A STUDY ON LIQUIDITY CRUNCH FACED BY

NBFC’s ININDIA

A Project submitted to
University of Mumbai for partial completion of the degree of
Bachelor in Commerce (Accounting and Finance)
Under the Faculty of Commerce

By

ASHISH BABU HULE

Under the Guidance of

PROF. GEETA CHOUDHARY

AVM’S KARMVEER BHAURAO PATIL

DEGREE COLLEGE

ARTS, COMMERCE AND SCIENCE, THANE

Road no.16v, Nehru Nagar, Wagle Estate, Thane (W)

ACADEMIC YEAR: 2019-20

1
 A STUDY ON LIQUIDITY CRUNCH FACED BY
NBFC’s IN INDIA

A Project submitted to
University of Mumbai for partial completion of the degree of
Bachelor in Commerce (Accounting and Finance)
Under the Faculty of Commerce

By

ASHISH BABU HULE

Under the Guidance of

PROF. GEETA CHOUDHURY

AVM’S KARMVEER BHAURAO PATIL

DEGREE COLLEGE

ARTS, COMMERCE AND SCIENCE, THANE

Road no.16v, Nehru Nagar, Wagle Estate, Thane (W)

ACADEMIC YEAR: 2019-20

2
 Certificate
This is certify that Ms./ Mr. ASHISH BABU HULE has worked and duly
completed her/his Project Work for the degree of Bachelor of Accounting
and Finance under the Faculty of Commerce in the subject of Accounting
and Finance (Commerce) and her/his project is entitled, “A STUDY ON
LIQUIDITY CRUNCH FACED BY NBFC’s IN INDAI” under my
supervision.

I further certify that the entire work has been done by the learner under
my guidance and that no part of it has been submitted previously for any
Degree of Diploma of any University.
It is her/his own work and facts reported by her/his personal findings and
investigation.

Signature of Signature of Signature

Guiding Teacher Principal External Examiner

Date of Submission:

3
 DECLARATION

I the undersigned MR.ASHISH BABU HULE here by, declare

that the work embodied in this project work titled “A STUDY ON
LIQUIDITY CRUNCH FACED BY NBFC’s IN INDAI”, forms
my own contribution to the research work carried out under the
guidance of Prof. Geeta Choudhary is a result of my own
research work has not been previously submitted to any other
University for any other Degree/Diploma to this or any other
University.

Wherever references has been made to previous works of others, it

has been clearly indicated as such and included in the bibliography.

I, here by further declare that all information of this document has

been obtained and presented in accordance with academic rules and
ethical conduct.

Name and signature of the learner

MR. ASHISH BABU HULE

Certified by

Prof. Geeta Choudhary

4
 Acknowledgment

I would like to acknowledge the following as being idealistic

channels and fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for

giving me chance to do this project.

I would like to thank my Principal, Dr. Sunil Karve for providing

the necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator Prof. Santosh

Gawde, for her moral support and guidance.

I would also like to express my sincere guidance towards my

project guide Prof. Geeta choudhary whose guidance and care
made the project successful.

I would like to thank my College Library, for having provided

various reference books and magazines related to my project.
Lastly, I would like to thank each and every persons who directly
or indirectly helped me in the completion of the project especially
my Parents and Peers who supported me throughout my project.

5
 SUMMERY

Liquidity crunch or crisis occurs when a solvent business or an enterprises

fails to honour the liabilities or do not have any liquid assets (i.e cash) to meet
its short term obligations such as to meet its vendor obligations, loan
repayments, paying bills and its employee requirements. The liquidity crisis is
a obstacle for any financial institutions for its growth and would be speed
breaker for its book size and maturity of its portfolio. The crisis is not only
resulted by the current economical situations, but depending upon every
NBFC/HFC’s results of its day to day operations.Today many of NBFC‘s/
HFC‘s are in struggle in foreseeing the future, as the result, landing up in No
Man‘s Island left with Larger NPA‘s and high cost of funds. Major activities
of the NBFC’s/HFC’s are to strive the balance of funds between the Intake and
outtake of funds in current scenario with challenge of cheaper Cost of Funds
with minimum risk. In case of any imbalance may lead to liquidity crunch and
may even stop the business activities of the entities. Current raise of interbank
rates which has tightened credit circles among the NBFC‘s and HFC‘s and
made them to not borrow further from other banks , hence NBFC‘s has been
forced to run their own shows to save their faces .As the result theses NBFC‘s
are not any more sustainable to honour their current obligations, Thus has
resulted in adverse cash crunch.The facts revealed of ILFS currently is not
only an story at present, but a lesson on enterprise‘s solvency in present
economic situation, which will also show the face off of other players in real
time to reflect in future of economy.

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Chapter No. Title of the chapter Page No.

1 Introduction 1

2 Research Methodology 42

3 Literature Review 60

4 Conclusion 66

5 Suggestion 67

6 Finding 68

A Bibliography 69

B Annexure 70

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 INDEX

SL.N CHAPTER Page

O No.
1. Chapter-1

1.1 Introduction
1.2 Background of the study
1.3 Current scenario of NBFC’s
1.4 Statement of the problem
1.5 Definition
1.6 Types of NBFC’s
1.7 Characteristics of NBFC’s
1.8 Role of NBFC’s
1.9 Case study
2. Chapter-2

2.1 Objective of the study

2.2 Need of the study

2.3 Scope of the study

2.4 Benefits of the study

2.5 Limitation of the study

2.6 Significance of the study

2.7 Selection of the problem

3. Chapter-3

Literature Review
4. Chapter-4

4.1 Conclusion

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 4.2 Suggestion

4.3 Finding
5. Chapter-5

5.1 Bibliography
6. Chapter-6

Annexure

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 CHAPTER 1

INTRODUCTION
1.1INTRODUCTION

A Non-Banking Financial Company (NBFC) is a company registered under

the Companies Act, 1956 engaged in the business of loans and advances,
acquisition of shares/stocks/bonds/debentures/securities issued by Government
or local authority or other marketable securities of a like nature, leasing, hire-
purchase, insurance business, chit business but does not include any institution
whose principal business is that of agriculture activity, industrial activity,
purchase or sale of any goods (other than securities) or providing any services
and sale/purchase/construction of immovable property. A non-banking
institution which is a company and has principal business of receiving deposits
under any scheme or arrangement in one lump sum or in installments by way
of contributions or in any other manner, is also a non-banking financial
company (Residuary non-banking company.

Financial activity as principal business is when a company’s financial assets

constitute more than 50 per cent of the total assets and income from financial
assets constitute more than 50 per cent of the gross income. A company which
fulfils both these criteria will be registered as NBFC by RBI. The term
'principal business' is not defined by the Reserve Bank of India Act. The
Reserve Bank has defined it so as to ensure that only companies predominantly
engaged in financial activity get registered with it and are regulated and
supervised by it. Hence if there are companies engaged in agricultural
operations, industrial activity, purchase and sale of goods, providing services
or purchase, sale or construction of immovable property as their principal
business and are doing some financial business in a small way, they will not be
regulated by the Reserve Bank. Interestingly, this test is popularly known as
50-50 test and is applied to determine whether or not a company is into
financial business.

1
This classification technically encompasses a wide range of companies
offering bank-like financing and investing services. Examples of NBFCs
include insurance companies, money market funds, asset managers, hedge
funds, private equity firms, mobile payment systems, microlenders, and peer-
to-peer lenders.

The financial history of every country carries stories of ups and downs
economic movements. While the impact of a crisis will be on all the
stakeholders involved, the responsibility of handling it and bringing stability
back into the system is with the regulators and the governments only. This
paper examines one such mini-bubble in the Indian context – the 2018/19
financial crisis in the NBFC sector. The paper introduces to the backdrop or
the situation that led to the crisis. Then we discuss news flow and the reaction
of various stakeholders. Finally, we examine the possible outcomes of these
actions from a theoretical perspective.

While understanding the basic idea of a Non-Banking Financial

Companies (NBFCs), we need to know what exactly NBFCs are. As per law,
A Non-Banking Financial Company (NBFC) is a company registered under
the Companies Act, 1956 engaged in the business of loans and advances,
acquisition of shares / stocks / bonds / debentures / securities issued by
Government or local authority or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, chit business but does not include
any institution whose principal business is that of agriculture activity,
industrial activity, purchase or sale of any goods (other than securities) or
providing any services and sale/purchase/construction of immovable property.

Capital inputs into the economy get accelerated as we increase our pursuit of
economic growth and development. The financial structures of a country will
be closely related to the structure of its real economy. The journey of chasing
investment returns at times leads to pockets of increased risk, which, if not
appropriately handled, culminate to form a bubble leading to systemic risks or
even a financial crisis. Global economies, however, are not ready for such
events in the present situation. In extreme cases, these risks might even lead to
an economic recession. Crises would be limited to one or a few sectors in the

2
initial stages. Because it is contagious, it slowly propagates. Research in
economic circles documented past crises related to the banking system,
currencies, stock markets, sovereign or the whole of the economy (giving rise
to an economic recession or a depression). Since economies are tightly held
and controlled by Governments, crisis management is often averted or handled
with due legislation from time to time. Nevertheless, in rare circumstances,
they become a global financial crisis, thanks to the globalization and inter-
linking of global economies. Financial crises are an inevitable response that we
get from the excess interplay between various macro and microeconomic
factors.

3
HISTORY OF NBFCs

i. NBFCs in India made a humble beginning way back in the 1960’s to serve
the need of the savers and investors whose financial requirements were not
sufficiently covered by the existing banking system in India. The NBFCs
began to invite fixed deposit from investors and work out leasing deal for big
industrial firms. Initially, they operated on a limited scale and could not make
a significant impact on the financial system.

ii. During the first stages of their development, this business of financing was
regulated by the Companies Act. At that time a need was felt that due to the
unique and complex nature of operations and also financial companies acting
as financial intermediaries, there should be a separate regulatory mechanism.

iii. Accordingly Chapter III B was included in the Reserve Bank of India Act,
1934, assigning limited authorities to the Bank to regulate deposit taking
companies. The RBI has since initiated measures to bring the NBFC sector
within the realm of its regulation.

iv. The RBI accepted and implemented the key recommendations of James S.
Raj Study Group formed in 1975 that financial companies be allowed to
gearing often times. As per the salient features of the Directions, the hire
purchase and leasing companies could accept deposits to the extent of their net
owned funds. The Directions also required the Companies to maintain liquid
assets in the form of unencumbered approved government security.

v. Between 1980’s and 1990’s, NBFCs gained good ground and started to
attract a huge number of investors owing to their customer friendly reputation.
Since the days of Liberalization, Privatization and Globalization (LPG, started
in 1991), there has been a mushrooming growth of NBFCs; the number of
NBFCs grew from a mere 7000 in 1981 to around 30000 in 1992. This is when
the RBI felt that it was becoming increasingly onerous for it to regulate the
industry. In 1992, the RBI formed a Committee headed by A. C. Shah, former
Chairman of the Bank of Baroda, to suggest measures for the effective
regulation of the industry. The Shah Committee gave its recommendations,
which ranged from compulsory registration to prudential norms.

4
1.2Background of the study in NBFCs Crises

One fine day, the market was no longer bullish about Non-Banking Financial
Companies (NBFCs). Instead, their stocks were being hammered. DHFL
which is considered to a blue chip NBFC stock suddenly saw its stock price
decline by 60% in one day! The same was the case with IL&FS which is
supposed to be a stalwart in this field. The main reasons behind the decline of
the Non-Banking Financial Companies (NBFCs) stocks are as follows:

Timing Mismatch: Indian Non-Banking Financial Companies (NBFCs) have

been playing a very risky game. They have been borrowing money short term
and have been lending it out long term. This asset liability timing mismatch is
obviously a recipe for disaster. However, the NBFCs have been able to roll it
over and pay their debts when due. This is the reason the Non-Banking
Financial Companies (NBFCs) were able to function without too many
problems.

The problem started when IL&FS, i.e. one of the NBFC’s mismanaged its
funds. As a result, it is now not able to pay back its creditors. The end result is
that IL&FS stands exposed, and so does this faulty business model of the
NBFCs. Since the IL&FS panic has scared the investors away, the Non-
Banking Financial Companies (NBFCs) are not able to issue new debt in order
to roll over the old debt.

Mutual Funds: These Non-Banking Financial Companies (NBFCs) also

heavily relied on funds available from debt mutual funds. The problem is that
the NBFCs have caused a market crash. As a result, both retail and
institutional investors have reduced the quantum of investments in mutual
funds. As a result, the supply of funds from there has died down as well. This
has added to the woes of the Non-Banking Financial Companies (NBFCs).

Asset Quality Issues: A lot of these Non-Banking Financial Companies

(NBFCs) are classified as housing finance companies. They lend money either
to the developers or to the homebuyers. The end result is that the money lent
out by these companies is heavily invested in the housing sector. The problem

5
is that the Indian housing sector has gone bust. Stalwarts like Amrapali group,
Supertech, Unitech, etc. have all gone bust. This is the reason why the asset
quality of these Non-Banking Financial Companies (NBFCs) is also in
question. These companies are facing a double whammy with both their assets
and liabilities under increasing scrutiny. This is putting pressure on the net
worth of these companies and driving them towards insolvency.

6
 1.3CURRENT SCENARIO OF NBFCS
The base of today’s feebleness of Non-Banking Finance
Companies can perhaps be traced back to early nineties. The buoyant capital
market, in the first flush liberalization welcomed every issue with huge
premiums and massive over subscription. This was the signal for several
unscrupulous promoters to set up high profile finance companies and raise
money from both the capital markets and through public deposits.

The Reserve Bank of India for its past, progressively relaxed its
regulatory hold over the industry and made it possible for the companies with
little financial strength and even fewer scrupulous to raise large amounts of
money from an unsuspecting public. Hardly anyone knew or questioned how
these moneys were deployed. Soon afterward, the stock market scam broke
claiming its first victim from the non-banking finance companies sector. With
the capital market in disarray, it was no longer possible for continue of fund
flow, from investors who had burnt their fingers in the stock markets. It was
thus convenient fresh deposits. In July1996, the RBI, perhaps the most
sweeping changes in the non-banking finance companies regulation, virtually
pulled out all the stock, enabling companies to raise deposits with minimum
number and more significantly, removed the ceiling on interest rate.

At the point, when the government was faced with grim situation and
responding to the plea of the industry, the government set up a special task
force headed by Mr. C.M. Vasudev to recommend the steps for the orderly
growth of finance companies while keeping investor protection as its key
priority. The committee in its final report recognized the important role played
by these companies and warned against the tendencies to tar all the companies
with the same brush. The silent recommendations of the Vasudev committee
were

 Review of minimum capital requirement of Rs. 25lakhs for registration

purposes
 Higher capital adequacy ratio for non-banking finance companies seeking

7
 public deposits without credit rating
 Preview of prudential norms with ceiling for exposure to real estate and capital
markets
 Differential ceiling on public deposit acceptance for companies with and
without credit ratings
 A separate instrument to regulate and supervise non-banking finance
companies.

8
1.4STATEMENT OF THEPROBLEM IN NBFCs

As discussed above, the NBFCs in different areas in general and in housing

finance are playing significant role in society and also profitable to investors.
Due to competition between these institutions, the customers are getting
diverse housing finance schemes and attractive rates of interests; thereby these
NBFCs are also growing in terms of investment, deposits, loans, profits, etc.
Hence, the present study is made to evaluate the performance of NBFCs in
housing sector under the title Performance Evaluation of Non-Banking
Financial Companies in India (A Comparative Study of Select Companies).

Liquidity Squeeze and how it effects

This credit squeeze occurs in a situation where NBFC‘s decides not to lend
from their reserves due to a global cue or a occurrence of financial event with
its concerns to availability of short term funds.
Due to raise of interbank rates, hands of NBFC are tightened and borrowings
have become expensive, hence liquidty becomes deciding factor for its
business to continue in given economical situations. In Banks decide to lend
from their reserves, it is very difficult to replace the same with cheaper
borrowings from other institutions.
In India, NBFCs are the largest borrowers of funds from the financial system
over the past few years from Banks. According to the study conducted by
Edelweiss ,The proportion of mutual fund financing for NBFCs/HFCs has
gone up to as high as 32-33% while the supply from banking channel has
reduced to 39-44%,
Here is the question arises, why a commercial Bank has to Fund NBFC‘s. The
main reasons behind the same is
1. To cover the Exposure of subscription the commercial papers
2. Sanctioning a loan or line of credit
3. Buying existing loan book from them.
With reference to the above reasons, the failure is much associated to increase
of investment made in mutual funds by these NBFC‘s and stuck up in trap for
missing its current obligations. One of the recent studies conducted by

9
Edelweiss reveals that the proportion of short-term commercial papers (CPs)
has posted a four-fold jump to 31% from 12% in FY14. Due to tightening in
lending rates with retrospective impacts of increase of oil prices and weakling
of Indian rupees anecdotal evidence suggests that the sale of motorcycles,
tractors, plywood and cement have all slowed in the past few weeks with
consumers postponing purchases, as the result incoming cash flows are filtered
.This kind of impacts resulted in recent announcement of Digjam Ltd, one of
India's biggest exporters of woollen and worsted fabrics, announced its
temporary closure of its Jamnagar mill "in view of tight liquidity and
inadequate working capital position. Another Developer Supertech has also
defaulted the payments and current obligations. Hence the impact of this crisis
contributes towards GDP also , which was forecasted by The Survey of
Professional led by Reserve Bank of India showed that GDP growth for
Dec‘18 and Mar‘18 are likely to be in the lower end of 7-7.5% range. It is very
difficult for NBFC‘s if they divert incoming cash flows to service the current
obligations will certainly impact their ability to continue fresh lending
operations, which again fans the liquidity situation

10
 MEANING OF NBFCs

i. A financial institution which is a company;

ii. A non- banking institution and which has as its principal business the receiving
of deposits, under any scheme or arrangement or in any other rnanner, or
lending in any manner;
iii. A such other non-banking institution or class of such institutions, as the bank
may, with the previous approval of the Central Government and by
notification in the Official Gazette, s Specify.

1.5 DEFINATION OF NBFCs

According to the Reserve Bank (Amendment Act) 1997, a NBFC is defined

as,

(a) A financial institution which is a company,

(b) A non-banking institution which is a company and whose principal

business is to

receiving of deposits under any scheme/arrangement/in any other manner

or leading in any manner and

(c) other non- banking institutions/ class of institutions as the RBI may
specify.

Financial Institution (FI): Financial Institution [mentioned in S. 451()(i)

above] is definite
under Section 45-1(c) of the Reserve Bank of India Act, 1934 to mean any
non-banking
institutes which carries on as its business any of the following activities -
 Financing by way of loans, advances, and so on, any activity except its own:
 Acquisition of shares/stocks/bonds/debentures/securities;
 Hire-purchase;
 Any class of insurance, stockbroking etc.:

11
 Chit funds and
 Collection of money by way of subscription/sale of units or other
instruments/any other more and their disbursement.
 But does not include any institution whose principal business is that of
agriculture act
industrial activity, purchase or sale of any goods (other than securities) or
providing
services and sale purchase/construction of immovable property.

FAO Definition: As per RBI FAQ (Frequently Asked Questions) dated 10

January 2017
Banking Financial Company (NBFC)
 is a company registered under the Companies Act, 1956 and 2013
 engaged in the business of loans and advances, acquisition of shares stock/hen
cho
securities issued by Government or local authority or other securities of the
marble
leasing, hire-purchase, insurance business, chit business
 but does not include any institution whose principal business is that of
agriculture
industrial activity, purchase or sale of any pods (other than securities
services and sale/purchase construction of immovable property.

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 1.6TYPES OF NBFCs

There are different types of NBFCs fulfilling multiple objectives of the

investors and the borrowers. These are as follows:

i. Non-Banking Financial Company-Factors: NBFC-factors is that form of

NBFCs which functions as a factoring business. At least 50% of the total
assets, is the financial assets, and the business income should constitute at least
50% of the gross income.
ii. Investment Companies: The principal function of an investment company is
dealing in securities.
iii. Mutual Benefit Finance Company: These companies invest the money
collected by multiple investors or customers having similar investment
objective, and pool the clubbed amount into the particular securities or bonds.
iv. Asset Finance Company (AFC): An asset finance company usually provides
a loan for the purchase of physical assets. These are used for business or
production purpose such as automobiles, machinery, equipment, etc. The

13
 income generated by an AFC should not be less than 60% of its total assets or
income.
v. Equipment Leasing Company: The companies which either give out
equipment on lease or carry out the financing of such lease contracts are
known as equipment leasing company.
vi. Hire-Purchase Company: These companies provide the facility of buying
goods on instalment where the hirer, i.e. the buyer needs to pay the amount
(principal + interest) regularly in parts; till the total payment is made to the
hire.
vii. Housing Finance Company: The housing finance companies are engaged in
providing loans to the clients for constructing or acquiring houses along with
the development of the land available.
viii. Loan Company: Except for the AFC, any company sanctioning loans or
advances to the public for any activity is called a loan company.
ix. Residuary Non-Banking Company: The RNBCs are engaged in accepting
deposits as per specific schemes or arrangements or through other means
except the loan company, investment or asset financing.
x. Infrastructure Finance Company (IFC): These NBFCs grant loans (project
loans and term loans) to the companies belonging to the infrastructure sector
including social and commercial infrastructure, transport, communication,
water, energy and sanitation.
xi. Non-banking Financial Company: Micro Finance Institution (NBFC-MFI):
A NBFC-MFI is that NBFC which has at least 85% of assets as qualifying
assets, i.e. microfinance or the funds given out as loans; without any collateral
and the repayment is in the form of regular instalments.
xii. Infrastructure Debt Fund: Non-Banking Finance Company (IDF-NBFC):
With the aim of generating fixed income on the investment value, these
NBFCs engage the client’s funds into the infrastructure sector for the long
term.
xiii. Systematically Important Core Investment Company (CIC-ND-SI): The
companies which own a net asset of at least Rs. One hundred crores out of
which 90% of the value is invested in the shares and debts while 60% of it
must be out into equity shares or other instruments which can be easily
converted into cash.
14
xiv. Chit Fund Company: A chit fund company runs, manages and controls
various chit schemes by making the subscribers or investors subscribe for such
plan by paying the sum in regular instalments up to a specific period. Every
subscriber is then liable to receive a prize amount as per the lot, tender or
auction.

1.7CHARACTERISTICS OF NBFCs

i. 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 on demand.
ii. NBFCs cannot offer interest rates higher than the ceiling rate 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.

15
 iii. NBFCs cannot offer gifts/incentives or any other additional benefit to the
depositors.
iv. NBFCs (except certain AFCs) should have minimum investment grade credit
rating.
v. The deposits with NBFCs are not insured.
vi. The repayment of deposits by NBFCs is not guaranteed by RBI.
vii. There are certain mandatory disclosures about the company in the Application
Form issued by the company soliciting deposit.
viii. NBFC registration is easier as compared to Bank license.
ix. The Banks look into the financial needs of large business, whereas NBFC are
more concentrated on small borrowers.
x. The loan processing facility of NBFC is faster than what most banks provide.
xi. The banks are more stringent when it comes to giving loans. They have long
paperwork with strict eligibility and requirements.
xii. When a borrower takes a gold loan, the NBFC gives leverage to them for
repaying their regular interest throughout the term of the loan and pay the
principal in the end. But it is different in case of banks, both the principal and
interest have to be paid at regular intervals.

1.8ROLE OF NBFC

(1) Indian Financial System: The Non-Banking Financial Companies (NBFCS)

are inimportance in thefinancial sector-the third largest segment after the
scheduled commercial bank port SCB 16and insurance companies (14%),
according to RBI statistics 2014. They are complementarythe banking system,
capable of absorbing shocks and spreading risks at times of financial distress.

16
 They play a crucial role in broadening access to financial services, enhancing
competitiondiversifying the financial sector.

(2) Deposit - Credit Gap: NBFCs are financial intermediaries engaged

primarily in the businessaccepting deposits and delivering credit. NBFCs reach
out to inaccessible areas for depositscater to the specialised credit requirements
of certain classes of borrowers

(3) Financial Inclusion: NBFCs help achieve financial inclusion by serving the
unbankedpopulation in turalsemurhan und urban areas. NBFCS also provide
services to the microtaland medium enterprises (MSMEs) segment. NBFCS
provide a range of services such as birtpurchase finance, equipment lease
finance, loans, and investments.

(4) Key Advantages: NBFCS hoy advantages of cost efficiency, refined

product lines, benecustomer services, niche segmentation, simplified
procedures and a focused credit approud. These key factors increase the
profitability of NBFCS, making.

CATEGORIES OF NBFCs

i. Loan Companies

ii. Investment Companies

iii. Hire Purchase Companies

17
iv. Leasing Companies

v. Mutual Benefits Finance Companies

vi. Housing Finance Companies

i. Equipment leasing company – Any company, which is a financial institution,

carrying on its principal business. The activities of leasing of equipment of the
financing of such activity.

ii. Hire purchase finance company – A company, which is a financial institution,

carrying on its principal business, hire purchase transaction.

iii. Investment Company – A company, which deals with acquisition of securities.

iv. Loan Company – A company, which is a financial institution and carries on its
principal business of providing finance by any activities other than its own.

v. Mutual benefit finance company – A company, which is a financial institution.

This is notified by the central government under section 620 (a) of The
Companies Act 1956.

RBI REGULATIONS

18
 Given the nature of these companies, through Chapter III B of the Reserve
Bank of India Act, 1934 the Reserve Bank of India (RBI) was entrusted with
the regulation and supervision with the following objectives;
i. to ensure healthy growth of the financial companies:
ii. to ensure that these companies function as a part of the financial system within
the policy
iii. framework, in such a manner that their existence and functioning do not lead
to systemic aberrations, and
iv. to sustain the quality of surveillance and supervision exercised by the Bank
over the NBFCs by keeping pace with the developments that take place in this
sector of the financial system.

MANDATORY REGISTRATION
(1) Registration and NOF: Section 45-1A of the Reserve Bank of India Act,
1934 provides that a non-banking financial company shall not commence or
carry on business of a non-banking financial institution without-
(a) obtaining a certificate of registration issued under Chapter III B of the said
Act and
(b) having the net owned fund of two hundred lakh rupees (as per the RBI
Notification No.
DNBS 132 / CGM (VSNM) - 99, dated 20/04).

(2) Certificate of Registration: An application is to be made to Reserve Bank

of India in prescribed form along with necessary documents for registration.
The RBI issues Certificate of Registration after satisfying itself that the
conditions as enumerated in Section 45-1A of the RBI Act, 1934 are satisfied.

19
1.9 Case Study
1.Infrastructure Leasing & Financial Services Ltd. (IL&FS)
1.1 COMPANY INTRODUCTION
The leading factor affecting the performance of Indian Economy is the
Infrastructure sector. This sector aims at creating adequate infrastructure in a
time bound situation and enjoys the focus of the government; also it is majorly
responsible for India’s overall development. This sector includes areas which
are the basic needs in an economy like: bridges, dams, roads. In World Bank's
Logistics Performance Index India ranked at 44th position last year. In the
terms of growth of existing financial firms and new entries of financial firms
the diversified financial sector of India is undergoing an expansion at great
rate. In infrastructure development and financial services the completion of
project successfully depends on visioning, documentation, development and
finance, to management, technology and execution. Through the financial
services a financial service firm involves in developing innovative, layered and
competitive financial solutions for infrastructure development.
Infrastructure Leasing & Financial Services Limited is one of India's leading
infrastructure development and finance companies. Its central mandate is
catalysing the development of innovative world-class infrastructure in the
country.
For over 25 years, we have focused on commercializing infrastructure projects
and creating value-added financial services to become a proactive partner in
India’s growth story.
Widely acknowledged as the pioneer of Public Private Partnership (PPP) in
India, the IL&FS Group has, through a variety of projects, benchmarked the
private sector’s role in and commitment towards infrastructure development in
India.
IL&FS has 256 group companies as of 2018, including subsidiaries, joint
venture companies and associate entities. Though on the surface, the company
appears to have 23 direct subsidiaries, 141 indirect subsidiaries (including
special purpose vehicles for different projects), 6 joint ventures and 4 associate
companies, each of them is further subdivided into additional legal entities,

20
with much cross ownership as well as ownership by investment vehicles of
various governments.
While some of its subsidiaries (such as IL&FS Transport) ran into high losses
in 2018 and found it difficult to repay their loans, others (such as IL&FS
investment managers) posted profits of Rs.725 million in 2018, a 33% Profit
after tax.

OBJECTIVES
1. The purpose of this study is to understand the role of infrastructure
development and financial services institutions in helping the economy, by
financing them for infrastructure development of a country.
2. This paper aims at tracing the solutions for the crisis of IL&FS

SCOPE
1. The scope of this research is made with regard to the crisis of IL&FS.
2. This research includes the information regarding IL&FS crisis till February
2019.
3. The research includes the opinions of other researches regarding IL&FS
crisis and infrastructure development and financial services sector.

LIMITATIONS
1. The research is restricted to the case of IL&FS.
2. This research is based purely on the secondary data. So evaluating the
existing data was not possible.

21
1.2 COMPANY BACKGROUND

In 1987 IL&FS was formed by three financial institutions, Central Bank of

India, Housing Development Finance Corporation (HDFC) and Unit Trust of
India (UTI), to provide loans for major infrastructure projects. After few years
two big international institutions, namely Mitsubishi (through Orix corporation
Japan) and the Abu Dhabi Investment authority bought the shares of IL&FS.
Subsequently, Life Insurance Corporation India, Orix and ADIA became
its largest shareholders, a pattern that continues to this day.

22
Infrastructure Lending and Financial Services (IL&FS) has more than 250
subsidiaries. IL&FS has financed some of the largest infrastructural projects in
India – for e.g. Chennai-Nashri tunnel (longest road tunnel in India) & is
considered as a pioneer in PPP projects. IL&FS was envisioned to provide
long term big infrastructure loans which the banks were reluctant to provide.

From July to September 2018, two subsidiaries of IL&FS’s reported having

trouble paying back loans and inter corporate deposits to other banks and
lenders, resulting in the RBI requesting its major share holders to rescue it.
Recently, Government of India has taken control of IL&FS’s, after it failed to
pay off debt payments. Since this move by the government there has been an
increase in volatility in the stock markets. A new board was constituted as the
earlier board was deemed to have failed to discharge its duties. The new board
consists of Kotak Mahindra Bank managing director Uday Kotak, former IAS
officer & Tech Mahindra head Vineet Nayyar, former Sebi chief G N Bajpai,
former ICICI Bank chairman G C Chaturvedi, former IAS officers Malini
Shankar and Nand Kishore.
IL&FS has been recognized as systematically important institution due to the
size of Infrastructure projects it funds. If IL&FS fails then there will be
repercussions in various fields like agriculture, education, health, sanitation
etc.

23
 Reasons for failure of IL&FS

Lack of regulators
i. Rating Agencies – The rating agencies gave IL&FS an AAA rating and this
encouraged investment in the company but now they have changed the

rating of IL&FS as junk.

ii. Shareholders – Major shareholders failed to monitor the company that

they invested in.

iii. Board of Directors – All the senior officers have resigned from their posts.

iv. RBI – RBI is considering itself a regulator today but it could have
monitored the situation before the crises unfolded.

v. Government of India –It never properly assigned any regulator.

24
 Source and use of funds
i. Increase in interest rates of short term borrowings.
ii. Loans skewed in the long term – Most debts that IL&FS had to pay off

were short term while the loans it had granted were majorly long term.
iii. Lacking transparency in financial position and too many loans to own

subsidiaries.
iv. No clear distinctions between public & private projects.

Complex company Structure

i. Too many subsidiaries – with more than 250 subsidiaries, the auditing
and monitoring of the company is difficult for any auditing firm or

regulator.

Ethical Issue
i. Crony capitalism – there have been known cases where things were

hidden deliberately & unviable projects were sanctioned to please the

ruling parties.

Effects of IL&FS crises

i. Loss of confidence of investors.

ii. Many mutual funds have invested in its Bonds, Certificate of Deposits. The
default and further fear of default is contagious to all financial markets which
resulted in loss of money for many investors during last few months.
iii. Government decision to pump more funds to meet with crises can result in
widen of fiscal deficit which has adverse repercussion on inflation, exchange
rate, growth etc.

25
1.3 COMPANY CHAIRMAN & BOARD OF DIRECTORS

CHAIRMAN: Mr Uday Kotak

VICE CHAIRMAN: Mr Vineet Nayyar

MANAGING DIRECTOR: Mr CS Rajan

DEPUTY MANAGING DIRECTOR: Mr Bijay Kumar

DIRECTOR: Mr Srinivasan Natarajan

DIRECTOR: Mr GC Chaturvedi

DIRECTOR: Mr Nand Kishore

DIRECTOR: Dr Malini Shankar

26
ROLE OF INFRASTRUCTURE DEVELOPMENT AND FINANCIAL
SERVICES IN DEVELOPMENT OF A COUNTRY’S ECONOMY
1. It helps in increasing agricultural production and productivity:
Infrastructure investment made in a region helps to increase that regions
competitive advantage. Which results in the increase of production of
agricultural products also increases its productivity. And that’s why
agricultural infrastructure needs adequate amount of investment.
2. Industrial growth accelerates:
The productivity of industries is increased by good infrastructure. So, adequate
infrastructure would help in rapid growth of industrial development. This also
helps in increasing the competitiveness of industrial sector.
3. The flow of foreign capital increases:
In the era of globalization attracting foreign capital becomes easier by having
world class infrastructure. There will be flow of FDIs and portfolio
investments in those countries where there are adequate infrastructure facilities
available.
4. Generation of employment opportunities:
Mobility, productivity, and efficiency of labour is improved. And
infrastructure is the foundation for investments, development of agriculture
and industry which creates employment opportunities.
5. Contribution to the development of tourism:
Infrastructure development is need of the hour in tourism industry; many
tourists’ spots remain unnoticed due to lack of adequate infrastructure
development. It is needed to notice and develop this industry, as it is major
source of revenue.

27
1.4 PROFIT & LOSS
Consolidated Profit & Loss account ------------------- in Rs. Cr. -------------------
  Mar '19 Mar '18 Mar '17 Mar '16 Mar '15

  12 mths 12 mths 12 mths 12 mths 12 mths

Income
Sales Turnover 1,239.14 1,868.76 1,817.71 2,131.54 2,782.72
Net Sales 1,239.14 1,868.76 1,817.71 2,131.54 2,782.72
-
Other Income 277.12 202.07 134.35 117.54
1,618.34
Stock Adjustments 0.00 0.00 0.00 1.60 9.30
Total Income -379.20 2,145.88 2,019.78 2,267.49 2,909.56
Expenditure
Raw Materials 437.78 540.72 548.99 1,006.00 815.18
Power & Fuel Cost 0.00 0.00 0.00 5.14 5.06
Employee Cost 142.84 146.60 105.73 140.82 319.09
Other Manufacturing Expenses 0.00 795.15 791.93 903.75 1,297.99
Miscellaneous Expenses 746.60 230.04 228.00 282.64 156.74
Total Expenses 1,327.22 1,712.51 1,674.65 2,338.35 2,594.06
  Mar '19 Mar '18 Mar '17 Mar '16 Mar '15

  12 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit -88.08 156.25 143.06 -205.21 197.96

-
PBDIT 433.37 345.13 -70.86 315.50
1,706.42
Interest 290.18 409.38 348.81 308.08 273.48
-
PBDT 23.99 -3.68 -378.94 42.02
1,996.60
Depreciation 36.75 44.54 47.95 56.36 64.18
-
Profit Before Tax -20.55 -51.63 -435.30 -22.16
2,033.35
-
PBT (Post Extra-ord Items) -20.55 -51.63 -435.30 -22.16
2,033.35
Tax 10.44 -3.71 0.43 1.82 0.95
-
Reported Net Profit -20.46 -29.00 -437.12 -23.11
2,043.79
Minority Interest 0.00 0.00 0.00 -111.37 -12.21
Share Of P/L Of Associates -1.01 -32.00 -5.77 0.00 0.00
Net P/L After Minority Interest & Share Of
-402.36 15.16 -46.29 -325.75 -10.90
Associates
Total Value Addition 889.44 1,171.79 1,125.66 1,332.35 1,778.88
Per share data (annualised)
Shares in issue (lakhs) 1,311.20 1,311.21 1,311.21 1,211.59 1,121.23
Earning Per Share (Rs) -155.87 -1.56 -2.21 -36.08 -2.06

28
Book Value (Rs) -140.17 -2.39 -3.31 -9.77 11.76

1.5 BALANCE SHEET

Consolidated Balance Sheet ------------------- in Rs. Cr. -------------------
  Mar '19 Mar '18 Mar '17 Mar '16 Mar '15

  12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds
Total Share Capital 131.12 170.87 170.87 213.91 249.12
Equity Share Capital 131.12 131.12 131.12 121.16 112.12
Preference Share Capital 0.00 39.75 39.75 92.75 137.00
-
Reserves -162.46 -174.47 -239.52 19.69
1,969.04
-
Networth 8.41 -3.60 -25.61 268.81
1,837.92
Secured Loans 1,338.86 2,052.26 1,830.77 1,838.00 1,778.04
Unsecured Loans 0.00 0.00 0.00 144.82 111.58
Total Debt 1,338.86 2,052.26 1,830.77 1,982.82 1,889.62
Minority Interest 0.00 -107.79 -110.94 -94.16 18.30
Total Liabilities -499.06 1,952.88 1,716.23 1,863.05 2,176.73
  Mar '19 Mar '18 Mar '17 Mar '16 Mar '15

  12 mths 12 mths 12 mths 12 mths 12 mths

Application Of Funds
Gross Block 120.81 259.66 221.80 727.06 692.63
Less: Accum. Depreciation 0.00 79.38 44.65 529.58 507.54
Net Block 120.81 180.28 177.15 197.48 185.09
Capital Work in Progress 0.00 2.98 6.78 8.54 2.24
Investments 59.58 318.91 277.88 284.17 284.17
Inventories 89.79 1,020.78 725.35 872.96 1,107.10
Sundry Debtors 155.25 494.72 403.75 594.38 795.75
Cash and Bank Balance 29.36 28.48 21.94 21.66 40.10
Total Current Assets 274.40 1,543.98 1,151.04 1,489.00 1,942.95
Loans and Advances 2,793.04 3,260.14 2,694.33 2,016.01 1,922.15
Total CA, Loans & Advances 3,067.44 4,804.12 3,845.37 3,505.01 3,865.10
Current Liabilities 3,477.73 3,286.21 2,519.57 2,064.96 2,123.17
Provisions 269.16 67.20 71.38 67.19 36.70
Total CL & Provisions 3,746.89 3,353.41 2,590.95 2,132.15 2,159.87
Net Current Assets -679.45 1,450.71 1,254.42 1,372.86 1,705.23
Total Assets -499.06 1,952.88 1,716.23 1,863.05 2,176.73

29
Contingent Liabilities 0.00 1,714.68 1,764.24 1,882.29 1,791.23
Book Value (Rs) -140.17 -2.39 -3.31 -9.77 11.76

1.7 CASE STUDY TOWARDS LIQUIDITY CRUNCH

IL & FS is india‘s one of the largest infrastructure companies which manages

infrastructure funding projects across india established in 1982 . The IL&FS
Ltd is an unlisted holding company — which is the parent corporation to at
least 24 direct subsidiaries, 135 indirect subsidiaries, four associate companies
and six joint ventures.
IL&FS has institutional shareholders comprising SBI, LIC, ORIX Corporation
of Japan and Abu Dhabi Investment Authority (ADIA). As on March 31, 2018.
The largestshare holders are LIC and ORIX Corporation with their stake at
25.34 per cent and 23.54 per cent, respectively. Other prominent shareholders
include ADIA (12.56 per cent), HDFC (9.02 per cent), CBI (7.67 percentage
and SBI with 6.42 percentage
Main reason for failure of Debt-ridden IL&FS, in which various corporates,
as well as mutual funds and insurance firms, had invested through short-term
instruments like commercial papers and non-convertible debentures (NCDs),
has been defaulting on its several debt-obligations since August 18.
IL&FS‘ borrowings from banks and financial institutions adds to nearly Rs
63,000 crore as per the balance sheet of 2017-2018, hence is this a asset
liability mismatch which resulted in crisis of the enterprises. The Infrastructure
Leasing & Financial Services (IL&FS) has debt of nearly Rs 1 lakh crore —
and is facing a massive liquidity crunch at present. Analysts at Nomura
Research have reportedly estimated that 64% of these loans are from banks,
almost all of them state-owned.
According to reports, the IL&FS Financial Services Ltd has loan repayments
worth $500 million (Rs 3,600 crore) coming up in the second half of this

30
financial year. However, it has cash amounting to only $27 million (around Rs
194 crore).
The IL&FS Financial Services Ltd has already defaulted in repaying a short-
term loan of Rs 1,000 crore to the Small Industries Development Bank of India
(SIDBI). One or more subsidiaries of IL&FS are also reported to have
defaulted in repaying loan worth about Rs 500 crore. According to Money
Life, since IL&FS Financial Services Ltd is a Non-Banking Financial
Company (NBFC), it is not covered under the Insolvency and Bankruptcy
Code (IBC).
On September 17,-2018 credit-rating agency ICRA downgraded the
company‘s creditworthiness to ‗D‘ (default grade), after it could not meet its
repayment obligation for short-term and longterm borrowings worth more than
Rs 12,000 crore. Credit rating agency CARE also downgraded several
subsidiaries of IL&FS.
According to reports, the company needs to immediately raise capital between
Rs 3,000 crore and Rs 4,000 crore — and there are talks of the Life Insurance
Corporation (LIC) bailing it out.

Present actions of RBI to overcome the liquidity

According to RBI data, outstanding bank credit to all industry stood at 27.01
trillion in the fortnight ended 28 September, up 2.6% from the year-ago period.
Loans to NBFCs stood at ₹5.46 trillion on the same fortnight, up 41.5% from
the same period last year.
This is the latest disaggregated sectorial data available from RBI. Currently
RBI has inducted Rs 40,000 crores through the government securities to meet
the liquidity demand ahead of the festive season
In October, the central bank infused Rs 36,000 crore through open market
operations in order to improve sustainability in crisis
Currently RBI has allowed banks to lend up to 15% of their capital funds to a
single non-infra funding NBFC from the earlier 10%. The measures are
available up to 31 December this year.

31
2.Dewan Housing Finance Corporation Ltd. (DHFL)
2.1 COMPANY INTRODUCTION
Dewan Housing Finance Corporation Ltd. (DHFL) is a deposit-taking
housing finance company, headquartered in Mumbai with branches in major
cities across India. DHFL was established to enable access to economical
housing finance to the lower and middle income groups in semi-urban and
rural parts of India. DHFL is the second housing finance company to be
established in the country. The company also leases commercial and
residential premises. DHFL is among the 50 biggest financial companies in
India.
Dewan Housing Finance Corporation Limited operates in the Personal credit
institutions sector. In addition to historical fundamental analyses, the complete
report available to purchase compares Dewan Housing Finance Corporation
Limited with three other companies in this sector in India: L&T Finance
Holdings Ltd (2019 sales of 128.43 billion Indian Rupees [US$1.79 billion]
of which 39% was Wholesale Business), Indiabulls Housing Finance
Ltd (164.52 billion Indian Rupees [US$2.30 billion] of which 100% was
Housing Finance), and Mahindra & Mahindra Financial Services
Ltd (103.71 billion Indian Rupees [US$1.45 billion] of which 98% was
Financing Activities).

Sales Analysis. Dewan Housing Finance Corporation Limited reported sales

of 126.76 billion Indian Rupees (US$1.77 billion) for the fiscal year ending
March of 2019. This represents an increase of 20.6% versus 2018, when the
company's sales were 105.15 billion Indian Rupees. Sales at Dewan Housing

32
Finance Corporation Limited have increased during each of the previous five
years (and since 2014, sales have increased a total of 155%).

Stock Price:
Current Price (2/20/2020): 11.25

33
2.2 COMPANY HISTORY
DHFL was established and incorporated by Rajesh Kumar Wadhawan on 11
April 1984. The name of the company was changed to Dewan Housing
Development Finance Ltd. and later to Dewan Housing Finance Corporation.
In 2010, DHFL acquired Deutsche Postbank Home Finance unit for
₹1079 crores. On 18 December 2013, DHFL acquired 74% stake DLF
Pramerica Life Insurance Company Ltd.
On 29 January 2019, Cobra Post claimed an exposé of DHFL for using shell
corporation to siphon up ₹ 31,000 crore loan from various banks for their
own personal gains. DHFL has filed a response with BSE saying this is untrue.
DHFL, rebutted these allegations in a Hosted Investors / Analysts conference
& clarified that ₹ 31,000 crore loans mentioned in the allegation comprise its
Project Loan Portfolio. Also that these Advances commented by CobraPost
should be ₹ 21,000 Crores and not ₹ 31,000 Crores as alleged. Post
CobraPost allegations Rating agencies reaffirmed their High Safety Rating for
Instruments issued by DHFL.
On 6 June 2019, The DHFL shares tanked 16% after the company defaulted
on debt repayment. This was a five and a half year low. And has left investors
wondering whether to stay in the game or not.

On 20th November 2019, the Reserve Bank of India superseded the Board of
Directors of the company owing to governance concerns and defaults by
DHFL in meeting various payment obligations.

34
2.3 CHAIRMAN & BOARD OF DIRECTOR

Alok Kumar Misra - Independent Director

AsishSaraf -Chief Risk Officer

Deepali Joshi - Independent Director

Dheeraj Wadhawan - Non Executive Director

HarshilMehte - Executive President

Kapil Wadhawan - CEO

Kapil Wadhawan - Chairman

Naveen Manghani - Asst. Company Secretary

Naveen Manghani - Secretary

Satya Narayan Baheti - Co. Secretary

Srinath Sridharan - Non Executive Director

Sunil Kumar Bansal - Chief Financial Officer

Sanjay Joshi - Independent Director

35
2.4 PROFIT & LOSS

Consolidated Profit & Loss

------------------- in Rs. Cr. -------------------
account
  Mar '19 Mar '18 Mar '17 Mar '16 Mar '15
  12 mths 12 mths 12 mths 12 mths 12 mths
Income
Sales Turnover 12,882.14 10,849.40 9,609.90 7,851.60 6,419.61
Net Sales 12,882.14 10,849.40 9,609.90 7,851.60 6,419.61
Other Income 30.40 39.40 1,861.19 5.05 2.72
Total Income 12,912.54 10,888.80 11,471.09 7,856.65 6,422.33
Expenditure
Employee Cost 485.33 370.25 391.68 323.55 258.68
Other Manufacturing Expenses 2,458.37 0.00 0.00 0.00 0.00
Selling and Admin Expenses 74.89 80.52 147.93 138.68 0.00
Miscellaneous Expenses 1,529.02 963.12 937.40 751.73 710.38
Total Expenses 4,547.61 1,413.89 1,477.01 1,213.96 969.06
Operating Profit 8,334.53 9,435.51 8,132.89 6,637.64 5,450.55
PBDIT 8,364.93 9,474.91 9,994.08 6,642.69 5,453.27
Interest 9,416.91 7,744.02 6,674.37 5,491.95 4,460.24
PBDT -1,051.98 1,730.89 3,319.71 1,150.74 993.03
Depreciation 51.15 27.63 43.46 29.84 27.07
Profit Before Tax -1,103.13 1,703.26 3,276.25 1,120.90 965.96
PBT (Post Extra-ord Items) -1,103.13 1,703.26 3,276.25 1,120.90 965.96
Tax -120.08 461.03 479.90 376.75 324.70
Reported Net Profit -983.93 1,244.56 2,796.35 744.15 641.26

36
2.5 BALANCE SHEET

Consolidated Balance Sheet ------------------- in Rs. Cr. -------------------

  Mar '19 Mar '18 Mar '17 Mar '16 Mar '15
  12 mths 12 mths 12 mths 12 mths 12 mths
Sources Of Funds
Total Share Capital 313.82 313.66 313.15 291.80 145.68
Equity Share Capital 313.82 313.66 313.15 291.80 145.68
Share Application Money 0.00 0.00 0.00 125.00 0.00
Reserves 7,623.55 8,684.35 7,417.45 4,972.99 4,835.75
Networth 7,937.37 8,998.01 7,730.60 5,389.79 4,981.43
Secured Loans 93,998.92 91,979.34 62,141.90 42,776.15 33,911.27
Unsecured Loans 0.00 0.00 9,127.20 8,779.92 6,597.65
Total Debt 93,998.92 91,979.34 71,269.10 51,556.07 40,508.92
Policy Holders Funds 0.00 0.00 0.00 638.34 422.20
Total Liabilities 101,936.29 100,977.35 78,999.70 57,584.20 45,912.55
Application Of Funds
Gross Block 913.16 870.44 301.55 588.14 253.95
Less: Accum. Depreciation 48.48 20.65 90.87 80.25 62.89
Net Block 864.68 849.79 210.68 507.89 191.06
Capital Work in Progress 104.01 129.05 633.77 590.36 810.06
Investments 2,487.22 8,120.33 13,509.49 1,810.70 1,751.28
Sundry Debtors 4.76 42.74 12.43 218.20 196.14
Cash and Bank Balance 3,000.68 2,953.50 3,430.09 3,496.90 687.49
Total Current Assets 3,005.44 2,996.24 3,442.52 3,715.10 883.63
Loans and Advances 100,140.65 94,249.06 74,493.61 62,620.50 51,793.11
Total CA, Loans & Advances 103,146.09 97,245.30 77,936.13 66,335.60 52,676.74
Current Liabilities 4,655.56 5,360.83 12,575.13 11,002.25 9,048.06
Provisions 10.15 6.29 715.24 658.10 468.53
Total CL & Provisions 4,665.71 5,367.12 13,290.37 11,660.35 9,516.59
Net Current Assets 98,480.38 91,878.18 64,645.76 54,675.25 43,160.15
Total Assets 101,936.29 100,977.35 78,999.70 57,584.20 45,912.55

37
2.6 CASH FLOW STATEMENT

Cash Flow Margin

9,922.0bps
-67.7%
PEER RANGE
-418.1

177.6
Cash Flow Solvency

1,045.0bps
-9.3%
PEER RANGE
-39.1

28.5
Cash Flow ROA

938.0bps
-8.6%
PEER RANGE
-33.0

24.2

38
2.7 CASE STUDY TOWARDS LIQUIDITY CRUNCH

DHFL has Rs 850 crore of outstanding commercial papers of which Rs

750 crore is due in June 2019. The first CP maturity is on June 7, 2019

Dewan Housing Finance Ltd (DHFL) delayed interest rate payments on June

4, which has hit the net asset values (NAVs) of debt funds. Mutual funds had

lent to the company in the form of debt securities.

The NAVs of several debt schemes fell by 6-53 percent on June 4, reflecting

the marked-down value of their holdings in DHFL paper.

The non-banking finance company with a focus on housing finance has

reportedly missed interest payments of Rs 960 crore. Valuation norms require

a write-down in the value of assets in case of such payment delays.

DHFL has faced a series of downgrades by rating agencies on its debt over the

past two months.

According to the rating agencies, DHFL has Rs 850 crore of outstanding

commercial papers of which Rs 750 crore is due in June 2019. The first CP

maturity is on June 7, 2019.

Scheduled aggregate cash outflows (including loan repayment and

securitisation payouts) till July 2019 remains high at an estimated Rs 6,200

crore.

As per CNBC TV18 report, DHFL is likely to default on payments on non-

convertible debentures (NCDs) worth Rs 1,150 due to liquidity concerns.

In order to ease liquidity situation, DHFL and Wadhawan Global Capital have

sold stake in many of their subsidiaries.

39
In February, Wadhawan Global Capital (WGC) had announced that it was

selling its entire 70 percent stake in the affordable housing finance company,

Aadhar Housing Finance Ltd (AHFL), to Blackstone. DHFL, which held a

9.15 percent stake in AHFL, had also exit the company.

Also, in March, Wadhawan Global Capital had entered into a definitive

agreement with an affiliate of the Warburg Pincus Group to sell its entire
49.04 percent stake in its education finance subsidiary Avanse Financial
Services Ltd.
Here's the timeline on the sequence of events:

— Sep 21: DHFL got attention when DSP Mutual Fund sold Rs 300 crore of

DHFL papers at 11 percent in the secondary market, way higher than the

traded rates sparking speculation that DHFL could be facing liquidity issues,

which has been strongly denied by the company.

 —Jan 29: An online investigative portal alleged that DHFL promoters had
lent money to ‘shell companies’ allegedly linked to the promoters who have
used this money to buy assets abroad.

—March 7: Its share price post the accusation fell further, prompting Care to

downgrade the ratings of various debt instruments of DHFL by a notch.

—May 19: CARE Ratings downgraded DHFL's FD programme worth Rs

20,000 crore from ‘A’ to ‘BBB-‘. CARE A signifies “low” credit risk, while

CARE BBB- signifies “moderate” credit risk.

— May 21: DHFL stopped acceptance and renewal of fixed deposits. Also

stopped renewals and premature withdrawals from existing fixed deposits on

hold.

—May 30: Informed the stock exchanges that it will not be able to furnish the

audited standalone and consolidated financial statements for FY19 within the

time stipulated by SEBI norms.

40
—June 4: Delayed interest payment on its bonds and bond repayments worth

Rs 960 crore due on June 4.

—June 5: ICRA, CRISIL, CARE and Brickwork Ratings (Brickwork) have

downgraded credit ratings on commercial papers of DHFL to 'D' (Default)

owing to liquidity concerns.

Under the stress test, the banking regulator calculates capital ratio of the financial

service companies under several adverse scenarios. The US Federal Reserve

conducted a stress test for the banking sector after the financial crisis in 2008 to

ensure banks have enough reserves.

The latest disclosure by DHFL has raised doubt on the collection efficiency of
NBFCs. This could potentially show down banks buying loans from NBFCs
under priority sector loans. The securitization of loans from NBFC to banks
rose to Rs 1.90 lakh crore in FY19 compared with Rs 0.83 lakh crore in the
FY18, according to data compiled by Kotak Institutional Equities. If banks
slow down the securitisation portfolio, it will be detrimental to borrowing
plans of NBFCs.

41
 CHAPTER 2

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

Research can be defined as “A Scientific and Systemic Search for pertinent

information on a specific topic”. Therefore, research could be understood as an
organized activity with specific objectives on a problem or issues supported by
compilation of related data and facts, involving application of relevant tools of
analysis and deriving logically on originality.

RESEARCH DESIGN

Research Design is the arrangement of condition for collection and

analysis of data in manner that aims to combine relevance to the research
purpose with the economy in procedure. Research Design is important
primarily because of the increased complexity in the market as well as
marketing approaches available to the researchers. A research design specifies
the methods and procedures for conducting a particular study.

42
TYPE OF RESEARCH

ANALYTICAL RESEARCH

In this type of research has to use facts or information already

available, and analyze these to make a critical evaluation of the material. The
researcher depends on existing data for his research work. The analysis
revolves round the material collected or available.

SOURCE OF DATA

SECONDARY DATA

Secondary Data refers to the information or facts already collected such data
are collected with the objectives of understanding the past status of any
variable or the data collected and reported by some source is accessed and
used for the objective of a study. Normally in research, the scholars collect
published data, journals, annual reports and websites.

43
EVOLUTION, GROWTH AND DEVELOPMENT OF NBFC’s
IN INDIA
Till recently NBFCs and Unincorporated Bodies have been competing and
complementing the services of commercial banks all over the world. While, the
financial system in a country generally develops through a process of gradual
evolution, it has been observed that here is a stage in the evolutionary process
wherein the growth of NBFCs is more pronounced than other components of
the financial system. Further, they take different forms and sizes depending
upon the needs of their clientele. Thus, in the United States of America, the
growth of NBFCs was more pronounced during the first three decades of
twentieth century and two of the top five commercial lenders are NBFCs and
three of the four top providers of consortium finance are non-bank firms at
present. In India such marked growth in the non-bank financial sector was
noticed in the last three decades. The NBFCs, as a group, have succeeded in
broadening the range of financial services rendered to the public during this
period. The evolution, growth and proliferation of financial intermediariesare
essentially the reflection of the different forms of savings (resource) flows and
different types of investment (uses) of such funds – whether for current
working capital needs or for capital investments and as between different
sectors of the economy.

Sources of Financing
This section examines the salient indicators of NBFCs with regard to the
borrowings and their key ratios which help to understand the growth in the
financing activity. Chart 1 exhibits the total outstanding borrowings (long term
borrowings, short term borrowings and current maturity of long term
borrowings) of the sample NBFCs under study. The total outstanding
borrowings of all three categories are Rs. 16.5 lakh crs in FY18 having
increased from Rs. 8.5 lakh crs inFY13

Chart 1: Total outstanding borrowings (Rs. lakh crs)

44
Credit Disbursement
This section deals with the asset side of the balance sheet focusing on the
credit granted by the NBFCs to the varied sectors to fund their requirements.
The NBFC sector has traditionally funded both the industrial and the retail
segments. The RBI study states that while industry has received about 2/3rd of
the total credit by these companies, there has been a significant jump in the
share of retail credit from 3.4% in FY15 to 17.7% in FY17. Chart 2 shows that
total credit disbursed by these sample companies under study and the growth in
the total credit across the timeperiod.

Chart 2- Total outstanding credit (Rs. lakh crs) and growth in credit (%)

Profitability indicators
This section covers few profitability indicators of the NBFC sector as a whole
which will give an understanding of the performance of this sector during
FY13 to FY18. Chart summarise the total income during the last 5 years and
the growth in the income during this period. It is observed that, barring FY16,
the total income under study has witnessed rapid and double digit growth in
income. The total income of these companies has grown at CAGR( compound
annual growth rate) of 12.2% during FY13 to FY18.

Chart 3 Total income (Rs. lakh crs) and income growth (%)

45
Recent RBI frameworks for NBFCs
To address the liquidity crunch faced by some segments of the NBFC sector,
primarily on account of asset liability mismatches, the RBI has come up with
regulatory relaxations to ease the challenges of the sector. – Banks are
permitted to raise their exposure to a single NBFC (non-infrastructure
financing NBFC) from 10% to 15% until the end of the year. - Till Dec 31,
2018, the government securities equivalent to the incremental credit disbursed
by the banks to NBFCs after October 19 will be eligible for Liquidity
Coverage Ratio (LCR) requirements. This is in addition to the 13% carve out
from Statutory Liquidity Ratio (SLR) norms permitted for use against LCR
requirements. - To provide partial credit enhancement (PCE) to bonds issued
by systematically important non-deposit taking financial companies (NBFCs)
registered with RBI and HFCs registered with National Housing Bank.
Share of total credit (%) in FY13 and FY18

Chart exhibits the share of Credit of each of the three categories of NBFCs and
juxtaposes with the share of credit (outstanding loans and advances) for FY13
and FY18. The credit share covered in the following chart is the quantum of
the outstanding credit of the NBFCs as at the end of the year. The objective of
the following chart is to find out which category of the NBFC sector has the
highest share total credit and how has it changed between FY13 andFY18.

46
2.1 OBJECTIVE OF NBFCs

i. To study the impact of liquidity in current market scenario of NBFC‘s in

liquidity crisis situation.
ii. To trace the series of events that lead to the Indian NBFC crises.
iii. To highlight the current steps undertaken by RBI to overcome the crisis.

2.2 NEED OF NBFC’s

The Financial Statements are mirror which reflects the financial

position and strengths or weakness of the concern. The Non- Banking
Financial Company has been witnessed intense competition from domestic
banks and international banks. Every business needs to view the financial
performance analysis.

The study on effectiveness of operational and financial performance of

Sundaram finance limited is conducted to measure the overall performance of
company. The financial analysis strengths the firms to make their best use, and
to be able to spot out financial weakness of the firm to state suitable corrective
actions.

This study aims at analyzing the overall financial performance of the

company by using various financial tools like Comparative Analysis, common
size statement analysis, Ratio Analysis, and Cash Flow Analysis

47
2.3 SCOPE OF THESTUDY IN NBFCs

The present study expected to produce some important findings and

conclusions/recommendations which may help the housing finance companies
to formulate policies and programmes to manage minimization of risk &
maximization of profit & value creation of Non- banking housing financial
companies effectively. This will go in the improvement of better performance
in the market.

i. India is home for thousands of NBFCs, most of whom are tiny and
fragmented. At least a tenth of them qualifies for getting converted into
a bank. The consequences of doing so could be studied.
ii. The interplay of regulations with a focus on how NBFCs are surviving
amidst a plethora of regulations can be of potential research interest.
iii. The impact of increasing net worthiness for NBFC to be eligible to get
a license is a topic for study.
iv. Cascading of NBFC crisis on the mutual fund industry can be further
studied.

48
2.4 BENEFITS OF NBFCs

Instant Fund: As soon as your business loan gets approved, these NBFCs
ensure that the loan amount gets disbursed and credited in your bank account
within a few working days. Also, NBFCs don’t charge any penalty on the
foreclosure of the business loan after the payment of few EMIs.

Quick Processing: Loan approval is easier in case of NBFC as they follow

lenient eligibility criteria. Generally, people apply for loans when in need of
quick money, and NBFCs fast service makes it the best option. Many times
borrowers compromise on the interest rates if the loan amount is huge.

Less Stringent Rules: NBFC has less stringent rules and regulations. Since
they have less complicated loan processing, borrowers are satisfied.

Loans To People Having A Poor Credit Score: Banks usually reject

applications from individuals having a very poor credit score. But NBFCs
offer loan to individuals having low credit scores. But mostly the interest rates
are higher than the market value in NBFC.

Profitability: NBFCs are more profitable than the banking sector because of
lower costs. This helps them offer cheaper loans to customers. As a result,
NBFCs' credit growth - the increase in the amount of money being lent to
customers – is higher than that of the banking sector with more customers
opting for NBFCs.

Infrastructure Lending: NBFCs contribute largely to the economy by

lending to infrastructure projects, which are very important to a developing
country like India. Since they require large amount of funds, and earn profits
only over a longer time-frame, these are riskier projects and deters banks from
lending. In the last few years, NBFCs have contributed more to infrastructure
lending than banks.

Promoting inclusive growth: NBFCs cater to a wide variety of customers -

both in urban and rural areas. They finance projects of small-scale companies,
which is important for the growth in rural areas. They also provide small-ticket

49
loans for affordable housing projects. All these help promote inclusive growth
in the country.

2.5LIMITIONS OF NBFCs

Less Regulation: Non-bank lenders are able to escape much of the federal and
state regulation imposed on bank. After the credit market crash of 2007, the
federal government passed new lending standards and regulations limiting the
exposure banks could assume in making loans. These regulations did not apply
to all lenders, and many non-bank lenders were able to escape oversight. This
is not to say non-bank lenders are unregulated; in fact, a whole series of
regulations at both the federal and state level apply to any lending activity.
However, there is not regulation regarding the amount of equity a non-bank
lender can release in the form of loans. There is also less oversight to assure
that a non-bank lender does not have a conflict of interest in a loan contract,
according to BNET.

Lower Lending Standards: In part because non-bank lenders do not have to

meet federal and state requirements imposed on banks, non-bank lenders can
set lower lending standards for borrowers. This is the reason many borrowers
go to non-bank lenders in the first place. They may have lower credit
requirements, and most require less paperwork in making a loan. This means
the loans are easier to attain, but it also means the lender is engaging in riskier
lending. This places the lender at a higher risk of bankruptcy, which could
force your loan into a sale, and it also means the lender will have to
compensate for losses through more expensive loan options.

Higher Interest Rates: Due to higher-risk lending, non-bank lenders are more
likely to lose money on loans. They make up for these losses with higher
interest rates for even qualified borrowers. They may also issue loans with
higher penalties if you miss payments, pay late or even choose to prepay the
debt. On the whole, non-bank loans are simply more expensive than most bank
loans, says CreditLoan.com.

Credit Issues Equalling High Risk: Several situations can occur that can
place you in a high-risk category for borrowing. If your debt-to-income ratio is

50
higher than 36 percent, lenders may consider you overextended with too much
debt, according to Bank of America. Some lenders may be more lenient,
flagging DTIs of 50 percent or more, according to FDIC. More than two 30-
day payment delinquencies in the past year or one 60-day delinquency in the
past two years is also a marker for subprime borrowers. Chargebacks,
judgments, repossessions and foreclosures within the last two years can pose
significant credit problems. A bankruptcy within the past five years is also a
red flag.

Difficult Approval: Submitting an application for a loan when you have

issues that classify you as high risk can make the approval process more
difficult. The risks to lend you money often make a lender more cautious,
which usually results in more investigation and analysis. A lender might make
you complete additional forms that seek more information about your income
and financial history. This additional investigation could make the approval.

51
2.6SIGNIFICANCE OF THESTUDY IN NBFCs

1. Helps NBFCs to be better prepared to avoid a crisis and handle it if

required

2. Regulators and Governments can take policy measures and strength

regulation

3. Other sub-sectors can retrospect and take pro-active measures to have

better risk management systems.

According to the Economic Survey 2010-11, it has been reported that

NBFCs as a whole account for 11.2 percent of assets of the total
financial system. With the growing importance assigned to financial
inclusion, NBFCs have come to be regarded as important financial
intermediaries particularly for small-scale and retail sectors. In the multi-
tier financial system of India, importance of NBFCs in the Indian
financial system is much discussed by various committees appointed by
RBI in the past and presently, RBI has been modifying its regulatory and
supervising policies from time to time to keep pace with the changes in
the system. NBFCs have turned out to be engines of growth and are
integral part ofthe Indian financial system, enhancing competition and
diversification in the financial sector, spreading risks specially at times
of financial distress and have been increasingly recognized as
complementary of banking system at competitive prices. The banking
sector has always been highly regulated, however simplified sanction
procedures, flexibility and timeliness in meeting the credit the needs and
low cost operations resulted in the NBFCs getting an edge over banks in
providing funding. The report of the Finance Ministry of the
52
Government of India revealed that there were 428 deposit taking NBFCs
and their number is reduced to 297 in 2011. It shows the negative growth
of the NBFC.
On the other hand, housing has been recognized as a basic human
need. Several Initiatives at the centre and state levels have focused on
“housing” as an integral part of the growth process. Housing is known to
have multiple linkages with the rest of the economy and investments in
housing have orchestrated impact in the region and on the broader
economy. Housing initiatives must be viewed in the background of the
overall economic development and the needs of the people. According to
the NSSO Report, about 66% financing of new constructions in the last
one year was done by families with their own resources; about 27%
constructionshadsomeamountfinancedfromnon‐bankingagenciessuchas
money lenders, NBFCs, family and friends while 9% of new
constructions were financed by institutional channels such as
government schemes, banks etc. Hence, it revealed that the non-banking
institutional agencies are playing significant role in housing finance. Due
to their financial assistance on the one hand, they are enhancing housing
in society and on the other, due to their attractive schemes in housing,
they are earning profits. The profit helps them by further growth. There
are many NBFCs in housing finance. It is essential to compare their
performance so as to get the overall growth of these NBFCs. In this
regard, the present study is proved as useful andsignificant.

53
  WHAT IS A NON-BANKING FINANCIAL COMPANY?
i. NBFCs are financial institutions that offer various banking
services but do not have a banking license.
ii. These institutions are not allowed to take traditional demand deposits.
iii. In India, NBFC is a company registered under the Companies Act,
1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities, leasing, hire-purchase,
insurance business, chit business etc.

 WHAT’S THE NBFC CRISIS?

i. NBFCs borrow money from banks or sell commercial papers to mutual
funds to raise money.
ii. These money is then given as a loan to small and medium enterprises,
retail customers and so on.
iii. But when NBFCs face liquidity crunch– this leads to NBFC CRISIS.

54
  WHAT LED TO THE CURRENT CRISIS?
 Reasons
1. First
i. the NBFC business model itself is flawed.
ii. It raises short-term funds which are then lent out as long-term loans.
iii. For example, an NBFC raises money by selling 6-month debt
papers and on-lends this as a car loan with a tenure of 5 years.
iv. Now every time the NBFC has to renew the 6-month debt paper or
raise fresh loans to repay the old debt paper.
v. In good times, this happens very smoothly.
vi. But when times are tough, this cycle is broken.

2. Second
i. The cycle was broken by a default of some firms of the IL&FS group.
ii. This led to the fear among banks, mutual funds that more such
entities could default.
iii. Due to this many institutions refused to give money to NBFCs.
iv. The cost of funds rose by 150 basis points for NBFCs.
v. This led to the whole NBFC crisis.

55
2.7SELECTION OF THE PROBLEM
Reason behind Liquidity crunch witnessed NBFC
1. Huge exposure of Commercial Papers
The portfolio of the NBFC having huge exposure of CP which is of short term
in nature and NBFC are still now is comfortable position to face the challenges
in repayment of current obligations. As per CRISIL estimate 15% of NBFC
business is met through CP market and these NBFC‘s raise 10% of their
capital around 6 lakhs crores through CP.Market estimates around 50,000
crores of CP are due for redemptions, which creates fresh fear in market . But
as a proactive measure few of smaller NBFC are trying to liquidate their loan
portfolio to raise the funds, but most of them are not doing lending business .
In October 2018, country's largest lender SBI bought Rs 5,250 crore of
portfolio of assets from NBFCs. Also further SBI is in plan to buy assets
worth Rs 45,000 crore from NBFCs to help tide over the liquidity crisis. These
sale of assets helped to meet the sizeable repayment obligations of the NBFC
sector, which was around Rs 78,000 crore of commercial paper (CP) due for
repayment in October 18, in an otherwise difficult market for continue in
business. Currently Other funding windows has started to close for the NBFC
sectors, with capital market investors becoming hesitant of taking incremental
exposures to some entities hence there is a general freeze in the credit markets
owing to tight liquidity crunches.
2. Market Speculation and re-investment in lending
In foreign counties the Central Banks – The US Federal Reserve, The
European Central Bank, the Bank of England, the Bank of Japan —
implemented a policy of Quantitative Easing, injecting a lot of liquidity into
banks, and buying ―very toxic‖ products like mortgage-backed securities and
asset backed-securities in order to sustain this cash crunch in their economy.
But whereas as the current Indian NBFC‘s do invest only in lending and
involve in speculation with high cost of funds , which results in mismatch of
Assets and liabilities and incur in write offs
Increase of Intra Bank rates. Currently the economy is witnessing the
increase of Intra Bank rates which is passed to ultimate customer, which
impacts reduced the business and reduction in margins. Due to which there is

56
no benefits to be passed to the end user and whipped existing market share.
3.Raise of NPA’s and Decline in CAR
The major concerns for NBFC‘s and HFC‘s are Steep raise in NPA over last 4
years , which has impacted to their business and question‘s their
sustainability . The following chart shows the raise of NPA‘s of NBFC‘s and
HFC‘s which is self explanatory. Major TOP NBFC‘s are witnessing growth
of stock their GNPA‘s , which is un controllable inspite of their efforts to roll
it back to standard accounts. The Major reason said to be Demonetisation and
implementation of GST in 2016-2018 clubbed with current recession in
financial market. Since NBFC‘s are in verge of slowing their business for
another 6 months with forecasting of maintaining the Status Quo .

57
The Minimum Ratio of Capital to Risk-Weighted Assets

Currently, the minimum ratio of CAR is 8% under Basel II and 10.5 percent
under Basel III. When any CAR is more than minimum of 8%, it is said to be
High capital adequacy ratios under Basel II and Basel III for Banks

Minimum CAR measures cushion to absorb a reasonable amount of losses

before Banks become insolvent and consequently lose depositors‘ funds.

For example, suppose bank ABC has $10 million in tier-one capital and $5
million in tier-two capital. It has loans that have been weighted and calculated
as $50 million. The capital adequacy ratio of bank ABC is 30 percent (($10
million + $5 million) / $50 million). Therefore, this bank has a high capital
adequacy ratio is said to be safer. As a result, Bank ABC is less likely to
become insolvent if unexpected losses occur.

The decision of the Reserve Bank of India‘s (RBI) board to extend the timeline
for full implementation of Basel III rules for bank capital by a year would free
up as much as ₹3.7 trillion for potential lending. The central bank‘s board on
Monday decided that banks would have to meet the capital conservation buffer
norms under Basel III regulations by 31 March 2020, instead of the earlier
deadline of March 2019.

58
Implications witnessed due to Cash crunch in Real estate and
housing sector

According to Kotak Securities Research ― All-India real estate sales across

major cities amounted 22.2 million sq. ft in the year of July 2018, against
housing project launches of 7.9 million sq. ft, which reflects significantly
lower project launches than monthly average of 14.5 million sq. ft which was
witnessed in the past 12 months.

Home buyers and real estate developers are facing huge crisis dispite RBI
recent measures to increase bank credit to NBFC‘s and HFC‘s . The problem
is so acute that in several cases home loans are not getting disbursed and this
cash crunch has increased Home Loan intrest rates by 5075 basis points .

The condition is so worse that No NBFC‘s are now ready to write a large
cheque of Rs 30- 40 crs . This cash crunch in the system was triggered by
series of repayment defaults by IL&FS resulting in mutual funds and other
financial players virtually freezing investment in commercial papers

59
 CHAPTER 3

LITERATURE REVIEW

REVIEW OF LITERATURE

Literature Review was done by referring previous studies, articles and

books to know the areas of study and analysis the gap or study not done so far.
There are various studies were conducted relating to operational performance
of the company from which most relevant literatures were reviewed.

Rajiv Kumar Bhatt(2018) “Recent Global Recession and Indian

Economy: An Analysis”-

This paper displays various measures handled by RBI during 2008-2009 crisis
such as SLR, CRR, OMO, MSS, LAF. This also portrays development of the
economy can be achieved by only way of development rural economy as one
of the alternative ways through institutional based with principal of
cooperation under capitalistic economy. The need of today is not just the
pumping of liquidity in to the Indian economy but also in addition the injection
of demand.

Deepak Mohanty(2018) “Global Financial Crisis and the Indian

Economy”.

The study portrayed that despite sound fundamentals and no direct exposure to
the sub-prime assets, India was affected by global financial crisis through all
the channels – trade, financial and confidence channels – reflecting increasing
globalisation of the Indian economy than what is apparent in terms of
traditional indicators. The policy responses to the global crisis were swift and
timely and have transited through distinct phases since the second half of
2008-09.

60
Reserve Bank introduced a comprehensive range of conventional and
unconventional measures to limit the impact o the adverse global
developments measures undertaken in response to the crisis were terminated
signifying return to normal pace of activity

Present Indian Liquidity market- Conceptual Framework

According to the statistics of Bloomberg Economics India in Oct 2018,

Liquidity in the Indian financial system is currently at a deficit of around 1.4
trillion rupees ($20 billion), As per Banking Liquidity Index, Liquidity moved
from a surplus of 580 billion rupees earlier this month. Advance tax outflows
in the second half of the month were a major factor in the cash crunch. This
gives a snapshot of the current picture of the liquidity profile of the economy.

Ravi Puliani and Mahesh Puliani (2014)

writes a book entitled “Manual of Non-Banking Financial Companies”.The

book discussed the glossary of terms that are used in banking operations and
non-banking activities. The book covers the circulars and directions issued by
Reserve Bank of India from time to time to control, manage and regulate the
business of NBFCs.

Shail Shakya (2014)

published a working paper entitled “Regulation of Non-banking Financial

Companies in India: Some Visions & Revisions”. Non-Banking Financial
Companies are pioneer in their cash deployment, accessibility to the markets
and others to count. NBFCs are known for their higher risk taking capacity
than the banks. Despite being an institution of attraction for the investors,
NBFCs have played a significant role in the financial system. Many
specialized services such as factoring, venture capital finance, and financing
road transport were championed by these institutions. NBFC sector has more
significantly seen a fair degree of consolidation, leading to the emergence of
large companies with diversified activities. However, the recent financial crisis

61
has highlighted the importance of widening the focus of NBFC regulations to
take particular account of risks arising from the regulatory gaps, from arbitrage
opportunities and from inter-connectedness of various activities and entities
associated with the financial system.

Kumar and Afroze (2014)

revealed that Loans, Management Efficiency, Liquidity and Sensitivity have

statistically significant influence on the capital adequacy of private sector
banks. However, the independent variable asset quality has negligible
influence on capital adequacy of Indian private sector banks. Moreover, the
study reveals that the Indian private sector banks maintain a higher level of
capital requirement than prescribed by Reserve Bank of India.

Sornaganesh et al. (2013)

investigated the fundamental analysis of NBFC in India to analyze the

profitability position of 5 sample NBFC companies, like STF, SF, BF, and M
and MF for the period from April 2008 to March 2012, using Ratio Analysis.
The study revealed that SF has performed better in terms of Earnings Per
Share but STF and M&MF are far better than other in NPM.

Perumal and Satheskumar (2013)

studied on the topic “NBFCs” analyzing the Balance Sheets and income
statements of two sample companies, viz., Sundaram Finance Limited and
Lakshmi General Finance Limited for the period 2007–2012 using primary
and secondary data. The study was performed using various statistical
techniques such as average, standard deviation, co-efficient of variation, trend
analysis, index number, etc. and concluded that the contribution of NBFCs to
economic development is highly significant.

62
Shailendra Bhushan Sharma and Lokesh Goel (2012)

“Functioning and Reforms in Non-Banking Financial Companies in

India”.Non-Banking Financial Companies do offer all sorts of banking
services, such as loans and credit facilities, retirement planning, money
markets, underwriting and merger activities. These companies play an
important role in providing credit to the unorganized sector and to the small
borrowers at the local level. Hire purchase finance is by far the largest activity
of NBFCs. The rapid growth of NBFCs 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. This
paper provides an exhaustive account of the functioning of and recent reforms
pertaining to NBFCs in India.

Debts” in ‘International Journal of Management, IT and Engineering’

Non-Banking Financial Corporation (NBFC) in each of the countries involved

in the business of lending mortgage loans took stock of their policies and terms
& conditions while disbursement of loans. Critics and some experts might
argue that given the technologically advanced systems in place to do credit
scoring, it is enough to have certain set of quantitative parameters to do a
check. The parameters, which are discussed in the credit scoring software, are
primarily quantitative parameters and some qualitative features whose
measurements are also quantified.

Suresh (2011)

investigated the performance of NBFCs in India (other than banking,

insurance, and chit fund companies) during the year April 2008–March 2009.
Study highlighted that Financial and Investment Companies’ growth in
income, main as well as other, decelerated during the period and growth of
total expenditure also decelerated but it was higher than the income growth.

63
Viswanathan (2010) in the study titled “the global financial crisis and its
impact on India”

studied the insights of global financial crisis and its impact on India. Inspite of
global crisis, India, China and Brazil were able to sustain the growth rate and
was not affected by the crisis. The impact created was not uniform across the
countries. Smaller emerging markets had growth impact in smaller way. The
study identified that the banking sector in India should be still highly regulated
and continuously monitored. The Reserve Bank of India has at its disposal a
number of tools to control the money supply and to infuse liquidity as needed.
The size of its foreign reserves allows India to intervene effectively in the
foreign exchange market to support its currency

D K Nauriyal and Bimal Kishore Sahoo “Financial Crisis Indian Economic

Growth and External Sector” in their study suggested that financial crisis has
adversely impacted India's GDP although imports, exports and FDI were found
to have exercised stimulating influence through technological spillover and
other externalities. The paper studied that recovery of global economy is
extremely important for Indian economic growth although the effects of global
slowdown could be minimised through the use of stimulant fiscal and
monetary measures by RBI.

Jafor Ali Akhan (2010)

writes on “Non-Banking Financial Companies (NBFCs) in India”. The book

discussed the financial system in India. It covers the financial intermediaries
including commercial banks, regional rural banks, cooperative banks and Non-
Banking Financial Companies in India. The book is good source in getting
information on businesses, classification, management of assets, risk coverage,
etc of the NBFCs in India.

Kennedy and Muller (2010), has explained that“The analysis and

interpretation of financial statements are an attempt to determine the
significance and meaning of financial statements data so that the forecast may

64
be made of the prospects for future earnings, ability to pay interest and debt
maturines (both current and long term) and profitability and sound dividend
policy.”

T.S.Reddy and Y. Hari Prasad Reddy (2009), have stated that “The
statement disclosing status of investments is known as balance sheet and the
statement showing the result is known as profit and loss account”

Peeler J. Patsula (2009), hedefine that a sound business analysis tells others a
lot about good sense and understanding of the difficulties that a company will
face. We have to make sure that people know exactly how we arrived to the
final financial positions. We have to show the calculation but we have to avoid
anything that is too mathematical. A business performance analysis indicates
the further growth and the expansion. It gives a physiological advantage to the
employees and also a planning advantage.

Salmi, T. and T. Martikainen (2009), in his "A review of the theoretical and
empirical basis of financial ratio analysis", has suggested that A systematic
framework of financial statement analysis along with the observed separate
research trends might be useful for furthering the development of research. If
the research results in financial ratio analysis are to be useful for the decision
makers, the results must be theoretically consistent and empirically
generalizable.

John J.Wild, K.R.Subramanyam& Robert F.Halsey (2008), have said that

thefinancial statement analysis is the application of analytical tools and
techniques to general-purpose financial statements and related data to derive
estimates and inferences useful in business analysis. Financial statement
analysis reduces reliance on hunches, guesses, and intuition for business
decisions. It decreases the uncertainty of business analysis.

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 CHAPTER 4
CONCLUSION & SUGGETION&
FINDING

Conclusion
NBFC in India or across the globe has same sample model of borrowing either
from banks or capital markets in forms of NCD‘s or commercial papers
,looking at the current scenario NBFC‘s as well as HFC‘s has to tone their
growth rate with sharp increase of interest rate and thus can maintain only thin
margins in their business
Model of Bailout plans by LIC and SBI for IL & FS can be an example for
other NBFC‘s as one of the temporary strategy to sustain in current position
and carefully strategise their Lending activity
Raise in NPA is a great concern for all NBFC‘s and Banks and Arresting of
NPA‘s should be in warfoot basis
Due to Steep increase in interest rates in both NBFC‘s and HFC‘s is not able to
achieve the profitability in one side and struggling to get new acquisitions to
increase the book size and most of the institutional had slowed down their
business . Similarly in another side there are more number of loan rundowns
in their portfolio, which impacts the book size of these institutional in the Q3
Hence the present challenge of NBFC/ HFC‘s is to maintain balance maturity
profile of the assets they finance and their borrowings they take during this
Crisis.
This paper highlights that the 2018 Indian NBFC crisis is limited to be a
liquidity issue and if not handled properly on time, it would make it into a
solvency issue and can cause a massive dent to the NBFC sector, which is
already losing its business to its rival category – banks. The housing finance
sector who borrowed and the mutual funds which lend the money are primarily
affected. The crisis will surely be an unforgettable lesson in the pages of
Indian banking and financial history.

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SUGGESTION

Bank Can use government level 1high-quality liquied asset equivalent to their
incremental lending to NBFC.

The Capital Fund lending limit for bank to a single NBFC has been hiked to
15% from theearliear 10%.

The First measure will ease the mandatory liquidity coverage ratio
requirements for banks

The second step is likely to ease curbs on lending to a single NBFC .

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FINDINGS
1. Indian financial intermediaries and institutions appear to be working more
closely than ever before to avoid a potential crisis.
2. Regulators made a timely intervention to handle the crisis. However, higher
importance is attributed to the regulatory approach over creating a liquidity
window for NBFCs.
3. Tweaking regulations would cause short term pain for long term gains. At
the end of the crisis, only the fittest NBFCs will survive the crisis.
4. The crisis and regulations would trigger consolidation amongst the already
well-diversified Indian NBFCs sector.

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 BIBLIOGRAPHY

 www.google scholar.com
 www.shodhganga.inflibnet.co.in
 www.moneycontrol.com
 www.timeofindia.com
 www.il&fs.com
 www.DHFL .com

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APPENDIX

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