CHAPTER 3

INTRODUCTION TO THE RESEARCH STUDY

Sr. No. ToOle Paqe No.

3.1 Introduction to the Research StudY- 62
3.2 Sionificance and Need of the Research Study 63
3.3 Ob;ectiYes of the Research Study 68
3.4 Research MethodolooY 68
3.4.1 Formation of Hypothesis 70
3.4.2 Type of Research Desiqn 71
3.4.3 SamDlinq Desiqn 72
3.4.4 Data Collection 73
3.4.5 Data Editina and Processina 75
3.4.6 Data AnalYsis and InterPretation 76
3.5 Area and Coyeraae of the Research Study 77
3.6 Limitation of the Research Study 78
3.1 Introduction to the Research Study

Research has been described as "inquisition" and "study" by the dictionaries

in English Language. Every research has an aim, a purpose and some
objectives. These objectives underline the need and scope of the study. While
each inquisition requires a purposeful exploration with a defined scope to
qualify as a research, the following sections deal with the significance, scope
and methodology for the research undertaken.

In the global society, the Non-Banking Financial Companies (NBFC) have

played an important role on the overall economic development. The seed of
the concept of a non-banking financing company in India was sown
particularly after introduction of the New Economic Policy in the year 1991.
Since then the post nineties era has seen a vast development in the financial
sector in India, more than any other sector. The financial system, as we all
know, comprises of financial institutions, financial instruments and financial
markets that provide an effective payment and credit system and thereby
facilitate channelizing of funds from savers to the investors of the economy.
The components of the Indian Financial System have gone through a
remarkable transformation in these years.

A research study of the NBFC was necessary for everyone to understand the
cause and effect relationships between the driving factors of the industry.

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 3.2 Significance and Need of the Research Study

In India, a considerable and substantial growth has taken place in the

financial sector in last two decades. The overall financial system has
witnessed a complete turnaround on all possible parameters, to be specific:
1. There has been privatization of the financial institutions,
2. The statutory financial institutions undergoing a change of their role in the
overall economy as a whole and
3. Most importantly offering of new and new financial products/services
commonly known as financial innovations to the investors as well as
market participants.

The government of India has put their maximum efforts to de-regulate the
banking system on the line of global requirement and maximum thrift and
credit activities have been promoted by financing. The banking system have
undergone huge reforms with the coming up on private as well as foreign
banks, a more than ever scrutiny also resulting into regulatory reforms with
the securitization bill being an apt example.

The capital markets have seen a more than 100% increase in the companies
listed on stock exchanges, more mature movements than before, increased
investor awareness, new trading dynamics as well as launch of derivatives,
positive developmental regulations amongst others. The money markets
have seen an increased participation more than ever resulting from more and
more financial institutions that have come up in the post nineties era
resulting into variety of products as well as huge volume of transactions.

One of the new as well as very major developments in this period was the
- coming up of non-banking financial companies (NBFCs). Non-banking
financial companies (NBFCs) have been a subject of vast attention since the
nineties.

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According to Reserve Bank (Amendment act, 1997) "A Non Banking Finance
Company (NBFC)" means:
1. a financial institution which is a company;
2. a non banking institution which is a company and which has as its
principal business the receiving of deposits under any scheme or
arrangement or in other manner a lending in any manner;
3. such other non-banking institution or class of such institutions as the bank
may with the previous approval of the central government specify. The
definition excludes financial institutions, which carry on agricultural
operations as their principle business. (RewveBankofIndla, 2005-06)

NBFCs consists mainly of finance companies which carry on functions like hire
purchase finance, housing finance, investment, loan, equipment leasing or
mutual benefit financial operations, but do not include insurance companies
or stock exchange or stock broking companies.

It has been revealed by some research studies that economic development

and growth of NBFCs are positively related. In this regard the World
Development Report has observed that in the developing counties banks hold
a major share of financial assets than they do in the industrially developed
countries. As the demand for financial services grow, countries need to
encourage the development NBFCs and securities market in order to broaden
the range of services and stimulate competition and efficiency. Keeping with
the spirit of financial sector liberalisation, NBFCs were integrated into the
mainstream of overall financial sector. Over a period of time the NBFCs have
been very successful in rendering a wide range of services. Initially intended
to cater to the needs of savers and investors, NBFCs later on developed into
institutions that can provide services similar to banks. They provide tailor
made services to their clients. The main reason for depOSits with NBFCs is
greater customer orientation and higher rate of interest offered by them as
compared to ·banks.

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In India, the last decade has witnessed a phenomenal increase in the number
of NBFCs. The number of such companies stood at 7,063 in 1981, at 15,358
in 1985 and it increased to 24,009 by 1990 and to 55,995 in 1995. The rapid
growth of NBFCs, especially since the nineties has led to a gradual blurring of
dividing lines between banks and NBFCs, with the exception of the exclusive
privilege that commercial banks exercise in the issuance of cheques.
Simplified sanction procedures, orientation towards customers, attractive
rates of return on deposits and flexibility and timeliness in meeting the credit
needs of specified sectors (like equipment leasing and hire purchase), are
some of the factors that have enhanced the attractiveness of this sector. The
total regulated deposits of NBFCs aggregated Rs.17,390 Crore as at end of
March 1994, equivalent to 4.0 per cent of bank deposits. The quantum of
regulated deposits grew more than three-fold and as at end-March 1997, at
Rs.53,116 Crore constituted 7.9 per cent of bank deposits. In the year 1998,
a new concept of public deposits meaning deposits received from public
including shareholders in the case of public limited companies and unsecured
debentures/ bonds other than those issued to companies, banks and financial
institutions, was introduced for the purpose of focused supervision of NBFCs
accepting such deposits. The amount of such public deposits held by NBFCs,
which as at end of March 1998 was Rs.23,820 Crore, declined to Rs.19,341
Crore as at end of March 2000. In India, several factors have contributed to
the growth of NBFCs. Comprehensive regulation of the banking system and
absence or relatively lower degree of regulation over NBFCs has been one of
the main reasons for the growth momentum of the latter. 1

With such a dramatic growth in the numbers of NBFCs it was thought

necessary to have a regulatory framework for NBFCs. To encourage the
NBFCs that are run on sound business principles, on July 24, 1996 NBFCs
were divided into two classes:
equipment leasing and hire purchase companies (finance companies) and
loan and investment companies.

1 Reserve Bank of India, Report on Trend and Progress of Banking in India, 2005-06, Chapter 5

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However, the NBFCs segment of finance was less regulated over a period of
time. On account of scams and the inability of some of the NBFCs to meet
with the investors demand for return of the deposits the need was felt by the
Reserve Bank of India to increase the regulations for the NBFCs. In the light
of this background Reserve Bank of India felt the requirement of some
further guidelines.

Owing to certain disquieting developments in the NBFC sector, the RBI Act
was amended in 1997, providing for a comprehensive regulatory framework
for NBFCs. The RBI (Amendment) Act, 1997 provides for compulsory
registration with the Reserve Bank of all NBFCs, irrespective of their holding
of public deposits, for commencing and carrying on buSiness, minimum entry
point norms, maintenance of a portion of depOSits in liquid assets, creation of
Reserve Fund and transfer of 20 per cent of profit after tax annually to the
Fund. The Amendment Act also conferred powers on Reserve Bank to issue
directions to companies and its auditors, prohibit deposit acceptance and
alienation of assets by companies and effect winding up of companies.

Accordingly, the Reserve Bank issued directions to companies on acceptance

of public deposits, prudential norms like capital adequacy, income
recognition, asset classification, provision for bad and doubtful debts,
exposure norms and other measures to monitor the financial solvency and
reporting by NBFCs. Directions were also issued to auditors to report non-
compliance with the RBI Act and regulations to the Reserve Bank, Board of
Directors and shareholders.

Thus, it can be easily seen that in a remarkable period of time the NBFCs
have gained more and more stature in the Indian Economy in general and
our Financial System more particular. It can also be observed that new
sectors have come up in our economy as a result of a mature financial
system, from a traditional banking system to a financial system with capital
and money markets, NBFCs, insurance organizations, mutual funds among
others is a positive development that has taken place. These developments

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 ----------------------------------------~-----------------------

have also come up with certain questions that need to be inquired into.
Taking into account the NBFCs, it is of utmost importance for anyone to know
as well as understand how this entire part of a financial system has evolved
and progressed. This could also be used as a model for any developing
economy or a financial system or any part there of. It is this requirement
that this study aims to answer.

The sudden growth of the Non Banking Financial Companies as well as the
slowing up of the same in the current scenario is viewed with much
suspicion. It is also been argued that these services would no longer be a
driving force in the economic front, at the same time there is coming up of
various sectors such as insurance and mutual funds which will be competing
with the NBFCs for business in terms of investments along with the existing
strong sectors of capital markets and most importantly banks.

In addition to that, the NBFCs were facing huge problems in terms of their
identity, responsibility and identity of management operations and
managerial resources, infrastructure facility, loyalty with other companies,
liaison with government and other financing agencies, customer services,
institutional image and social responsibility. All the above circumstances
indicate that NBFCs have to be economically viable to sustain as well as for
new NBFCs to flourish in the Indian Financial System. In these prevailing
circumstances and the way the trends indicate, one must surely inquire that
is the role of NBFCs just restricted to the pushing up of the momentum in the
financial system or are they having any role in maintaining the momentum.

To evaluate and analyze this striking question the topic of

Non-Banking Financial Companies has been undertaken for a detail study.

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 3.3 Objectives of the Study

-- The classifications of NBFCs have been changed over a period of time. The
functioning of different categories of NBFCs is not governed by the
homogeneous factors. Therefore implications can differ for different group of
companies. The performance of various companies in this sector has been
carried out on various financial as well as other parameters.

In the light of these circumstances, the present study attempts to examine

the NBFCs at a greater scale separately. The present study objectives are:
1. To study the overall performance of the non - banking financial
companies (NBFC)
2. To analyze the various business segments covered by various NBFCs
3. To study the institutional image of NBFC in relation to marketing and
consumer satisfaction
4. To locate new business opportunities for future growth of NBFCs

3.4 Research Methodology

Considering the subject of the research (An Analytical Study of NBFCs) and
observing the different research methods that have been identified for similar
subjects, the following research methods (methodologies will be used for the
purpose of the study:

Literature Review
This methodology is considered to be an important part of every research.
Hereby, the various literature as well as the Government regulations on the
area of the subject will be reviewed in order to judge the appropriateness of
the variables that are to be considered along with their implications. Also, it
is all the more important to have a concrete understanding of all the theories
that are prevailing on the subject as a whole including the external
environment as well as the variables that are having an impact on the
functioning of the sector as a whole.

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 ----------

Survey Research
"Survey research is inflexible to discoveries made during data collection."
Getting close to the phenomenon - gathering insights or discoveries about
casual links, motivations, reasons why things happened - should precede
verification by more objective techniques, such as surveys.2 In order to know
the reasons for the events as well as keeping in consideration the objectives
it is imperative to generate first account information on the functioning,
image as well as potential segments. A survey is therefore a most efficient as
well as reliable tool.

Case Study
Case study should help in "capturing the knowledge or practitioners and
developing theories from it. A case study methodology is well suited to
identifying key events and actors and to linking them in a casual chain. Case
study is chosen in finding an answer to a research question because of its
some unique abilities to give the possibility to generate theories form
practice allow to understand the nature and complexity of the processes
taking place.

Justification of the research methodologies:

The review and analysis of existing models that support the management
control of NBFCs is done at the first stage. Literature study is performed on a
basis of proceedings of current and past conferences, devoted to NBFCs,
Internet and management journals. Literature study will also include the
study of history NBFCs in United States, Japan, Europe (three major world
centers on the economic arena) and other regions and countries of the world.
The literature study also includes the study of the history through Internet.
Books form libraries and electronic publications will also be used for this
study.

2 lambert, Steve and Howe, Walt: Survey basics, New York, Random House, July 1993

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The survey method involves the collection of clearly defined variables, in a
natural setting. This method seems to be appropriate for the purpose of any
further model setting as well as testing (validating) in a small case or in a
bigger scale. Furthermore, as this is the information on which the further
findings are to be based for formulation of any further supporting theories,
this has to be highly representative besides being authentic. As this phase of
the research will be the most time-consuming one, only the major
metropolitans and the cosmopolitan cities of India are only targeted after
taking into consideration the base and operational areas of various NBFCs.

Inquiries and interviews are the main part of the study and consecutive
analysis of data gained will secure the validity of the answer on the research
questions. This case study will provide contemporary data obtained from
practitioners, personally involved in running and managing of various forms
of NBFCs. This phase is also a complex one. This includes managers'
willingness to cooperate with the researcher and practically implement
managerial tasks/activities, the presence of financial resources to carry out
activities recommended as well as availability of time.

3.4.1 Type of the Research Design

The research design is both Exploratory as well as Descriptive in nature.

Under Exploratory deSign, literature research through physical and electronic
medium has been carried out.

In case of descriptive research, a cross - sectional study consisting sample

survey of financial services company's executives and investors have been
carried out.

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3.4.2 Variables covered in the Research Study

The various variables that have been identified for the purpose of the study
after taking into consideration the nature of the information that is required
along with the objectives are as follows:
1. Financial & Non Financial performance parameters of NBFCs
2. Operational Efficiency indicators of NBFCs
3. Operational Efficiency for various business segments of NBFCs (Hire -
Purchase, Loan, etc.)
4. Various Customer Segments of NBFCs
5. Customer Preferences for various services of NBFCs
6. Customer Perceptions for various services of NBFCs
7. Customer Expectations for various services of NBFCs
8. Macro Policies & their impact on the functional aspects of NBFCs
9. Relationships of other sectors of Indian financial system on functioning of
NBFCs

In the course of the study, after taking into account the objectives of the
study, the above - mentioned variables are to be considered since these are
more relevant to the nature of the study and the purpose of the study.

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3.4.3 Sampling Design

The different sampling plans adopted by the researcher to collect responses

from the best possible accurate samples, have been highlighted below, along
with the detailed profiles of the two categories of samples.

Sample Details Corporate Survey Investor Survey

Sampling plan for survey of
Sample Design Executives of Financial
services companies'
Defining the Organizations engaged in
Universe Financial Services
Executives of Financial
Survey Population
services companies
Executives of Financial
Sampling Frame
Services and NBFCs
An Executive of Financial
Sampling Unit
Services and NBFCs
Sampling Method Non-probability method,
and Selection using judgment sampling
Sample Size 80 Corporate Executives
Sampling Plan for Investors'
Survey
Individuals willing to invest and
aware about financial services
Individuals aware about
financial products, investors
and financial intermediaries
Investors in Ahmedabad,
Gandhinagar, Baroda and
Mumbai
An Investor
Non- probability method, using
Convenience sampling
The respondents were
contacted at the offices and
social gathering
400 Investors

The detailed sample profile in the two categories has been highlighted further
in the annexure.

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 - ----~~~~~~-

3.4.4 Data Collection

The data for fulfilling the objectives of the study has been collected from both
primary and secondary data sources as outlined below:

3.4.4.1 Primary Data

Sources of primary data:

To gain a fresh, practical insight into NBFCs and the Financial Services
industry and keeping in mind the objectives of the research study, the
primary data has been collected from the Marketing executives of various
financial services companies and the common investors. However, to
understand the perceptions of the investors, primary research has been done
for collecting information from both these segments.

Methods of primary data collection:

The Questionnaire method is used for collecting information from the two
sources - the Financial and NBFC executives as well as the investors. A
Structured Questionnaire was prepared and administered to both the
categories of respondents. The Questionnaire was designed keeping in mind
the type of information required for the research study and the ability of the
questions to generate required data.

For getting the response to the structured questionnaire, two methods were
adopted. Wherever feasible, the responses were collected by the researcher
by conducting Personal Interviews or surveys. But in some cases, especially
in the case of some company executives, the responses were solicited
through e-mail.

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Type of Questionnaire

The Questionnaire for collecting the primary data from Corporates and the
Investors were prepared taking into consideration the objective of the
research study. Different types of question such as multiple-choice questions,
dichotomous question and open-ended questions were included in the
respective questionnaires depending upon the complexity as well as the
objective of the issue involved in the question.

Moreover, different types of attitudinal measurement scales were also used in

these questionnaires. A S-point Likert scale was employed in case of and
investors' questionnaire in order to know the intensity of agreement or
disagreement of the respondents on different issues.

In addition to that, the Rank-order scale has also been used in order to judge
the relative importance of several issues for the respondents. In case of
NBFC executives, a S-point Itemized Rating scale has been used to know the
extent of applicability of the different issues for the concerned organization.

Moreover, a pre-testing of both the Questionnaires was also carried out by a

pilot study of a few respondents in the two categories. A few changes were
effected in the questionnaire for the NBFC executives after the pilot study
because of some practical difficulties faced by the researcher and the
respondents during the survey in the fields as well as on the basis of
suggestions received from the executive during the pilot study.

Both the Questionnaires used for the surveys have been attached separately
in the Annexure.

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3.4.4.2 Secondary Data

Sources of secondary data:

The secondary data, for understanding the concept of NBFCs as well as to

review the previous researches undertaken in this area, has been gathered
from various sources such as books, journals, periodicals, magazines,
newsletters, research reports of previously conducted studies in this
direction; as well as web. The sources include published reports from Reserve
Bank of India, Trade and Finance Journals such as Capital Markets, Chartered
Financial Analyst, etc. and Newspapers i.e. The Times of India, Economic
Times, Business Standard and The Financial Express. These sources have
been highlighted in the bibliography at the end of the research study.

Methods of secondary data collection:

The secondary data has been collected by the researcher by personally

visiting the various institutional, private as well as associations' libraries,
organizational reports, published articles and through the Internet.

3.4.5 Data Editing and Processing

The data collected for the purpose of the research study is from primary data
and secondary data sources. The primary data has been processed so as to
organize data the same and classify it further for generating information. The
representation of classified data included forming tables and graphs for
facilitating the analysis and drawing findings from the primary data.

The secondary data gathered in processed form has been edited for the
purpose of including the relevant information keeping in mind the objectives
of the study.

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3.4.6 Data Analysis and Interpretation

Three different methods that have been chosen for the study - literature
review, study research and case study. The choice of statistical tools is be
applicable only for the analysis of the raw information that has been
accumulated from the survey research and the secondary data gathered from
published reports. The activities, fulfilling this step, will depend on the most
appropriate method and on the raw information itself.

For the research study, the most feasible to apply the basic statistical tools
such as:
1. Correlation and Regression analysis to analyze the cause and effect
relationships,
2. Time Series Trends to know the business as well as the cyclical
fluctuations,
3. Multivariate Analysis to establish a relationship among the variables that
are taken into account and
4. Tests so as to know the acceptance of the models.
are used for the purpose of generating information, findings and drawing
conclusions.

Further, certain simulation exercises have been carried out with a realistic
view on the future of the NBFC and Financial Services industry to examine
the validity of the proposed conclusions and drawing further inferences.

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 3.5 Area and Coverage of the Research Study

In the process of globalization, India is a rapidly progressing economy.

Sooner or later the state will have to provide stability and security to its
subjects (citizens) in order to retain the human talent as well as to attract
global human talent. A Research Study on Non Banking Financial Companies
will help to understand the implications of various factors on the Financial
Services Industry as ultimately this will be the guiding force for the
development of the economy and in turn the subjects of the society. The
study on Non Banking Financial Companies will help to understand which are
the progressive aspects and which factors the policy makers have to
acknowledge as well as which ones need to improved further.

It is also important to understand the measures adopted by advanced

economies in the area of Financial Services so as to know its scope and
extent of applicability for us. This is imperative when one tries to evaluate
the benefits it has to offer to any nation's development and stability. It is
only after knowing the gap between the actual and potential practices that an
economy can proceed in the right direction. The opinion of the industry
participants coupled with its affordability will give a true picture of the
statement of affairs as well as the future for NBFCs in our context. This will
also offer an insight on the issue form both perspectives, the opinions of the
industry as well as the investor's point of view.

The researcher expects that this analytical study on Non - Banking Financial
Companies will be of use to the captains of the industry, business
organizations and academicians as well as research scholars.

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______________________________________________J
 3.6 Limitations of the Research Study

The only thing that is constant is change. In the current scenario, as a result
of an intensively dynamic environment, the macro aspects change as a result
of their linkage or internal reliance on other macro variables. These
possibilities much depend on a progress of the research, communication
activities, economic relations and other circumstances. The results and the
subsequent theories that have been a result of this research study are after
taking into account the variables and their interaction with the external
environment as of now. However, the results may vary with the changing
circumstances.

- Furthermore, the study also depends on responses form representations of

various Financial Service industry participants and the common investors
included for the purpose of the research. It is based on the assumption that
the information gathered for the purpose of the study will be true and
unbiased. In addition to that, only the major variables, which are perceived
to be having an impact on the subject of the study, are taken into
consideration.

Like any subject of research, where lots of other supporting or counter

theories are resulting from any basic work, this subject is no exception .

...

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