15% and having minimum investment grade cre
dit rating *AFC=Asset Finance Company 1.5 times of NOF
4 times of NOF
** LC/IC = Loan company/Investment Company
As has been notified on June 17, 2008 the ceiling on level of public deposits fo
r NBFCs accepting deposits but not having minimum Net Owned Fund of Rs 200 lakh
is revised as under: Category of NBFC having NOF more Revised Ceiling on public
deposits rating and Equal to NOF
than Rs 25 lakh but less than Rs 200 lakh AFCs maintaining CRAR of 15% without c
redit
AFCs with CRAR of 12% and having minimum investment 1.5 times of NOF grade credi
t rating
LCs/ICs with CRAR of 15% and having minimum investment Equal to NOF grade credit
rating Presently, the maximum rate of interest an NBFC can offer is 12.5%. The
interest may be paid or compounded at rests not shorter than monthly rests.
The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months. They cannot accept deposits repayable o
n demand. The NBFCs are allowed to accept/renew public deposits for a minimum pe
riod of 12 months and maximum period of 60 months. They cannot accept deposits r
epayable on demand. NBFCs cannot offer interest rates higher than the ceiling ra
te prescribed by RBI from time to time. The present ceiling is 12.5 per cent per
annum. The interest may be paid or compounded at rests not shorter than monthly
rests. NBFCs cannot offer gifts/incentives or any other additional benefit to
he depositors. NBFCs (except certain AFCs) should have minimum investment grade
credit rating. The deposits with NBFCs are not insured. The repayment of deposit
s by NBFCs is not guaranteed by RBI. Certain mandatory disclosures are to be mad
e about the company in the Application Form issued by the company soliciting dep
osits. Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs exc
ept deposits by debit to NRO account of NRI provided such amount does not repres
ent inward remittance or transfer from NRE/FCNR (B) account. However, the existi
ng NRI deposits can be renewed.
1.3 GUIDELINES FOR NEW DEPOSITS
Customer identification: Know The Customer (KYC) should be the key guiding pri
nciple for identification of an individual / corporate customer (depositor or bo
rrower).
8
Accordingly, the KYC framework should have two-fold objective, (i) to ensure cus
tomer identification and verifying his identity and residential address; and (ii
) to monitor transactions of a suspicious nature.
NBFCs should ensure that the identity of the customer, including beneficial owne
r is done based on disclosures by customers themselves.
Typically easy means of establishing identity would be documents such as Permane

nt Account Number (PAN), ration card, driving licence, Election Commission s ide
ntity card, passport, et cetera in case of individuals and registration certific
ate, partnership deed/agreement, et cetera and other reliable documents in respe
ct of companies, firms and other bodies.
Verification through such documents should be in addition to the introduction by

a person known to the NBFC.
Procedures for existing customers
In respect of existing customers, NBFCs should ensure that gaps and missing info
rmation in compliance of KYC guidelines on customer identification procedure is
filled up and completed before June 30, 2004.
Ceiling and monitoring of cash transactions
NBFCs would normally not have large cash withdrawals and deposits. However, wher
ever transactions of Rs 10 lakh (Rs 1 million) and above are undertaken, they sh
ould keep record of these transactions in a separate register maintained at bran
ch, as well as at Registered Office.
Such information should be made available to regulatory and investigating author

ities, when demanded.
Guidelines and monitoring procedures
The board of directors of NBFCs should formulate policies and procedures to oper
ationalise the guidelines and put in place an effective monitoring system to ens
ure compliance by their branches.
Early computerisation of branch/office reporting will facilitate prompt generati

on of such reports and monitoring.
Internal control systems
Duties and responsibilities should be explicitly allocated among the staff for e
nsuring that policies and procedures are managed effectively and that there is f
ull commitment and compliance to an effective KYC programme in respect of both e
xisting and prospective customers/clients.
Internal audit/inspection
Internal auditors must specifically scrutinise and comment on the effectiveness

of the measures taken by branches / offices of NBFC in adoption of KYC norms and
steps towards prevention of money laundering.
Specific cases of violation should be immediately brought to the notice of head

/ controlling / registered office.
Record keeping
NBFCs should prepare and maintain proper documentation on their customer relatio
nships and cash transactions of Rs 10 lakh and above.
The records of all such transactions should be retained for at least ten years a
fter the transaction has taken place and should be available for perusal and scr
utiny by audit functionaries as well as regulators and law enforcement authoriti
es; as and when required, at the branch as well as at registered office.
Training of staff and management
It is important that all the operating and management staff is made fully aware
of the implications and understand the need for strict adherence to KYC norms.
NBFCs may take suitable steps to impart training to their operational staff on a
ntimoney laundering measures.
10
1.4 RESPONSIBILITIES
The NBFCs accepting public deposits should furnish to RBI i. Audited balance she
et of each financial year and an audited profit and loss account in respect of t
hat year as passed in the annual general meeting together with a copy of the rep
ort of the Board of Directors and a copy of the report and the notes on accounts
furnished by its Auditors; ii. iii. Statutory Annual Return on deposits - NBS 1
; Certificate from the Auditors that the company is in a position to repay the d
eposits as and when the claims arise; iv. v. vi. Quarterly Return on liquid asse
ts; Half-yearly Return on prudential norms; Half-yearly ALM Returns by companies
having public deposits of Rs. 20 crore and above or with assets of Rs. 100 cror
e and above irrespective of the size of deposits ; vii. Monthly return on exposu
re to capital market by companies having public deposits of Rs. 50 crore and abo
ve; and viii. A copy of the Credit Rating obtained once a year along with one of
the Half-yearly Returns on prudential norms as at (v) above.
11
1.5 CURRENT SCENARIO
Nearly 11 years after the last of the two banking licences were issued by RBI to
private sector entities, the government has again started the process of allowi
ng the better-managed nonbanking finance companies (NBFCs) to graduate to full-f
ledged banks. FM Pranab Mukherjee‘s Budget proposal on Friday was the first step t
owards the same.
The second step will be enacted on Tuesday morning. A select group of officials
from top NBFCs, under the aegis of the Finance Industry Development Council (FID
C), the trade body for NBFCs in India, are meeting R Gopalan, the banking secret
ary in the finance ministry, to present a case for select NBFCs to be converted
into full-fledged banks, sources said. About 12-15 NBFCs and corporate houses ha
ving presence in the financial sector are expected to join the race to float a b
ank. ‗‗The finance minister is convinced that there is a huge need for low-cost fina
ncing at the semi-urban and rural areas in India,‘‘ said a industry source. The fina
ncial services industry believes the Budget proposal was a reflection of the sam
e. ‗‗In the finance ministry things are moving in the right direction and the bankin
g secretary‘s meeting proves the same,‘‘ said the source. FIDC office bearers could no
t be contacted during the extended weekend.
n the last Union Budget, the FM had announced that RBI is considering giving add
itional banking licences to private sector players, including NBFCs. This was os
tensibly to further financial inclusion and also to improve the size and sophist
ication of the Indian banking system. The announcement set the financial markets
on fire with a lot of conjecturing as to who would be the lucky few. The access
to low-cost current account and savings accounts and the ability to offer all f
inancial products under one roof were cited as major attractions for NBFCs to ru
sh to seek banking licences. It was also expected that RBI would give new licenc
es to private players very soon. But, an analysis reveals a different picture. N
either is RBI in a hurry to issue fresh licences nor are many NBFCs keen to get
into commercial banking. The reasons for this are manifold. RBI rules are string
ent for commercial banks as they are the visible face of the Indian financial sy
stem and commercial banks are primarily the custodians of public money. RBI plac
es restrictions on commercial banks in their lending operations. Out of Rs 100 t
aken in as deposits, approximately Rs 30 has to be set apart as statutory requir
ements towards CRR and SLR. This leaves the banks with Rs 70 to lend. Out of thi
s, 40% has to be statutorily lent towards the priority sector as defined by RBI.
This leaves banks with approximately Rs 42 to lend at their own discretion. Man
y NBFCs would definitely find this as restrictive to say the least. As per the g
uidelines of 2001, NBFCs seeking a banking licence should have a minimum paid-up
capital of Rs 200 crore, which must be increased to Rs 300 crore within 3 years
of conversion into a bank. Further, banks have to invest large funds in fixed a
ssets and information technology primarily to facilitate financial inclusion, ri
sk management, anti money laundering, etc. These huge capital expenditures incre
ase the payback period for the investments made. Also, banking-as-a-business mod
el is far more people-, process- and product-driven than a simple NBFC model. Fo
r example, in order to adopt universal banking, the staff needs to be multi-skil
led in banking functions. So, the operating expenses will be substantially highe
r, which, in turn, would reduce the profitability of operations. Also, there are
restrictions on ownership and voting rights. Current stipulations cap voting ri
ghts at 10%; higher rights require the specific approval of...
13
Chapter-2
Literature review
ALLIANCE BUSINESS SCHOOL | Literature review
14
2.1 IMPORTANCE OF NBFC’S
According to RBI Non Banking Finance Companies (NBFCs) is a constituent of the i
nstitutional structure of the organized financial system in India. NBFCs perform
a significant and important role in our financial system. They facilitate the p
rocess of channelising of public savings and provide better return to the deposi
tors. We are aware that due to liberalization and globalisation, banking industr
y and financial sector has gone through many reforms. In the present economic en
vironment it is very difficult to cater need of society by Banks alone so role o
f Non Banking Finance Companies and Micro Finance Companies become indispensable
. The activities of non-banking financial companies (NBFCs) in India have underg
one qualitative changes over the years through functional specialisation. The ro
le of NBFCs as effective financial intermediaries has been well recognised as th
ey have inherent ability to take quicker decisions, assume greater risks, and cu
stomise their services and charges more according to the needs of the clients. W
hile these features, as compared to the banks, have contributed to the prolifera
tion of NBFCs, their flexible structures allow them to unbundle services provide
d by banks and market the components on a competitive basis. The distinction bet
ween banks and non-banks has been gradually getting blurred since both the segme
nts of the financial system engage themselves in many similar types of activitie
s. At present, NBFCs in India have become prominent in a wide range of activitie
s like hire-purchase finance, equipment lease finance, loans, investments, etc.
By employing innovative marketing strategies and devising tailor-made products,
NBFCs have also been able to build up a clientele base among the depositors, mop
up public savings and command large resources as reflected in the growth of the
ir deposits from public, shareholders, directors and their companies, and borrow
ings by issue of nonconvertible debentures, etc.
According to KPMG survery The Indian Non Banking Finance Company (NBFC) sector h
as often been relegated to the shadows, in most discussions on the Indian Financ
ial Services (FS) industry. Banks, insurance companies and capital market player
s take centre stage and invariably, NBFCs attract public attention only during t
imes of crisis. Little attention has been paid to the silent but effective manne
r in which NBFCs have spread their operations across the country. NBFCs have pro
vided financial solutions to sections of society who hitherto were at the mercy
of unorganized players for credit and savings products, which
ALLIANCE BUSINESS SCHOOL | Literature review 15
were delivered on economically and socially usurious terms. ronically, in recent
times, NBFCs are once again in the spotlight for their perceived strengths and
capabilities rather than their problems. While this re-rating ought to bring che
er to a much maligned sector, a degree of caution needs to be instilled within p
otential investors in NBFCs, who need to clearly understand the true drivers of
value for finance companies. This understanding is imperative to enable a better
judgment of the intrinsic worth of NBFCs. This article proceeds to illustrate t
he key factors responsible for the strong re-rating of the NBFC sector, as well
as discuss the validity of each of these factors, as actual drivers of value. To
day, the NBFC sector is as financially sound as it has ever been.To an extent, t
his can be attributed to the very problems affecting the sector which have resul
ted in the purging of several players, leaving the fittest few to dominate the l
andscape. Taking the Reserve Bank of India‘s (RBI) definition of ‗reporting NBFCs‘ as
a proxy for non-dormant players, a mere 24 NBFCs held 92.7 percent of the total
assets of all NBFCs in 2005-2006. The balance assets, amounting to less than 8 p
ercent of the total, were fragmented across 439 NBFCs. In addition to this conso
lidation, at present, NBFCs in general are well-capitalized with strong parent s
upport. A majority of active NBFCs reported capital adequacy ratios exceeding 12
percent
2.2 ROLE OF NBFC’S
According to EPW Research Foundation (EPWRFThe Indian economy is going through a
period of rapid financial liberalisation . Today, the intermediation is bein
g conducted by a wide range of financial institution through a plethora of custo
mer friendly financial products. The segment consisting of Non-Banking Financial
Companies (NBFCs), such as equipment leasing/hire purchase finance, loan and in
vestment companies, etc. have made great strides in recent years and are meeting
the diverse financial needs of the economy. In this process, they have influenc
ed the direction of savings and investment. The resultant capital formation is i
mportant for our economic growth and development. Thus, from both the macroecono
mic perspective and the structure of the Indian financial system, the role of NB
FCs has become increasingly important. The crucial role of Non Banking Finance I
nstitutions (NBFIs) in broadening access to financial services, and enhancing co
mpetition and diversification of the financial sector has been well recognized.
The main advantages of these companies lie in their ability to lower transaction
s costs of their operations, their quick decision-making ability, customer orien
tation and prompt provision of services. While NBFIs are sometimes seen as akin
to banks in terms of the products and services offered, this is strictly not
ALLIANCE BUSINESS SCHOOL | Literature review 16
accurate, as more often, NBFIs play a range of roles that complement banks. Furt
her, Status Note on NBFCs NBFIs can add to economic strength to the extent they
enhance the resilience of the financial system to economic shocks. A well develo
ped and properly regulated NBFI sector is thus an important component of broad,
balanced, efficient financial system that spreads risks and provides a sound bas
e for economic growth and prosperity.
2.3 ON GLOBAL CRISIS
According to CARE: NBFC sector faced significant stresses on asset quality, liqu
idity and funding costs due to the global economic slowdown & its impact on the
domestic economy. While all the NBFCs were affected, the impact varied according
to the structural features of each NBFC. Asset-liability maturity (ALM) profile
s, type of assets financed and origination / collection models followed were the
primary differentiators within NBFCs. The support provided by the Reserve Bank
of India (RBI) highlighted the explicit acceptance of the systemic importance of
the sector. FY10 was marked by re-aligning of the liability profiles, tightenin
g of lending norms coupled with closing down of many of the unsecured loan segme
nts. On a structural basis, the sector is now more robust due to the lessons lea
rned by NBFCs from this crisis. Profitability is expected to be lower than histo
rical levels due to conservative ALM management, higher provisioning and avoidan
ce of high yielding unsecured loan segments. However profits are at the same tim
e expected to be much more stable & less susceptible.
ALLIANCE BUSINESS SCHOOL | Literature review
17
CHAPTER-3
RESEARCH METHODOLOGY
ALLIANCE BUSINESS SCHOOL | RESEARCH METHODOLOGY
18
3.1 RESEARCH DESIGN
Since the research is for industry analysis and it is structured for NBFC‘S. The r
esearch uses secondary data for analysIs and interpretation.
3.2 OBJECTIVE
The confined objectives of the present study are: To analyze the market of NBFC‘s
in India To study the financials of NBFC‘s
3.3 SCOPE OF THE STUDY
The study was limited to the Financial Service market of India which included NB
FC‘s mainly from the . The study was completed within the time frame of 60 days(2
months) starting from 1st April, 2010 and ending on 1st June, 2010. The target g
roup of the study were the NBFC‘s
3.4 DATA COLLECTION
There are two methods of data collection that can be considered when collecting
data for research purpose. These data collection types include the following: 1.
Primary data 2. Secondary data Both the secondary and primary data collection m
ethods were used in the study.
3.4.1 PRIMARY DATA
The primary data required for this study was collected by visiting the financial
services and analysing the information provided by them.
3.4.2 SECONDARY DATA
The secondary data for the research was collected from journals, research articl
es, books and internet websites, annual reports etc whose details and references
has been given in Chapter2 and in ―References . The source of the secondary data wa
s British Library, NBFC‘s and Internet.
ALLIANCE BUSINESS SCHOOL | RESEARCH METHODOLOGY 19
Secondary data was the main source in formulating the constructs of ― A comparativ
e study of NBFC‘s in India
3.5 FIELD WORK PLAN
The study was conducted in New Delhi (NCR and Bangalore visiting different insti
tutions and analyzing the different NBFC‘s work.
ALLIANCE BUSINESS SCHOOL | RESEARCH METHODOLOGY
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CHAPTER-4 MAJOR PLAYERS AND SELECTED COMPANY FOR STUDY
ALLIANCE BUSINESS SCHOOL | MAJOR PLAYERS AND SELECTED COMPANY FOR STUDY
21
LIC HOUSING FINANCE
RELIANCE CAPITAL SHRIRAM TRANSPORT FINANCE IDFC
22
23
4.1 LIC HOUSING FINANCE
4.1.1 Housing Finance Industry India‘s housing finance industry comprises of banks
and housing finance companies. They have contributed to new residential home lo
ans at a compounded annual growth rate (CAGR) of more than 30 percent during the
period 2002-2007. This has been due to the combined effect of a booming economy
and low interest rates. Further, steady prices and continuation of tax concessi
ons to self-occupied residential home borrowers are contributors to the growth o
f the industry. The average age of borrowers has declined over the years, while
the number of double income households has grown significantly enabling them to
borrow higher loan amount due to higher repaying capacity. The scenario of unpre
cedented growth in housing finance, driven by low interest rates, increasing pur
chasing power and attraction of the yield in this sector has begun to show signs
of change last year. There has been a decrease in demand during the last one ye
ar. Earlier to that i.e., during 2006 to 2007 home prices increased at a CAGR of
30 to 40 percent against a 20 percent increment in salaries witnessed in metros
and large cities. This had affected the buyer‘s affordability. As the borrowing c
ost for banks and housing finance companies steadily increased in line with risi
ng interest rates in the economy in the past two years up to Q3 of 2008-09, bank
s and housing finance companies resorted to hike in interest rates so as to main
tain their interest spreads. Interest rates on new home loan originations have i
ncreased significantly by 200 basis points during April‗2008 to September October‘ 2
008. As a result a higher proportion of monthly income was being paid out as hom
e loan equated monthly installments (EMI). The combined effect of an increase in
property prices and interest rates has meant that home loan buyers, who would h
ave had to borrow less at an interest rate of 8.75 percent a year ago, now have
to borrow more to buy the same property due to higher property prices at higher
interest rates of 10.5 to 11 percent. This trend has resulted in both lower affo
rdability i.e., an average home at a higher multiple of annual income, and highe
r debt burden (meaning that a larger proportion of income gets spent as home loa
n EMI). Further, the increase in interest rates on fresh loans to 10.5 to 11 per
cent from 8.75 percent meant increase in debt burden i.e., higher installment to
income ratio. Along with, the economic down turn and consequential apprehension
s of job insecurity and income reduction led to slump in the market. However,
ALLIANCE BUSINESS SCHOOL | MAJOR PLAYERS AND SELECTED COMPANY FOR STUDY 24
the scenario has taken the reverse turn in the last quarter of the financial yea
r 2008-09, which was evident from the higher booking of flats, and sharp increas
e in the disbursements. Real estate developers have taken sensible decision in r
educing or slashing rates in major centres specially Mumbai, Thane, Navi Mumbai,
Delhi NCR and Bangalore to encash on the existing demand in the real estate mar
ket. The good deals might be offered for a few weeks or for the first ten proper
ties or for a killer deal for a time-bound two days or similar schemes but yes,
the writing is clear on the wall that the willingness to connect with the ―real pri
cing has dawned on the developers to sell at reduced prices to encourage more an
d more sales. The sales teams in the builder/ developer offices are at their all
-time creative best with sales tactics. They now understand clearly that with bu
yers unwilling to relent on unrealistic pricing, there is an even greater need t
o price competitively, maybe with a lower profit margin, than holding on to the
price and project as the interest meter runs. These proactive steps should ensur
e renewed demands and increased volumes during the current year. The Indian econ
omy, which was on a robust growth path up to 2007-08, averaging at 8.9 per cent
during the period 2003-04 to 2007-08, witnessed moderation in 2008-09, with the
deceleration turning out to be somewhat sharper in the third quarter. Industrial
growth experienced a significant downturn and the loss of growth momentum was e
vident in all categories, viz., the basic, capital, intermediate and consumer go
ods. However, the fiscal stimulus packages of the Government and the monetary ea
sing of the Reserve Bank will, however, arrest the moderation in growth and revi
ve consumption and investment demand, though with some lag, in the months ahead.
Furthermore, prospects of the agricultural sector also remain bright, and this
will continue to support the rural demand. Finally, in the wake of expected impr
ovement in agricultural production as well as low international commodity prices
, inflationary pressures are also anticipated to remain at a low level through t
he greater part of the 2009-10.
4.1.2 Indian Housing Finance scenario India‘s housing finance industry comprises o
f banks and housing finance companies. They have contributed to new residential
home loans at a compounded annual growth rate (CAGR) of more than 30 percent dur
ing the period 2002-2007. The scenario of unprecedented growth in housing financ
e, driven by low interest rates and booming economy, has begun to show signs of
change last year. There has been a decrease in home prices during the last one y
ear.
Earlier to that i.e., 2006 to 2008 home prices increased at a CAGR of 30 to 40 p
ercent against a 20 percent increment in salariee witnessed in metros and larger
cities. This had affected the buyer‘s affordability. The average home buyer spent
around 4 times his net annual income for purchasing a new residential home in t
he 3-4 years till March 2005. (source CRISIL report 19th February, 2009) As the
borrowing cost for banks and housing finance companies steadily increased in lin
e with rising interest rates in the economy in the past two years upto September‘
2008, banks and housing finance companies resorted to hike in interest rates so
as to maintain their interest spreads. Interest rates on new home loan originati
ons had increased significantly by 200 basis points during April‗ 2008 to August S
eptember‘ 2008. As a result a higher proportion of monthly incomes was paid as hom
e loan equated monthly instalments (EMI). But, the scenario has taken the revers
e turn in the last quarter of the financial year 2008-09 which was evident from
the higher booking of flats and sharp increase in the disbursements. As interest
rates are heading southward, public sector banks have set the pace. Housing fin
ance companies would follow the suit. It may be mentioned here that with the dec
line ininterest rates, LIC Housing Finance has passed on 150 basis points rate c
ut to the customers i.e. 75 basis points each on 1st January, 2009 and 1st April
, 2009. Our interest rates are among the lowest in the industry. This has helped
our company in retaining customers and maintaining high growth rates even in to
ugh conditions. And interest rate is just one of the factors. Transparency, hass
le-free services, property prices and buyer‘s repayment capacity are equally impor
tant. The customer would not arrive at a decision solely based on the reduction
in interest rates for one year. LIC Housing Finance is one of the best players i
n the industry in terms of EMI as our company has no hidden costs.
4.1.3 LIC Housing Finance LIC Housing Finance Ltd. is one of the largest Housing
Finance Company in India. Incorporated on 19th June 1989 under the Companies Ac
t, 1956, the company was promoted by LIC of India and went public in the year 19
94. The Company launched its maiden GDR issue in 2004. The Authorized Capital of
the Company is Rs.1500 Million (Rs.150 Crores) and its paid up Capital is Rs.85
0 Millions (Rs.85 Crores). The Company is recognized by National Housing Bank an
d listed on the National Stock Exchange (NSE) & Bombay Stock Exchange Limited (B
SE) and its shares are traded only in Demat format. The GDR s are listed on the
Luxembourg Stock Exchange.
The main objective of the Company is providing long term finance to individuals
for purchase / construction / repair and renovation of new / existing flats / ho
uses. The Company also provides finance on existing property for business / pers
onal needs and gives loans to professionals for purchase / construction of Clini
cs / Nursing Homes / Diagnostic Centres / Office Space and also for purchase of
equipments. The Company possesses one of the industry s most extensive marketing
network in India : Registered and Corporate Office at Mumbai, 6 Regional Office
s, 13 Back Offices and 158 marketing units across India. In addition the company
has appointed over 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs
) and 777 Customer Relationship Associates (CRAs) to extend its marketing reach.
Back Offices spread across the country conduct the credit appraisal and adminis
trative functions. The Company has set up a Representative Office in Dubai and K
uwait to cater to the NonResident Indians in the GLCC countries covering Bahrain
, Dubai, Kuwait, Qatar and Saudi Arabia. Today the Company has a proud group of
over 10,00,000 prudent house owners who have enjoyed the Company s financial ass
istance.
Profile & Progress Provides loans for homes, construction activitie
ate housing schemes. Around 91% of the loan portfolio derived from the retail se
gment and the rest from large corporate clients Formed three new wholly owned su
bsidiaries in 2007-08 to promote marketing of financial products and venture cap
ital fund. Rated ‗AAA‘ by CRISIL for the 8th consecutive time in 2008-09; maiden Fix
ed Deposit program received an FAAA/stable rating by CRISIL. An offshoot of Life
Insurance Corporation of India (LIC), incorporate in 1989. Registered & Corpora
te Office at Mumbai with 6 regional offices, 13 Back Offices and 130 marketing u
nits across the country . 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents
(HLAs) and 777 Customer Relationship Associates (CRAs) comprise its pan-Indian
marketing network. Representative overseas presence in Dubai and Kuwait.
Listed on the Bombay Stock Exchange Limited, National Stock Exchange of
mited and the Luxembourg Stock Exchange. More than 10,00,000 satisfied customers
across the country since inception. Reported a 23.90 percent increase in disbur
sals in 2008-09. Improved return on networth by 267 basis points to 23.80 percen
t in 2008-09. Reduced net NPA to a record low of 0.21 percent in 2008-09. Enhanc
ed PAT 37.30 percent to Rs. 531.62 crore in 2008-09. Un-interrupted dividend pay
ment record since 1990. Recommended 30 percent increase in dividend over previou
s year i.e from 100 percent to 130 percent.
4.1.4 Financial Performance
Interest income from housing loans increased 34.90 percent from Rs. 2036.79 cror
e in 200708 to Rs. 2747.65 crore in 2008-09. The net interest income grew by 31.
97 percent from Rs. 553.94 crore in 2007-08 to Rs. 731.04 crore in 2008-09. Prof
it after tax surged 37.30 percent from Rs. 387.19 crore in 2007-08 to Rs. 531.62
crore in 2008-09.
28
A Comparative Study Of NBFC in India 2010 Debt-Equity Ratio
12 10 8 6 Debt-Equity Ratio 4 2 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
RONW (%)
30 25 20 15 10 5 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 RONW (%)
29
A Comparative Study Of NBFC in India 2010 PBDTM (%)
30 25 20 15 PBDTM (%) 10 5 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
PAT
600 500 400 300 200 100 PAT
0
30
A Comparative Study Of NBFC in India 2010 ROG-Sales (%)
40 35 30 25 20 15 10 5 0
ROG-Sales (%)
Operations: Funds mobilized grew 49.38 percent from Rs. 7489.70 crore in 2007-08
to Rs. 11,188.33 crore in 2008-09. Sanctions (Ind.+Proj.) increased 26.46 perce
nt from Rs. 8617.88 crore in 2007-08 to Rs. 10898.47 crore in 2008-09. Disbursem
ents (Ind.+Proj.) grew 23.90 percent from Rs. 7071.48 crore in 2007-08 to Rs. 87
62.01 crore in 2008-09. Loan portfolio grew 26.18 percent from Rs. 21936.41 cror
e in 2007-08 to Rs. 27679.28 crore in 2008-09.
Margins: Net interest margin improved by 10 basis points from 2.85 percent in 20
07-08 to 2.95 percent in 2008-09. Return on equity grew by 267 basis points from
21.13 percent in 2007-08 to 23.80 percent in 2008-09. Net profit margin improve
d by 49 basis points from 17.82 percent in 2007-08 to 18.31 percent in 2008-09.
31
Asset Quality: Gross NPA declined by 63 basis points from 1.70 percent in 2007-0
8 to 1.07 percent in 2008-09.Net NPA levels declined 43 basis points from 0.64 p
ercent in 2007-08 to 0.21 percent in 2008-09.
On funds
On the performance of the Company : In the turbulent times when Housing sector w
as passing through rough patch, LIC Housing Finance largely could manage the env
ironment well, inspite of various global as well as domestic economic challenges
and was successful in producing good business growth by its inherent strength i
n meeting difficult challenges through unceasing and untiring efforts. The Compa
ny has not only ensured consolidation of the gains achieved in the past years, b
ut also ensured further growth and increased profitability. The year 2008-09 has
been a year of further containment of defaults and NPA levels when compared to
previous years.
Lending operations The main thrust continues on individual loans with a growth o
f 25 percent as against 20 percent in the previous year. However, project loans
were also given due weightage resulting in a modest growth of 20 percent over pr
evious year. During the year, the Company sanctioned 67,886 individual loans for
Rs. 8,186.02 crore and disbursed 67,237 loans for Rs. 7,351.09 crore during 200
8-09. Individual retail loans constitute 75.11 percent of the total sanctions an
d 83.94 percent of the total disbursements for the year 2008-09 compared to the
last year‘s figure of 75.84 percent and 83.47 percent respectively. The retail (in
dividual) loan portfolio grew by over 22 percent from Rs. 20,618.78 crore as on
31st March, 2008 to Rs. 25,252.87 crore as on 31st March, 2009. The cumulative s
anctions and disbursements since the incorporation, in respect of individual oan
s are: Amount sanctioned : Rs. 45,624.24 crore Amount disbursed : Rs. 42,993.98
crore
32
Non-Performing Assets and provisions:
The amount of gross Non-Performing Assets (NPA) as on 31st March, 2009 was Rs. 2
97 crores, which is equivalent to 1.07 percent of the housing loan portfolio of
the Company, as against Rs. 372.92 crore i.e., 1.70 percent of the housing loan
portfolio as on 31st March, 2008. The net NPA as on 31st March, 2009 is reduced
to Rs. 57 crore i.e. 0.21 percent of the housing loan portfolio vis-à-vis Rs. 140.
90 crore i.e., 0.64 percent of the housing loan portfolio as on 31st March, 2008
. The total cumulative provision towards housing loan as on 31st March, 2009 is
Rs. 240.25 crore. During the year, the Company has written off Rs. 5.40 crore of
housing loan portfolio as against Rs. 38.99 crore during the previous year.
Fund raising The Company raised funds aggregating to Rs. 11,188.33 crore through
term loans from banks, Non-Convertible Debenture (NCD), sub-ordinate debts, com
mercial paper, Public Deposit and others which were used for fresh disbursements
as well as repayments/prepayments of past borrowings. The Company‘s NCD issue was
rated ‗AAA‘ and Public Deposit was rated as FAAA/STABLE by CRISIL.
4.1.5 Macro Economic Analysis Competition
33
The Housing Finance Industry is one of the most keenly competitive segments of t
he Economy, with the Banking sector having a significant presence. However, Hous
ing Finance Companies with a dedicated focus on the industry and better understa
nding of the underlying real estate markets stand on a better footing when it co
mes to understanding the needs and requirement of the customers as also assessin
g the risks in the industry. It may be mentioned here that with the decline in i
nterest rates, LIC Housing Finance has passed on 150 basis points rate cut to th
e customers during the calendar year 2009 so far 75 basis points each on 1st Jan
uary, 2009 and 1st April, 2009. Our interest rates are among the lowest in the i
ndustry. This has helped our company in retaining customers and maintaining high
growth rates even in tough conditions. And interest rate is just one of the fac
tors. Transparency, hassle-free services, property prices and customer affordabi
lity are equally important. NHB has lowered its interest rates on refinance to h
ousing finance companies. Refinance for rural housing at concessional rate of 8
percent per annum for seven years has also been provided. Its‘ PLR has been reduce
d to 10.75 percent per annum. The refinance facility of Rs. 4,000 crore extended
by RBI to NHB will be on-lent by NHB to housing finance companies with a cap of
Rs. 400 crore per housing finance company with the condition that the refinance
would be available at an interest of 8 percent, only for loans below Rs. 20 lak
h. Housing Finance, the Company, through its competitive pricing, transparency i
n operations, wide distribution network and good customer service, has not only
been able to show a good growth in new business, but has shown an improved reten
tion rate, which is reflected in high growth of loan book.
Opportunities There are many unique characteristics of housing distinguishing it
from other goods. It is a universal necessity. Home ownership is a social goal,
bringing social status to the buyer. Housing is also a relatively expensive ass
et, often soaking up a lifetime‘s savings. Housing properties have a downward slop
ing demand curve, which means that less people would effectively buy when prices
are high and vice versa. At high prices, buyers postpone their buying decisions
and opt for rented accommodation. At low prices, people often purchase more tha
n one house. Disposable incomes determine purchasing power. Government policies
relating to interest rates, mortgage subsidies, tax rebate and other taxes like
stamp duty etc. also impact the housing property market. The housing sector is m
arked by a variety of taxes and regulations. These are meant to ensure the safet
y of houses for occupation and to confer rights of ownership to enable further t
ransactions. Given that building or acquisition of a
house usually involves several intermediary agents (either statutory like regist
ration of various title documents or facilitating agents such as brokers, builde
rs or financiers), the final cost of acquisition includes not just the price of
the property that is paid to the seller (in case the property is purchased) but
also all the intervening transaction costs. As for the housing property market i
n India, the residential housing property segment constitutes about 75 percent o
f the real estate market in terms of value. Real estate development activity has
shifted from metros to their suburbs and tier-two cities. A gradual shift to ti
er-three cities and rural areas is taking place. Easy availability of finance fr
om the housing finance companies and commercial banks at lower interest rates, i
ncreased salaries and availability of fiscal and tax benefits are propelling the
demand for housing properties. The growth of the Information Technology Enabled
Services (ITES), industry has been a significant contributor of housing propert
y demand in recent years. ITES firms are moving from traditional centres like Mu
mbai, Delhi, Bangalore, Hyderabad and Chennai to the National Capital Region, Pu
ne, Chandigarh, Jaipur, etc. in order to be cost effective. This is resulting in
not only the boom in residential property markets but also in the institutional
property markets in these cities. There is great demand for modern office build
ings and commercial spaces in India.
Threats (bottlenecks) Impact of legal charges and documentation fees There are t
axes / duties / fees payable to the state at the construction stage. There are t
wo aspects of the cost namely: i) ii) monetary cost and; cost in terms of time d
evoted in obtaining various permissions and clearances. The number of permission
s and documentation required can be quite large. Further, permissions have to be
taken from different departments and that too sequentially. This delays the pro
cess of housing construction and occupation. The actual fees imposed by the gove
rnment are not necessarily high but the time taken to obtain requisite permissio
ns is very long, procedures cumbersome and sometimes involves extra payments to
facilitate the movement of files and getting the transaction through, is signifi
cant vis-à-vis the statutory fees. The delays highlight the sluggishness of the ma
rket by increasing the gap between change in demand and the market response to i
t.
35
Future Outlook: It is estimated that the housing finance industry will be able t
o maintain a higher growth in fresh origination of residential home loans over n
ext three to five years mainly due to increased affordability of the borrower i.
e. ratio of average property price to average annual income, on account of the f
alling loan interest rates and decrease in property prices. The average age of b
orrowers has declined over the years, while the number of double-income househol
ds has grown significantly thereby enabling them to borrow higher loan quantum d
ue to increased affordability and repayment capacity. The growth drivers will co
ntinue to increase demand for self-occupied residential housing; Revival of econ
omy will certainly lead to a steady increase in monthly incomes across key secto
rs. Rising proportion of double income households, renewed confidence in higher
income generation, reassurance of job security and availability of variety of fi
nancing options should stimulate growth of the housing sector. All these factors
will further boost the impact of increased affordability, leading to the sector‘s
steady and comfortable growth. Looking forward, LIC Housing Finance would like
to remain focused in end-user segment for growth and increased profitability and
wish to make the coming year, a year of further consolidation and progress by c
rossing greater milestones.
36
37
4.2 RELIANCE CAPITAL:
4.2.1 Indian Economy: After several quarters of around 9 per cent GDP growth, th
e rate moderated to 7.6per cent and 5.3 per cent in the last two quarters of 200
8, and is expected to average 7 per cent for Financial Year (FY) 2009. The slowd
own has been largely caused by a deceleration in industrial growth from about 8.
5 per cent in FY 2008 to 2.4 per cent in the third quarter of FY 2009. Surprisin
gly, the agriculture sector slowed down from 4.5 per cent in FY 2008 to -2.2 per
cent in the third quarter of FY 2009. In contrast, the remarkable service secto
r success story remained intact as output grew 9.9 per cent in third quarter, do
wn only slightly from 10.8 per cent in 2008. The moderation from previous years
was due to several factors. The financial crisis and global slowdown affected bo
th export growth in goods, services and hence industrial production as well as c
orporates‘ access to diverse and low cost funding. Moreover, high inflation during
the first half of FY 2009 forced RBI to pursue a tight monetary policy, which f
urther dampened investment and consumption. However, the fact that India‘s growth
in the last few years has been fairly broad based (across sectors and regions) a
nd balanced (with consumption, investment, savings and exports all rising) bodes
well for the structural transformation of the economy as the business cycle ent
ers a recovery phase, in the second half of FY 2010. RBI cuts rates aggressively
: India‘s Wholesale Price Index, which was as high as 12.9 per cent in August 2008
fell to 0.3 per cent by March 2009 resulting in an average inflation of around
8 per cent for FY09. The sharp fall in inflation was caused by a high base, a si
gnificant fall in commodity prices and various duty cuts announced by the Govern
ment. Inflation is expected to remainlow and may even enter the negative territo
ry for a short time before moving up again towards the end of 2009. Falling infl
ation and slowing growth gave the Central bank enough room and reason to cut rat
es aggressively. From September ‘08 to March ‘09, the RBI has cut Repo, Reverse Repo
and CRR by 400, 250 and 400 bps respectively. This easing in monetary policy is
likely to translate, with a lag, into a significant boost for the economy. Indi
a‘s Trade Deficit widens, largely due to increasing import growth: Global demand d
estruction due to the recent crisis led to a mere 3.4 per cent growth in exports
in FY 2009 while higher commodity prices (including oil) pegged the imports gro
wth at 14.3 per cent. This resulted in a trade deficit of
US$119 billion in FY09 compared to US$88.5 billion in FY 2008. For the first thr
ee quarters in FY 2009, the higher trade deficit, coupled with negative capital
flows, reduced India‘s Balance of Payments (BoP) surplus to a deficit of US$20.4 b
illion. After 10 consecutive quarters of surpluses, this is the second time in t
hree quarters that BoP has ended in a deficit. The capital a/c balance too turne
d negative (-US$ 3.7 billion) in third quarter FY 2009 mainly due to net outflow
s under portfolio investment, banking capital and short-term trade credit. Outfl
ows under portfolio investment were led by large sales of equities by FIIs and s
lowdown in net inflows under ADRs/ GDRs. India‘s foreign exchange reserves decline
d by about US$ 59 billion in FY 2009, but still remained at an impressive US$250
billion in March 2009. The country‘s current foreign exchange reserves far exceed
its total official and private sector external debt making India‘s balance of pay
ments position quite comfortable.
Import declines more than export in recent months, thereby improving trade defic
it: Since January 2009, Imports have declined more than exports due to both lowe
r oil import bills and slowing domestic investment and consumption. This has hel
ped in narrowing our trade deficit further. The trade deficit for the month of M
arch narrowed to US$4 billion (4.1 per cent of GDP, annualized) compared to US$1
4 billion in August 2008.
4.2.2 Reliance Capital (RCL) is a part of the Reliance Anil Dhirubhai Ambani Gro
up and is one of India‘s leading and fastest growing private sector financial serv
ices companies, and ranks among the top 3 private sector financial services and
banking groups, in terms of net worth. It is a constituent of S&P CNX Nifty and
MSCI India. Reliance Anil Dhirubhai Ambani Group is amongst India‘s top 3 business
houses with a market cap of US$ 22 billion, and 150 million customers. It has a
strong presence across a wide array of high growth consumer-facing businesses s
uch as Telecom, Financial Services, Energy, Power, Infrastructure and Media an E
ntertainment Reliance Capital has interests in asset management and mutual funds
, life and general insurance, private equity and proprietary investments, stock
broking and depository services, consumer finance, asset reconstruction, institu
tional broking and distribution of financial products. Reliance Capital, a const
ituent of S&P CNX Nifty and MSCI India, is a part of the Reliance Anil Dhirubhai
Ambani Group (www.relianceada.com). It is one of India s leading, most valuable
and fastest growing financial services companies in the private sector.
Reliance Capital has interests in asset management and mutual fund; life and gen
eral insurance; consumer finance and industrial finance; stock broking; deposito
ry services; private equity and proprietary investments; exchanges, asset recons
truction; distribution of financial products and other activities in financial s
ervices. Reliance Mutual Fund is India s largest Mutual Fund with over seven mil
lion investors. Reliance Life Insurance is one of India s fastest growing life i
nsurance companies and among the top four private sector insurers. Reliance Gene
ral Insurance is one of India s fastest growing general insurance companies and
among the top three private sector insurers. Reliance Money is one of India‘s lead
ing retail brokerage houses and distributors of financial products and services.
Reliance Capital has a net worth of Rs. 7,712 crore (US$ 2 billion) and total a
ssets of Rs. 26,003 crore (US$ 6 billion) as on March 31, 2010. Reliance Consume
r Finance offers a wide range of products, which include personal loans, vehicle
loans (car and commercial), home loans, loan against property, and SME loans. T
he focus in this business is primarily the asset quality and the profitability o
f each loan given; not merely growth or market share gains. In the September to
December quarter of the year, there was a steep drop in liquidity due to the glo
bal financial meltdown that had its fallout on India. Consequently we slowed our
disbursals. This naturally resulted in a smaller loan book, which fell from Rs.
9,513 crore last year to Rs.8,576 crore this year Reliance Consumer Finance offe
rs a wide range of products which include Home loans, Loans against property, Ve
hicle loans (cars and commercial vehicles), SME loans and Personal loans. The fo
cus in this business is not just on the growth of credit per se but also on the
quality of credit. Backed by the long-standing conservative approach, we have de
veloped stringent in-house credit risk management systems to ensure the highest
quality of credit.There was reduction the size of our loan book to Rs.8,576 cror
e (US$ 2 billion) as on March 31, 2009, as against Rs.8,902 crore at the end of
December 31, 2008. Our loan book is spread across 1,19,759 customers and 23 loca
tions. The loan book as on March 31, 2008 was Rs.7,120 crore. Reliance Consumer
Finance generated revenues of Rs.1,200 crore (US$ 261 million) for the year ende
d March 31, 2009, as against Rs.395 crore for the corresponding previous period
an increase of 204 per cent. For the year ended March 2009, it achieved a profit
before tax of Rs.91 crore (US$ 20 million) as against Rs.36 crore an increase o
f 152 per cent. _ Reliance Capital‘s subsidiaries i.e. Reliance Consumer Finance P
vt. Ltd. and Reliance Home Finance
40
Pvt. Ltd. have got approvals from RBI as NBFC and the National Housing Bank for
doing the business of retail financing i.e. consumer finance and homes finance r
espectively.
Business mix of Reliance Capital Asset Management Insurance Mutual Fund, Portfol
io Management, Offshore Fund Life Insurance, General Insurance
Consumer Finance & Home Mortgages, Loans against Property , Business Loans, Loan
s for Finance Commercial Vehicles, Loans for Construction Equipment, Auto Loans,
Loans against shares, Business Loans Broking and Distribution Stocks Commoditie
s and Derivatives, Wealth Management Services, Portfolio Management Services, In
vestment Banking, Foreign Exchange and Offshore Investment, Third Party Products
Other Businesses Asset Reconstruction, Institutional Broking, Private Equity, E
xchanges, Venture Capital
Debt-Equity Ratio
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
Debt-Equity Ratio
41
PBDTM (%)
100 90 80 70 60 50 40 30 20 10 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
PBDTM (%)
RONW (%)
25
20 15 10 5 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 RONW (%)
42
A Comparative Study Of NBFC in India 2010 ROG-Sales (%)
160 140 120 100 80 60 40 20 0 -20 -40
ROG-Sales (%)
PAT
1200 1000 800 600 400 200 0 PAT
The Company‘s gross income for the financial year ended March 31, 2009 increased t
o Rs.3,017.29 crore, from Rs.2,079.79 crore in the previous year, registering a
growth of over 45.08 per cent. The operating profit (PBDIT) of the Company incre
ased 46.24 per cent to Rs.2,334.99 crore during the year, up from Rs.1 596.69 cr
ore in the previous year. Interest expenses for the year increased by 203.02 per
cent to Rs.1,236.75 crore, from Rs.408.15 crore, in the previous year. Deprecia
tion was at Rs.21.22 crore as against Rs.17.09 crore in the previous year. The p
rovision for taxation during the year was Rs.109 crore. The net profit for the y
ear decreased by over 5.60 per cent to Rs.968.02 crore from Rs.1,025.45 crore in
the previous year. An amount of Rs.193.61 crore was transferred to the Statutor
y Reserve Fund pursuant to section 45-IC of the Reserve Bank of India Act, 1934,
and an amount of Rs.96.81
crore was transferred to the General Reserve during the year under review. The C
ompany‘s Net worth as on March 31, 2009, stood at Rs.6,697.42 crore, as against Rs
.5,927.50 Fixed Deposits The Company has neither accepted nor renewed any fixed
deposits during the year. Five deposit accounts, aggregating to Rs.26,000, remai
ned unclaimed on the due dates as on March 31, 2009. The Company has intimated t
he deposit holders individually of their unclaimed amount with a request to retu
rn the Fixed Deposit Receipts duly discharged to enable the Company to repay the
amount.
4.2.4 Macro Economic Analysis Opportunities Low retail penetration of financial
services / products in India Tremendous brand strength and extensive distributio
n reach Opportunity to cross sell services Increasing per-capita GDP Changing de
mographic profile of the country in favour of the young
Threats Competition from local and multinational players. Execution risk. Regula
tory changes. Attraction and retention of human capital.
Future Outlook India has survived one of the worst global crises in history bett
er than most other economies. The recent recovery in many of the leading macro i
ndicators of economic activity has led many to believe that the worst is over fo
r the Indian economy and we are on our way to a higher growth trajectory. There
has been a resurgence in sales across a variety of sectors from automobiles to c
ement, steel and electricity production. Rail and port traffic too has seen an u
p tick. The Purchasing Managers‘ Index (PMI) has shown an improvement from a
low of 49.5 for March to 53.3 for April 2009, signifying a renewed trend of grow
th in manufacturing. India is the second major economy after China where the PMI
has crossed the baseline 50 mark, indicating the start of an expansionary ph as
e. The growth in first half of FY 2010 is expected to remain soft, with the econ
omy turning around in the second half. The drivers of this turnaround include go
vernment‘s fiscal stimulus measures, the collapse in commodity prices, the coming
onstream of significant domestic oil and gas output, the recent infusion of reco
rd levels of FDI, the improvement in trade deficit and the environment for exter
nal commercial borrowing (ECB) the fall in the real exchange rate, the RBI‘s aggre
ssive monetary policy actions and the expected stabilization of the global econo
my. India remained the second fastest growing economy in FY 2009 after China. In
the light of the ongoing global recession, India will, even at a modest growth
of 6 per cent in FY 2010, be one of the fastest growing in the world.
45
46
4.3 SHRIRAM TRANSPORT FINANCE
4.3.1 ECONOMIC OVERVIEW The global economic conditions deteriorated sharply duri
ng the year 2008-09 with several advanced economies experiencing their sharpest
declines. The associated adverse effects spread across emerging market economies
(EMEs) particularly by the third quarter of the year and accentuated the synchr
onized global slowdown. Inflation conditions witnessed sharp volatility during t
he year as headline inflation in major advanced economies firmed up considerably
up to July 2008, but declined sharply thereafter. The global financial environm
ent entered a crisis phase in mid-September 2008, following the growing distress
among large international financial institutions. India – the third largest econo
my in Asia is estimated to have grown less than 7 percent in 2008-09, after grow
ing at an average rate of around 9 percent or more in three fiscal years to Marc
h 2008. This was on account of a global economic downturn and a contraction in d
omestic demand.
4.3.2 COMMERCIAL VEHICLE INDUSTRY OVERVIEW The financial year 2008-09 ended with
a net decline of 22.3 percent in new commercial vehicle (CV) sales (domestic an
d exports) as compared to the previous year. The industry witnessed a healthy gr
owth during the first-half of 2008-09, post which the CV sales started declining
at a high rate. This can be primarily attributed to the weakening of macroecono
mic indicators, resulting in drop in freight availability, and restricted credit
availability. However, in the fourth quarter, the industry witnessed a slight r
evival in sales, on a month-on-month basis, partly driven by the stimulus packag
es provided by the government. The key steps taken include reduction in excise d
uty and provision of accelerated depreciation to benefit CV buyers. In addition
to this, the government also undertook measures to improve liquidity for NBFCs a
nd provide financial assistance to State Transport Undertakings for purchasing b
uses under the Jawaharlal NehruNational Urban Mission.
MAJOR DEMAND DRIVERS 1. Roadways have remained a dominant transport mode:
47
Over the last few decades, roadways have dominantly improved their share due to
greater coverage, higher flexibility of door-to-door delivery and lower risk of
handling losses. Further, the government‘s investment in the development of nation
al highways over the last few years has led to higher demand for road transport.
With further improvement in road infrastructure and higher growth expected in r
oad transport (which are primarily transported through roadways), road freight i
s expected to account for 63.5 percent of the total freight movement.
2. Higher replacement demand: Higher CV sales over the last few years were also
supported by replacement demand which stemmed from stricter regulations on overl
oading and emissions. The Supreme Court, in November 2005, banned overloading of
goods‘ trucks and trailers in excess of prescribed gross vehicle weight. To reduc
e pollution, the Automotive Research OWNERSHIP TREND IN CVS Shriram Transport ca
ters to small truck operators (STO – owning less than five trucks) and first-time
users (FTU),and is currently the only organised player financing this segment (o
thers are private financiers). STOs and FTUs control around 75 percent of the to
tal truck fleet; however, they have poor freight origination skills and are ther
efore dependent on brokers for a majority of their contracts.
4.3.3 Shriram Transport Finance We are a part of the "SHRIRAM" conglomerate whic
h has significant presence in financial services viz., commercial vehicle financ
ing business, consumer finance, life and general insurance, stock broking, chit
funds and distribution of financial products such as life and general insurance
products and units of mutual funds. Apart from these financial services, the gro
up is also present in non-financial services business such as property developme
nt, engineering projects and information technology Our Company was incorporated
in the year 1979 and is registered as a Deposit taking NBFC with Reserve Bank o
f India under Section 45IA of the Reserve Bank of India Act, 1934. STFC decided
to finance the much neglected Small Truck Owner. Shriram understood the power of
Aspiration much before marketing based on Aspiration became
48
fashionable.Shriram started lending to the Small Truck Owner to buy new trucks.
But we found a mismatch between the Aspiration and Ability. The Truck Operator w
as honest but the Equity at his command was not sufficient to support the credit
levels required to buy a new truck. From Driver to Owner, even if only of a Pre
-owned Truck and from Pre-owned Truck to the New Truck, we have been with him in
his journey of Prosperity as he has been our partner in our road to success and
leadership.
49
A Comparative Study Of NBFC in India 2010 PBDTM (%)
35 30 25 20
15 10
5 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
PBDTM (%)
RONW (%)
35 30 25 20 15 10 5 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 RONW (%)
50
A Comparative Study Of NBFC in India 2010 Debt-Equity Ratio
9 8 7 6 5 4 3 2 1 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Debt-Equity Ratio
ROG-Sales (%)
180 160 140 120 100 80 60 40 20 0
ROG-Sales (%)
51
A Comparative Study Of NBFC in India 2010 ROG-PAT (%)
200 180 160 140 120 100 80 60 40 20 0
ROG-PAT (%)
PUBLICISSUEOFNCDs To explore and develop additional source of financing and with
a view to meet The Company‘s business operations, The Company, pursuant to the Se
curities and Exchange Board of India (Issue and Listing of Debt Securities) Regu
lations, 2008 and subject to the necessary approvals, consents and permissions,
issued and allotted Secured Non Convertible Debentures, through a public issue a
nd raised a sum of Rs. 99,999.96 lacs. Considering the potential in raising fund
s by issue of non convertible debentures (NCDs), The Board, at its meeting held
on January 18, 2010, has decided to offer and allot, subject to the aforemention
ed Regulations and such approvals as may be necessary, secured / unsecured, NCDs
not exceeding Rs. 50,000 lacs in one or more tranches through another public is
sue which is expected to open for public subscriptions in May 2010. 4.3.4 SWOTAN
ALYSIS Strengths The pioneer in the pre-owned CVs financing sector Knowledge-dri
ven (products as well as local customers) and relationship-based business model.
Significant expertise and experience in valuation of pre-owned CVs as well as i
n recovery/collection of monthly payments from customers Pan-India presence with
484 branch offices all over the country.
A well-defined and scalable organisation structure, capable of supporting surgin
g growth Low delinquency as assets are backed with adequate cover and are easy t
o repossess with immediate liquidity Strong financial track record driven by fas
t growth in AUM with low Non Performing Assets (NPAs) Experienced and stable man
agement team Strong relationships with public, private as well as foreign banks,
institutions and investors
Weaknesses The Company‘s business and its growth are directly linked to the GDP gr
owth of the country. Any slowdown in GDP growth may have a negative impact on th
e business
Opportunities
Growth in the CV market driven by the economic growth and the infrastructure dev
elopment in the country Strong demand for construction equipment Strong demand f
or passenger CVs Strong demand for pre-owned tractors Loans for working capital
requirements of CV users Partnerships with private financiers will enable the Co
mpany to enhance its reach without significant investments in building infrastru
cture
Threats Maintaining relationships with customers who are mobile and have no prop
er documentation Maintaining asset quality Regulatory changes in the Non-Banking
Financial Company (NBFC) and transportation sectors .
53
OUTLOOK AND OPPORTUNITIES
The global financial slump drastically squeezed export demand for our products a
nd services in the country‘s main US and European markets. The GDP growth for 2008
-09 is now projected to be in the range of 6.5 to 6.7 per cent. The Government o
f India as well as the Reserve Bank of India did a splendid task in somewhat ins
ulating the country and its financial markets from the effects of the world wide
crisis. They responded to the challenge quickly and magnificently, thus minimis
ing the impact of the crisis on India while maintaining comfortable domestic and
foreign exchange liquidity. The Government of India provided three stimulus pac
kages which, amongst other measures, cut excise duty by four per cent across the
board and increased planned expenditure by Rs. 20,000 crores. Easing of monetar
y curbs and regulatory actions of the Reserve Bank ensured that our financial ma
rkets functioned normally in spite of the disturbances across the world. These m
easures, on one hand stimulated consumption and on the other hand provided enoug
h liquidity in the financial markets. These initiatives, coupled with lower comm
odity prices, are expected to soften the downswing by stabilising domestic econo
mic activity. Several factors, such as increased movement of freight at the lead
ing ports, pick-up in project investments, increased hiring, and encouraging dat
a from a number of key manufacturing segments could be an indicator that the dow
ntrend has bottomed out and that our economy is poised to regain its lost vigour
shortly. It is reported that auto, cement, steel and capital goods sectors have
started performing strongly which indicates a possible strong turnaround in the
economy. Despite several challenges lying ahead, the Indian economy remains res
ilient and is widely expected to grow at around 6 percent in FY 2009-10. The cum
ulative production data for the Auto industry for 2008 – 09 recorded a growth of 2
.96 percent over 2007 – 08. During 2008-09 the sales of Commercial Vehicles declin
ed by 21.69 percent when compared to that of last year. Sales of Medium & Heavy
Commercial Vehicles (M&HCV) fell by 33.16 percent and Light Commercial Vehicles
(LCV) recorded a negative growth of 7.10 percent. In spite of the economic slowd
own in the country, Your Company was able to once again post sterling growth in
the FY 2008-09 as well. Your Company was, to a large extent, insulated from the
downswing as it operates mainly in the preowned commercial vehicle segment, and
is the only organised player in this segment.
55
4.4IDFC
4.4.1 Global Financial and Economic Crisis TH E Y E A R 2 0 0 8 - 0 9 SAW the wo
rst global financial and economic crisis in 60 years. The crisis had a sev ere k
nock-on effect on the developing and emerging economies, and caused India to los
e much sheen from the stellar economic performance of the past years. It exacerb
ated the beginning of a cyclical downturn in India‘s economy and India‘s GDP growth,
which was 9% during 2007-08, slowed to 5.3% in the third quarter of 2008-09. Al
though Financial Institutions (FIs) in India have very limited exposure to the ‗to
xic‘ or ‗distressed‘ assets, directly or through derivatives, and to the failed and st
ressed global FIs, India has felt a strong impact through trade, financial marke
ts and moderation in capital flows. The impact has also been felt by the infrast
ructure sector in the country, largely through weakening of demand, which was pr
onounced in the transportation sector (see Table 1), and reduced availability of
finances, as external capital dried up and the equity market On the other hand,
the global economic slowdown led to softening of commodity prices such as crude
oil, aluminum, iron ore, copper and steel after July 2008, there by reducing th
e cost of projects albeit with some time lag. Interest rates also started declin
ing in line with the monetary policy measures adopted by the Reserve Bank of Ind
ia. Nevertheless, these positive effects were offset by the weakening rupee, sla
ckening demand and problems faced by developers in respect of fund raising. Poor
infrastructure continues to hamper the prospects of economic growth and busines
s in the country.
56
meet the growing demand for infrastructure services - regulatory framework and p
rivate sector participation. Notwithstanding such efforts, the progress in capac
ity expansion in the different sectors was very limited (see Table 2). The globa
l crisis is only partly to blame as there are continuing defi ciencies in policy
and regulatory frameworks, and delays in decision making. The delays in allocat
ion of 3G spectrum and allegations of favoured treatment to some operators for 2
G spectrum have done little to strengthen the investment climate in not only the
telecom sector, but in infrastructure per se. Similarly, litigation relating to
norms laid down in the model bid documents for the roads sector delayed the muc
h needed impetus for new projects under the National Highways Development Progra
mme (NHDP). The concession agreements finalized for the award of new terminals a
t major ports in 2007-08 also underwent several revisions during 2008-09. The aw
ard and execution of projects also faced several problems. These include the lar
ge number of clearances required from various government agencies, delays in lan
d acquisition. changes in scope of projects during the bidding process, inadequa
te supply of equipment, delays in award of civil works, and weak project executi
on capacity. While financial markets in the US and Europe were feeling the press
ure in the second half of 2007-08, other capital markets, especially in emerging
economies, did not seem to think that the sub-prime problem would play out into
a full blown crisis of financial confidence. That changed by the first half of
2008-09, when everyone began to see a clearer picture of the extent of write-dow
ns undertaken by the major international financial houses on account of their no
n-performing assets.
4.4.2 Infrastructure Development Finance Company Limited (‗IDFC‘ or ‗the Company‘) was s
et up in 1997 to act as a financier and catalyst for the development of private
sector sponsored infrastructure projects in India. Over the last 12 years, and m
ore so since the Initial Public Offering (IPO) in July 2005, IDFC has pursued a
focused growth strategy to evolve rapidly into a ‗one-stop-shop‘ for infrastructure
fi nance in India, capable of meeting the increasingly complex and ambitious req
uirements of an expanding client base. Infrastructure typically involves project
s with long gestation periods, with each project going through different phases
of implementation. Broadly speaking, it begins with conceptualizing a project. T
hen the full project plan is developed, followed by financial closure. Next come
s the execution phase, where the underlying
physical infrastructure is actually created. Finally, the project moves to reven
ue generation, when the underlying asset starts getting utilised and generates a
ctual income streams. Each of the phases has different risk return profiles. IDF
C‘s expertise lies in a deep understanding of the risks and opportunities associat
ed with the different phases of a project‘s lifecycle, and appropriately packaging
differentiated financial solutions that best meet the requirements of investors
and clients at the different stages by progressively expanding the range of its
skills, products and services beyond the traditional project lending to investm
ent banking as well as different types of asset management. This diversified ran
ge of product and service capability has strengthened IDFC‘s core business model a
nd has propelled the Company into one of India‘s premier financial services platfo
rm leveraging knowledge and talent to span the areas of infrastructure project f
inance, asset management and investment banking. Much of IDFC‘s business is about
mobilizing international as well as domestic capital. Naturally, like other busi
nesses, it has to deal with demand and supply side issues. While the demand side
issues are domestic in nature and relate largely to the appetite for private in
vestment especially in the Infrastructure sector, the supply side issues are mor
e global. These include factors like cost of capital, liquidity and investor con
fidence that are intrinsic to international capital flows. On both fronts there
were significant developments in the macro-economic environment and overall mark
et conditions, which played a key role in defining the Company‘s strategy and prog
ress during 2008-09. In this context, it is important to first analyse the struc
tural changes that took place in the macroeconomic environment to appreciate the
challenges that IDFC had to face and overcome during 2008-09.
THE BUSINESS ENVIRONMENT AND IDFC As was reported in last year‘s Annual Report, th
e fall in housing prices in the US had sparked off the sub prime lending crisis
in the middle of 2007. Credit downgrading by rating agencies and increased defau
lt risk of various housing backed paper, particularly collateralised debt obliga
tions (CDOs) that were sliced, diced and far removed from the original assets, r
apidly spread throughout the US, and then to the European and Asian financial sy
stems. In a matter of months, what had started as a US housing problem became a
major crisis that affected the entire global financial system. Several large int
ernational financial institutions were left to grapple with the consequences of
large asset write-downs. Soon this led to an unprecedented contraction of credit
in the system — especially in the last three and a half months of 2008,
after the collapse of Lehman Brothers on 14th September. Thanks to massive finan
cial, monetary and fiscal interventions by the US as well as major European nati
ons, the acute financial crisis passed by January 2009. But it scarred the real
economy everywhere in the world. Starting with the US in the third quarter of 20
08, every major developed country went into a recession — which continues till tod
ay. At the time of writing this Management Discussion and Analysis, the global s
ituation remains grim. Indeed, this is the worst economic downturn that the worl
d has seen since the Great Depression of the 1930s. The US has already suffered
from three successive quarters of negative GDP growth, with possibly more to fol
low. Although it is believed by some that the US economy will bottom out by the
end of the third quarter of 2009, the estimated GDP growth for 2009 will be -2.9
%. In April 2009, unemployment was at 8.9%, and rising—the worst since the early 1
980s. The Euro area is also in a deep recession, and structurally much worse off
than the US. GDP growth for 2009 is estimated at -3.7%. Japan is heading for ye
t another period of long term de-growth. Industrial output has been falling by m
ore than 30% every month compared to a year earlier; and GDP growth for 2009 is
being estimated at 6.4%. With an estimated 11% to 12% fall in the real value of
world trade in 2009, China‘s growth is expected to reduce to high single digits. I
ndia‘s growth is down from the 9% plus range of the last three years to 6.7% in 20
08-09, with the chances of it being similar in 2009-10.
59
Debt-Equity Ratio
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
Debt-Equity Ratio
PBDTM (%)
50 45 40 35 30 25 20 15 10 5 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
PBDTM (%)
60
A Comparative Study Of NBFC in India 2010 RONW (%)
18 16 14 12 10 8 6 4 2 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 RONW (%)
Funding:
IDFC consolidated net profit at Rs. 750 crore for FY 2009 Highlights of FY 2009
Profit After Tax of Rs.750 crore for FY 2009 compared to Rs.742 crore i
Balance sheet size as on March 31, 2009: Rs. 29,809 crore : an increase of 7% N
et NPAs at 0.21% of outstanding loans Capital Adequacy Ratio at 23.75% (Tier I – 2
0.04%; Tier II – 3.71%) Net Interest income (NII) of Rs.922 crore : an increase of
33% Non Interest Income of Rs. 613 crore in FY 2009 Assets under management – USD
4.7 bn Closure of USD 1.0 bn India Infrastructure Fund and USD 0.70 bn IDFC Pri
vate Equity Fund III At its 72nd Board Meeting held on April 28, 2009, the Board
of Directors of Infrastructure Development Finance Company Limited (IDFC) appro
ved financial results for the period April 1, 2008 to March 31, 2009 and recomme
nded Dividend at the rate of Rs. 1.20 per equity share for FY 2009.
ROG-Sales (%)
80 70 60 50 40 30 20 10 0
ROG-Sales (%)
INCOME Net Interest Income (NII) increased by 33% from Rs. 694 crore in FY 2008
to Rs. 922 crore in FY 2009. Net Interest Income (NII) from infrastructure loans
increased by 34% from Rs. 565 crore in FY 2008 to Rs. 758 crore in FY 2009. Net
Interest Income from treasury operations increased by 27% from Rs. 129 crore in
FY 2008 to Rs. 164 crore in FY 2009.
Non Interest Income for FY 2009 decreased by 1% from Rs. 618 crore in FY 2008 to
Rs.613 crore in FY 2009. Fees from IDFC‘s asset management business were Rs. 203
crore in FY 2009. Income from Investment banking and broking activity of IDFC wa
s Rs. 115 crore in FY 2009. Income from principal investments was Rs. 184 crore
in FY 2009. Other fees was Rs.111 crore in FY 2009.
PAT
800 700 600 500 400 300 200 100 0
PAT
PROFITS Profit before tax (PBT) increased by 4% from Rs. 1,000 crore in FY 2008
to Rs. 1,036 crore in FY 2009. EPS (diluted) at Rs. 5.78 per share After account
ing for Rs. 278 crore for tax, profit in associate company and minority interest
, the profit after tax (PAT) for FY 2009 increased by 1% to Rs. 750 crore from R
s. 742 crore in FY 2008.
4.4.5 Macro Economic Analysis The infrastructure NBFC status, , will allow IDFC
to improve fund mobilization and ease overall funding pressure on the firm. the
status will give it higher single-party/group
exposures, and borrowing from banks could increase to 20% of net worth. Non-infr
astructure NBFCs can currently raise up to 15% of net worth. Additionally, the f
irm‘s plan to raise Rs3,500 crore over the next 12 months is a ―preemptive bid to rai
se capital and stay relevant with the ―SBIs of the world , Limaye told Mint in an in
terview last week. The state-owned State Bank of India is India‘s largest lender. ―I
n the next three years, the opportunity in the infrastructure landscape looks qu
ite attractive so we think it is a good time to capitalize on the opportunity, he
said, estimating that infrastructure lenders could stand to lend close to Rs3 t
rillion over the next three-four years, especially in power, roads and gas distr
ibution.
64
CHAPTER-5
INDIAN BANKS V/S NBFC’S
ALLIANCE BUSINESS SCHOOL | INDIAN BANKS V/S NBFC’S
65
2008-09 was a difficult year, especially for the financial segment across the gl
obe. However, India‘s strong macro-economic fundamentals and financial policies ha
ve shielded it from the turmoil.. The study considered those banks that have ann
ounced their results between 15th April -20th May 2008- 09 posted on the website
of Bombay Stock Exchange. The have analyzed in total 29 banks (both public & pr
ivate sector) and 7 NBFCs The) study has examined and compared the profitability
of banks with NBFCs during the financial year 2008-09. Simple average and profi
tability ratio of the two segments have been studied. Methodology - The AFP anal
ysis of the Indian commercial banks & NBFCs profitability is calculated using tw
o broad parameters including net profit and total income. Profitability Ratio is
a class of financial metrics that is used to assess a business s ability to gen
erate earnings as compared to its expenses and other relevant costs incurred dur
ing a specific period of time.
Profitability is calculated as: (Net Profit/Total income)*100
NBFCs more profitable than commercial banks despite slowdown Even as the world w
ide financial crisis and slowdown in key sectors of the Indian economy led the N
on Banking Financial Companies to face severe cash shortage during the financial
year 2008-09, the overall profitability of NBFCs has remained higher than the s
cheduled commercial banks. During the financial year 2008-09, Non- Banking Finan
cial Companies (NBFCs) average profitability stood higher at 18.90 per cent as c
ompared to the banks with 10.08 per cent. The NBFCs generally operates on the mo
del of lending to riskier projects with interest rates higher than offered by th
e banking institutions. As the financial markets faced the heat of global crisis
during the financial year 2008-09, most of the NBFCs faced problems in fund rai
sing. Among the seven NBFCs, in 2008-09 the highest profitability was reported b
y Infrastructure Development Finance Company Limited at 20.89 per cent, with tot
al income stood at Rs.3626.38 crore and net profit at Rs.757.73 crore. It was fo
llowed by Housing Development Finance Companies Limited (HDFC) andPower Finance
Companies Limited (PFCL) at 20.76 per cent and 20.67 per cent respectively. ―The R
eserve Bank of India (RBI) monetary measures by cutting interest rates during 20
08-09 has benefited the NBFCs since many of them finance their operations throug
h market borrowings said Mr. Sajjan Jindal President.
ALLIANCE BUSINESS SCHOOL | INDIAN BANKS V/S NBFC’S 66
Aggregate net profit to total income ratio of 17 public sector banks and 12 priv
ate sector banks reported to be 10.08 per cent during 2008-09. 5.1 Top 5 Banks a
nd NBFCs with highest profitability
Among the 17 public sector banks, the highest profitability was reported by Indi
an Bank and Bank of India at 15.83 per cent and 15.50 per cent respectively. Out
of the private sector banks the top positions were occupied by Axis Bank and Ye
s Bank at 13.22 per cent and 12.46 per cent respectively, among others. The 7 NB
FCs, aggregate total income grew by a whooping 57.3 per cent to Rs.28,208.72 cro
re in FY‘09 from Rs.17,906.84 crore in the previous fiscal. However, the aggregate
total income of 29 banks have increased by 25.3 per cent from Rs 2,69,055 crore
in 2007-08 to Rs 3,37,206.9 crore in 2008-09. Year-on-year performance of the 2
9 banks regarding net profit to total income ratio at the aggregate level showed
a marginal decline during FY‘09 with 10.08 per cent as against FY‘08 recorded at 10
.52 per cent, while in the case of 7 major NBFCs, the ratio declined during 2008
-09 at 18.90 per cent as against 21.80 per cent in FY‘08.
67
5.3 Banking versus NBFC regulatory arbitrage in India
68
69
Chapter-6
Porter’s five forces
ALLIANCE BUSINESS SCHOOL | Porter’s five forces
70
PORTER‘S FIVE FORCES MODEL OF COMPETITION The nature of competition in the industr
y in large part determines the content of strategy, especially business level st
rategy .based it is on the fundamental economics of the industry, the very profi
t potential of an industry is determine by competition interaction. Where these
interactions are intense, profittends to be whittled away by the activities of c
ompeting. Porter‘s model is based on the insight that a corporate strategy shouldm
eet the opportunities and threats in the organizations external environment.Espe
cially, competitive strategy should base on and understanding of industrystructu
res and the way they change. Porter has identified five competitive forces that
shape every industry and every market. These forces determine the intensity of c
ompetition and hence the profitability and attractiveness of an industry. The ob
jective of corporate strategy should be to modify these competitive forces in aw
ay that improve the position of the organization. Porter‘s model supports analysis
of the driving forces in an industry. Based on the information derived from the
Five Forces Analysis, management can decide how to influence or to exploit part
icular characteristics of their industry. Barriers to entry Product differentiat
ion is very difficult: As most of the NBFC‘s offer similar types of loans which ca
ters to same market. Innovation of a product plays a very important role in the
market. Licensing requirement: There are already 13000 registered NBFC . So, the
licensing requirement is also low. The regulations are not that stringent as th
at of a Bank.
Threat of substitute: Banks: Banks are important substitutes. As they are leader
s in the markets. They have a quite strong brand presence and a good credit appr
aisal method also. Money Lenders: Small NBFC‘s cater to the rural areas where ther
e is already a very strong presence. They dominate the market in the rural areas
and its mostly the unorganised market they tap in.
ALLIANCE BUSINESS SCHOOL | Porter’s five forces 71
Bargaining Power of suppliers Many alternatives: The suppliers in this case are
the depositors or the NBFC‘s funds. Suppliers have lots of alternatives to put the
ir money. With the risk they can invest their money. E.g. Low Risks: Banks, Bond
s etc. High Risk: Stocks, Investment RBI rules and regulations: RBI rules and re
gulations are not as stringent as of Banks. NBFC‘s are governed by many bodies. E.
g. RBI, FIDC, NHB etc
Bargaining power of consumer very high Large no. of alternatives Low
osts Undifferentiated services Full information about the market Threat of compe
titors Large no of NBFC‘s High market growth rate Low switching costs Undifferenti
ated services High fixed cost High exit barriers
Rivalry among competitors is very fierce in Indian Non Banking Financial Industr
y. The services NBFC‘s offer is more of homogeneous which makes the Company to off
er the same service at a lower rate and eat their competitor market‘s share. Marke
t Players use all sorts of aggressive selling strategies and activities from int
ensive advertisement campaigns to promotional stuff. Even consumer switch from o
ne bank to another, if there is a wide spread in the interest. Hence the intensi
ty of rivalry is very high. The no of factors has contributed to increase rivalr
y those are.
72
A large no of NBFC serving similar loan products: There is so many NBFC‘s and non
financial institution fighting for same pie, which has intensified competition.
High market growth rate: India is seen as one of the biggest market place and gr
owth rate in Indian financial industry is also very high. This has ignited the c
ompetition.
Homogeneous product and services: The services banks offer is more of homogeneou
s which makes the company to offer the same service at a lower rate and eat thei
r competitor market‘s share.
Undifferentiated services: Almost every NBFC provides similar services. Every ba

nk tries to copy each other services and technology which increase level of comp
etition. High exit barriers: High exit barriers humiliate banks to earn profit a
nd retain customers by providing world class services.
73
CHAPTER-7
FINDINGS & MANAGERIAL IMPLICATIONS
ALLIANCE BUSINESS SCHOOL | FINDINGS & MANAGERIAL IMPLICATIONS
74
7.1 FINDINGS
Top-rated NBFCs have not only been successful in managing their market share but
also in protecting their profitability. A combination of the factors cited earl
ier had helped these NBFCs earn better returns on their deployment. In fact, alm
ost all the top-rated NBFCs enjoy a return on total assets that is higher than H
DFC Bank s, one of the better-run banks. The higher return on assets was despite
their operating cost ratio being similar to that of HDFC Bank. For example, ope
rating expenses as a proportion of net margin worked out to 68 per cent for HDFC
Bank. On an average, this was not significantly higher than the ratio for most
top-rated NBFCs. If return on assets were still superior, then it was because of
the higher return on their funds. For top NBFCs, the interest income worked out
to 17-21 per cent of their total assets for the year ended FY. The liquidity in
the banking system also helped these finance companies. Spreads over government
securities for AAA rated corporate sector debt instrument are now only 50 basis
points. In other words, if the cost of funds for banking companies has declined
sharply, then top-rated NBFCs have also benefited from such a decline in intere
st rates. Some of these companies are now raising funds at 7-8 per cent.
Also, these companies have displayed the ability to manage their portfolio witho
ut large incidence of non-performing assets. For instance, LIC Housing Finance,
IDFC and Shriram Transport Finance boast of net non-performing assets to net adv
ances ratio of less than 1 per cent. This again has helped them lower the overal
l cost of operations and, thereby, protect their profitability. Higher profitabi
lity and innovative financing options, such as securitization, have also helped
in boosting the capital adequacy ratio of these NBFCs. among others, LIC Housing
Finance, IDFC and Shriram Transport Finance, Reliance Capital, boast of capital
adequacy ratios upwards of 15 per cent. In other words, their balance sheets co
ntinue to be strong to accommodate further growth in disbursements. 7.1.1 Disbur
sements - Sharp fall during the crisis Disbursements were clearly hit during the
crisis as is visible from Primary reason for this initial fall was lack of supp
ly of funds after the market liquidity dried up. Impact however differed dependi
ng on the capital structure of the company, with NBFCs having larger ALM mismatc
hes and those which had more dependence on mutual funds for funding were affecte
d more severely as mutual funds themselves faced redemption pressure on their sh
ort
ALLIANCE BUSINESS SCHOOL | FINDINGS & MANAGERIAL IMPLICATIONS 75
term schemes. To support the sector, RBI undertook several measures to improve l
iquidity flow to the NBFC sector. This was a significant development as the regu
lator highlighted the systemic importance of the sector.
RBI measures to improve liquidity of NBFCs The systemically important non-deposi
t taking non-banking financial companies (NBFCs-ND-SI) were permitted to raise s
hort-term foreign currency borrowings. Allowed banks to avail liquidity support
under the LAF for the purpose of meeting the funding requirements of NBFCs throu
gh relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL. Risk w
eights on banks‘ exposures to claims on NBFCs-NDSI were reduced to 100 per cent fr
om 150 per cent. Setting up of a special purpose vehicle (SPV) for addressing th
e temporary liquidity constraints of systemically important non-deposit taking n
on-banking financial companies (NBFCs-ND-SI). Deferring the higher CAR norms for
NBFCs-ND-SI by 1 year.
While liquidity conditions started improving from Q4 FY09, disbursements growth
remained subdued for the sector till the first half of FY10. On a y-o-y basis th
e cumulative disbursements showed a fall during Q1 FY10 and H1 FY10. This period
saw deterioration in asset quality of most NBFCs, which was especially high in
their unsecured loan portfolios. Lower disbursements were mainly because of the
pull back of NBFCs out of unsecured lending segments. On a cumulative basis 9ME
FY10 disbursements increased by more than 19%. Even if we consider the low base
effect of Q3FY09 disbursements, there is clear indication of pick up in disburse
ments and a positive outlook for the sector. With improvement in overall economi
c activity and higher thrust on infrastructure financing by the government, the
scenario is expected to improve further in FY11.
76
7.1.2 Cost of Funding - Shot up during the crisis due to short tenure borrowings
, stabilized now & expected to be less volatile due to larger proportion of long
term funding Many NBFCs took advantage of the lower interest rate regime at the
shorter end of the yield curve by borrowing short term funds (3months – 1 year) a
t lower rates and lending for maturities ranging from 3-4 years at higher rates.
However the level of mismatches differed between NBFCs and those with higher mi
smatch faced not only liquidity pressure, but their cost of funding also increas
ed during this period due to inversing of the yield curve and a general rise in
interest rates. Average borrowings costs1 (on an aggregate basis for CARE rated
NBFCs) increased from around 9.5-10.0% in FY08 to 11.5-12.0% in FY09. This shows
the severity of the impact as financial crisis affected funding costs in the se
cond half of FY09 and led to a 200 bps increase for the entire year. The respons
e by NBFCs was to gradually replace short term funding with long termsources. Th
is is a significant structural change in the borrowing profiles that will bring
more stability in profitability of the sector. However spreads will also be lowe
r compared to historical levels due to this change. During the 9ME FY10 cost of
borrowing reduced from the average of 11.5-12.0% of FY09 to 10.2 10.5% for the 9
month period and is expected to remain around these levels for FY10. This howev
er is still higher than the FY08 levels due to the structural move towards longe
r term borrowings. 7.1.3 Asset Quality – Deteriorated more due to unsecured loans
which is now virtually stopped by most players, provisioning has improved & asse
t quality expected not to worsen further. Asset quality for the sector deteriora
ted significantly during the crisis. Aggregate Gross NPA ratio trended from arou
nd 1.1% for FY08 to around 2.1% in FY09. While there was deterioration in all as
set classes, unsecured asset classes (Personal Loans, Unsecured SME loans) showe
d the maximum deterioration and were the key drivers for overall increase in NPA
s. Apart from the asset-type financed, another differentiator between asset qual
ities was the origination & collection model followed. NBFC‘s which originated maj
ority of their portfolio through branches & own employees showed better asset qu
ality performance than those which used the DSA model. Aggregate Gross NPA ratio
has further worsened to 3.0% at the end of 9M FY10, however it is close to peak
ing out. De-growth in unsecured portfolio segment has also lowered the portfolio
outstanding growth thereby leading to a ‗base effect‘ on the Gross NPA ratio and ad
ding to the rise in reported numbers. Provision coverage has
ALLIANCE BUSINESS SCHOOL | FINDINGS & MANAGERIAL IMPLICATIONS 77
increased from around 50% for FY09 to around 60% at the end of 9MFY10 as players
have become more conservative. Unsecured lending has virtually stopped for many
NBFCs and underwriting norms have also been tightened in general for other asse
t classes. These developments indicate positive structural changes.
78
CHAPTER-8
RECOMMENDATIONS AND CONCUSION
79
8.1 Recommendation: Domestic Financial markets can be integrated by making NBFC‘s
Channel partners to Banks. It will help in better allocation and funds availabil
ity. It will also help in better management of Financial services sector in Indi
a.. Enhancing the credit delivery mechanisms: The credit delivery mechanism need
s to be more transparent and hassle free. There should be more stringent norms f
or the defaulters. Strengthening the professionalism of NBFC sector through educ
ation and training: NBFC‘s are organized players. Regulatory body needs to educate
people about NBFC. To reduce in interest cost and hence benefit the ultimate co
nsumer.
8.2 Conclusion It is encouraging that the NBFC sector‘s importance is finally bein
g acknowledged across FS market constituents as well as the regulator. However,
the importance attached to the sector is often transcending into misplaced exube
rance. Over simplified and vague drivers for NBFC valuations such as strategic f
it and customer base, can never substitute dispassionate business analytics. A r
ational assessment of the intrinsic values of NBFCs factoring issues such as pas
t performance, structural weaknesses of the sector (for instance funding disadva
ntages), along with an identification of real capabilities are essential to ensu
re that the equilibrium between price paid and value realized is reached to the
extent possible. In the absence of this, India is sure to witness the re-opening
of the NBFC horror story albeit with a new chapter on the erosion of NBFC inves
tment values affecting investors across categories. Ratings of the NBFCs whose p
rofitability and asset quality was affected due to the crisis were supported by
their strong parentage. Based on the parental strength some players have raised
further equity and also managed to re-align their business models while maintain
ing their solvency. overall positive outlook on the sector due to the better ALM
position, focus on relatively safer asset classes and the demonstrated acceptan
ce of the sector as systemically important by the regulator. The crisis has impo
sed an overall sense of ‗caution‘ even for the newer entrants in the market. Also go
ing forward higher capital adequacy norms will put a
ALLIANCE BUSINESS SCHOOL | CHAPTER-8 RECOMMENDATIONS AND CONCUSION
80
fairly conservative cap on the leverage of the sector thereby improving the cred
it profile of many entities (NBFC-NDSI)
81
REFERENCES
http://www.rediff.com/money/2004/jan/07rbi.htm http://www.scribd.com/doc/2249880
9/Porter‘s-Five-Forces-Model-of-Competition
http://www.financialexpress.com/news/Column---Why-NBFCs-may-not-want-to-be-banks
/614492/ http://www.stockwatch.in/nbfcs-offering-high-dividends-yet-again-25964
http://www.livemint.com/2010/04/30204917/IDFC-seeks-infrastructure-NBFC.html htt
p://www.encyclopedia.com/doc/1G1-143176307.html http://mba-bba-dissertations.blo
gspot.com/2010/05/capital-structure-of-indiabulls-nbfc.html http://www.nbfc.rbi.
org.in http://www.rediff.com/money/2007/jul/20nbfc.htm http://www.thehindubusine
ssline.com/2009/11/14/stories/2009111451870100.htm http://indiabudget.nic.in/es9
8-99/chap35.pdf http://www.banknetindia.com/finance/fbanking.htm http://www.mydi
gitalfc.com/news/nbfcs-again-doling-out-higher-dividend-fy10-732 www.livemint.co
m/2008/.../The-multiplicity-of-regulation.html http://www.coolavenues.com/know/f
in/svs_nbfc_1.php3 www.thehindubusinessline.com/.../2005022800330800.htm Annual
Reports: 1) LIC Housing Finance 2) IDFC 3) Reliance Capital 4) Shriram Transport
Finance Research Papers: India Vantage by KPMG Indian Banks v/s NBFC’s NBFC Resea
rch by CARE
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A Comparative Study Of NBFC in India 2010

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Undifferentiated services: Almost every NBFC provides similar services. Every ba

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