NBFC role in Wealth Managment

BY:-
Nimisha Rai
Parth Mehta
Pooja Verma
Pargya Dwivedi
Pratik Tanwani
What are NBFCs?

• A NON BANKING FINANCIAL COMPANY(NBFC) IS A

COMPANY REGISTERED UNDER THE COMPANIES
ACT,1956.
• IT IS ENGAGED IN THE BUSINESS OF LOANS AND
ADVANCES, ACQUISITION OF
SHARES/DEBENTURES/SECURITIES ISSUED BY
GOVERNMENT OR OTHER MARKETABLE
SECURITIES.
Types and Services provided by NBFCs
 Hire Purchase services
In this if a buyer cannot afford to pay the price as a lump sum but can afford to
pay a percentage as a deposit, the contract allows the buyer to hire the goods for a
monthly rent.
E.g. Bajaj Auto Finance company

 Investment Company
It means any company which carries on as its principle business the acquisition of
securities. These types of companies are investment holding companies formed by
business houses.
 Loan company
This is a company which carries on as its principle business, the providing of
finance by making loans and advances. These companies obtain funds from public
and give loans to small scale industries and self employed persons.

 Housing finance company

This is a company which carries on as its principle business, the financing of the
acquisition or construction of houses.
Role of NBFCs in India
 Profitability
NBFCs are more profitable than the banking sector because of lower costs. This
helps them offer cheaper loans to customer. As a result NBFCs credit growth is
higher than banking sector.

 Infrastructure Lending
NBFCs contribute largely to the economy by lending to infrastructure projects,
which are very important to a developing country like India.

 Promoting inclusive growth

NBFCs cater to a wide variety of customers- both rural and urban areas. They
finance projects of small scale companies.
 MAHINDRA & MAHINDRA FINANCIAL SERVICES LIMITED

Mahindra Finance, a non-banking financial company (NBFC), was incorporated in 1991.

M&M, the majority shareholder, held 51.2% in Mahindra Finance as on March 31, 2018.
Mahindra Finance ranks among the larger NBFCs in India with total assets under management
of Rs 55,101 crore as on March 31, 2018 ( Rs. 46,776 crore as on March 31, 2017). The
company finances consumer purchases of UVs, LCVs, tractors, cars, and other assets. To
leverage its extensive branch network and rural clientele, the company has entered the rural
housing finance business through subsidiary, MRHFL. MIBL is the insurance broking arm of
Mahindra Finance.
Year PAT EPS P/E

2017-18 1051 15.35 27.13

2016-17 530 7.09 33.82

2015-16 787 11.92 17.52

2014-15 925 14.75 15.60

2013-14 965 15.75 14.85

Key Rating Drivers & Detailed Description
Strengths:
* Majority ownership by, and strategic importance to M&M
* Strong and established market position in rural and semi-urban areas, particularly in UV and
tractor financing business
* Adequate capitalization and stable resource profile

Weakness:
* Modest asset quality impacting profitability:
The gross NPA ratio increased to 9.3% as on March 31, 2018 (9.9% as on March 31, 2017).  The company
transitioned to 90+dpd NPA recognition as on September 30, 2017 versus 120+dpd NPA recognition until June 30,
2017.
 Muthoot finance
Muthoot Finance, an NBFC, was originally set up as a private limited company in 1997; this was reconstituted as a
public limited company in November 2008. It provides finance against used household gold jewellery; the promoters'
family has been in this business for over seven decades. Muthoot Finance is the flagship company of the Muthoot
group (promoters of Muthoot Finance), which is also in the hospitality, healthcare, media, education, information
technology, foreign exchange, insurance distribution, and money transfer businesses. The company had a nationwide
network of around 4344 branches as on June 30, 2018. It had gold loan advances book of Rs 30,562 Crore, and a net
worth of Rs 8,307 Crore, as on June 30, 2018. For fiscal 2018, Muthoot Finance's standalone PAT and total income
grew to Rs. 1,720 Crore and Rs 6,243 Crore, from Rs. 1,180 Crore and Rs. 5,747 Crore, respectively, the previous
fiscal.

Year pat eps p/e

2017-18 1720.27 43.04 9.06
2016-17 1179.83 29.56 12.22
2015-16 809.55 20.34 8.69
2014-15 670.52 16.97 12.39
2013-14 780.07 20.99 11.45
Key Rating Drivers & Detailed Description

Strengths

- Established track record in financing against gold jewellery 

- Adequate capitalization
- Profitability to remain healthy

Weaknesses

• Geographical concentration in revenue profile

Muthoot Finance has high geographic concentration in South India, which currently accounts for about 50% of
its total loans. While the level of concentration has been declining and is much lower than that of peers, the
significant regional exposure exposes the company vulnerable to economic, social, and political situation in the
region.

• * Challenges associated with non-gold loan segments:

Growth, asset quality, and profitability in the non-gold loan businesses are yet to stabilise. The track record in
housing finance segment is relatively short due to which the portfolio is not well seasoned. The company operates
in the affordable housing finance segment, and caters to self-employed customers, engaged in small business
activities.
 Bajaj Finance Limited
It was set up in 1987, Bajaj Finance is a subsidiary of Bajaj Finserv (55% ownership), the financial services arm of
the Bajaj group. Bajaj Finance has a diversified product suite comprising key businesses such as vehicle loans (2-
and 3-wheelers manufactured by Bajaj Auto), consumer durable loans, personal loans, mortgage loans, small
business loans, loans against securities, commercial finance, and rural finance. Bajaj Finance is the largest financier
of 2-wheelers and consumer durables in India. Profit after tax (PAT) was Rs 2647 crore on total income (net of
interest expense) of Rs 8744 crore in fiscal 2018, against Rs 1836 crore and Rs 6100 crore, respectively, the
previous fiscal.
In the first quarter of fiscal 2019, PAT was Rs 834 crores on total income (net of interest expense) of Rs 2502 crores
compared to Rs 456.4 crore and Rs 1754.6 crores respectively during the corresponding period of the previous
fiscal.

year pat eps p/e

2017-18 2674.00 46.49 38.25
2016-17 1836.00 33.58 35.16
2015-16 1279.00 233.65 29.19
2014-15 898.00 175.90 22.88
2013-14 876.00 160.65 21.76
Key Rating Drivers & Detailed Description

Strengths

• Large, well-diversified NBFC

• Strong capitalisation
•  Healthy earnings 
•  Strategic importance to, and strong expectation of support from, the Bajaj group

Weakness

• * Focus on risky asset classes and under-seasoned mortgage loan book

Over the past 18-24 months, risk management processes and data analytics capability have been
strengthened. Underwriting norms and monitoring mechanisms in small and medium-sized enterprise
(SME) business segments such as business loans and LAP have been reinforced. The unsecured lending
business (mainly consumer durables financing and personal loans) has also been supported through
investments in risk analytics and technology. Underwriting and collection norms have been tightened based
on portfolio performance trends and early warning indicators.
 Shriram Transport Finance Company
Limited
STFCL, incorporated in 1979, is the flagship company of the Shriram group. It is registered with RBI as a
deposit-taking, asset-financing non-banking financial company. STFCL provides financing for vehicles such as
CVs (both pre-owned and new), tractors, and passenger vehicles. It has pan-India presence, with 1,213 branches
and 862 rural centers as on March 31, 2018. STFCL is also engaged in the construction equipment (CEQ)
financing business through its erstwhile wholly owned subsidiary, *Shriram Equipment Finance Company that
was merged with STFCL with effect from 1st April 2015. In January 2018, STFCL announced that it would sell
majority stake in wholly owned subsidiary ShriramAutomall to MXC Solutions India Pvt Ltd (MXC, owner of
CarTrade.com) for Rs 156.38 crore. The transaction got completed in April 2018.

STFCL's reported total income (net of interest expense) and profit after tax (PAT) of Rs.6982 crore and Rs.1,568
crore respectively, for fiscal 2018 against Rs.5,597 crore  and Rs.1,257crore, respectively, for fiscal 2017.
year pat eps p/e
2017-18 1554 66.37 21.03
2016-17 1266 54.06 19.32
2015-16 1184 50.11 18.28
2014-15 1028 43.33 24.58
2013-14 1358 58.66 12.75

Key Rating Drivers & Detailed Description

1- Market leadership in the pre-owned commercial vehicle (CV) financing segment

2- Comfortable capitalization and earnings profile

Weakness
* Average, albeit improving resource profile
* Modest asset quality
 ADITYA BIRLA FINANCE LTD.
ABCL is the holding company for the financial services businesses of the ABG. The company has been
registered with the Reserve Bank of India as a systematically important, non-deposit-taking, core-
investment company. ABCL provides end-to-end financial services to both retail and corporate
customers and has a presence across life insurance, asset management, private equity, corporate lending,
structured finance, project finance, general insurance broking, wealth management, security broking,
online personal finance management, housing finance, pension fund management and health insurance
business. The group has more than 14,500 employees and a nationwide reach through over 1,600 points
of presence and more than 190,000 agents / channel partners.
 ABCL (on a consolidated basis) had a profit after tax (PAT; before minority interest) of Rs 1004 crore
on total income (net of interest expenses) of Rs 10,614 crore in the fiscal 2018, against a PAT of Rs 691
crore on total income (net of interest expenses) of Rs 3587 crore for fiscal 2017.
 ABCL (on a standalone basis) reported a profit of Rs 61.5 crore and total income of Rs 175 crore in the
fiscal 2018, against a PAT of Rs 4.2 crore and total income of Rs 35 crore in fiscal 2017.
 year PAT EPS P/E
2017-18 1004 3.64 23.54
2016-17 691 4.26 12.22
2015-16 524 6.55 8.69
2014-15 309 4.06 12.39
2013-14 281 5.56 11.45

Key Rating Drivers & Detailed Description

Strengths
* Strategic importance to, and expectation of strong support from, the parent and benefits derived
from being part of the ABG
Grasim is the majority shareholder and directly owns 55.99% of ABCL's equity shares, with another 16.77%
owned by other promoters and the promoter group. Grasim has key personnel from its senior management
on ABCL's board, including the chairman. ABCL also benefits from being a part of ABG group. ABCL is the
group's holding company for financial services, and remains critical, given the growth opportunities in this
sector. CRISIL believes Grasim will continue to have majority ownership in ABCL, and that financial services
will remain the key focus area for Grasim and ABG, over the medium term.
 
 Weakness
* Overall earnings profile is lowered by low profits in some of the businesses which are in
nascent stage of operations including losses in the recently launched health insurance
business.
ABCL's standalone revenue primarily comprises dividend income from its asset management and
insurance businesses. Contribution from the other two large investments, ABFL and ABHFL, will
remain muted as they are in growth phase and will require additional funding support in the near
to medium term. At a consolidated level, ABCL return on assets (RoA) and return on equity
(RoE) was at 1.1% and 10.7%, respectively, for the fiscal 2018 (0.9% and 10.0%, respectively, in
fiscal 2017). Earnings of the ABCL group remain well diversified across lending, insurance, and
AMC businesses, resulting in a good mix of fund-based and fee-based revenue. However, some
of the businesses that are in the nascent stage are reporting low profits; health insurance is loss-
making and housing finance has turned profitable only from the second quarter of fiscal 2018.
CRISIL believes ABCL's profitability will improve gradually over the medium term as these
businesses also start contributing to profits.
 ANALYSIS

 Non-banking finance companies in India are expected to see an 18 per cent compounded

annual growth rate (CAGR) for the next two and a half years and raise their share in total
credit to 19 per cent by 2020, according to rating agency Crisil.
 In 2017,NBFCs increased their share in the total credit market to 16 per cent, from 13
per cent in 2015. The share of public sector banks (PSBs) reduced to 51 per cent, from
57 per cent in 2015.Crisil says PSBs will see a further shrinking of their share to 47 per
cent by 2020 as they battle with capital constraints. NBFCs replicating traditional
banking services with innovative products and delivery systems would also chip away at
PSBs' share.
An analysis of the performance of the
country’s largest NBFCs and the biggest
banks does give a veritable idea of how
the former may have eaten into the
business of the latter, with whom they
compete directly.
we considered a five-year time horizon
between the financial years 2012-13 and
2017-18, and looked at how their asset
books grew on an annualized basis. In
other words, we compared their
compound annual growth rates (CAGR).
An analysis of the data shows that all the NBFCs on
our list recorded double-digit CAGR. However, assets
of at least three banks grew by less than 10% and of
two others were barely above that mark.
Bajaj Finance, for instance, saw its assets grow
almost 37% on a CAGR basis in the five years
through March 2018 while Edelweiss Financial
Services grew by more than 30%.
Clearly, the top NBFCs and even some private-sector
banks have been grabbing a higher share of
commercial and personal loans from government
banks.
In fact, an October 2017 report in Business Standard
newspaper said that the share of state-run banks in
commercial loans declined from 70.9% in 2014-15 to
64% in 2016-17 but those of their private competitors
rose by 6.8 percentage points to 33.1%. The report
also said that the shares of NBFCs rose from 2% in
2015-16 to 2.8% in the following year.
 RECOMMENDATION
8 of the 10 NBFCs posted handsome growth in their profits before tax in the
five years. However, at least four banks (all state-run) swung to losses as
they struggled to manage the toxic debt sitting on their books.
  There are multiple drivers in the vehicle finance and real estate finance
segments that will, in the coming years, pose good opportunities for NBFCs
to invest and expand within. The most significant driver of growth will be
the ability to create innovative products, delivered efficiently through the use
of technology.
THANKYOU