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pg. 1S.V. Institute of Management, Kadi

The Indian financial sector consists of a wide variety of institutions which cater to different

market segments. At the apex level are scheduled commercial banks which follow universal

banking model. Next, there is the cooperative banking sector with two different strands.

While the three Tier rural co-operative structure (State/District/grassroot level outfits), takes

care predominantly of agriculture and allied activities; the urban co-operative banking

structure provides succour mainly to the small customers at the bottom of pyramid in urban

areas. On the other hand, Non-Bank Financial Companies (NBFCs) are largely involved inserving those classes of borrowers who are generally excluded from the formal banking

sector. However, progressively over the years, the exclusiveness between the banks and

NBFCs has somewhat blurred. More recently, NBFCs are competing with banks in providing

financial services such as infrastructure finance and housing finance among others.

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

Act, 1956 and is engaged in the business of loans and advances, acquisition of

shares/stock/bonds/debentures/securities issued by Government or local authority or other

securities of like marketable nature, leasing, hire-purchase, insurance business, chit business

but does not include any institution whose principal business is that of agriculture activity,

industrial activity, sale/purchase/construction of immovable property. A non-banking

institution which is a company and which has its principal business of receiving deposits

under any scheme or arrangement or any other manner, or lending in any manner is also a

non-banking financial company (Residuary non-banking company).

NBFCs, historically are involved in providing financial services such as offering of small

ticket personal loans, financing of two/three wheelers, truck financing, farm equipment

financing, loans for purchase of used commercial vehicles/machinery, secured/unsecured

working capital financing, etc. Further, NBFCs also often take lead role in providing

innovative financial services to Micro, Small, and Medium Enterprises (MSME) most

suitable to their business requirements. The characteristics of NBFC financial services

include simpler processes and procedures in sanction and disbursement of credit; timely,

Introduction about Industry

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friendly and flexible terms of repayment aligned to the unique features of its clientele, albeit

at a higher cost.

NBFCs are doing functions akin to that of banks; however there are a few differences:

(i) NBFC cannot accept demand deposits;

(ii) NBFC is not a part of the payment and settlement system and as such an NBFC

cannot issue cheques drawn on it; and

(iii) Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation

is not available for NBFC depositors unlike in case of banks.

Profile of NBFC Sector

Legal Definition of NBFC

A company is considered as an NBFC if it carries on as its business or part of its

business, any of the activities listed in Section 45 I (c ) of the RBI Act, 1934, viz.,

business of making loans/advances or acquisition of shares / securities, etc. or hire

purchase finance or insurance business or chit fund activities or lending in any manner

provided the principal business of such a company does not constitute any of the

following non-financial activities viz.

(a) agricultural operations

(b) industrial activity

(c) trading in goods (other than securities)(d) providing services

(e) purchase, construction or sale of immovable property. Further in terms of section 45I

(f) of the RBI Act, a company would also be an NBFC, if its principal business is that of

receiving deposits under any scheme or arrangement.

Thus a company whose principal business is agricultural operations, industrial activity,

trading or real estate business is not a financial institution.

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Reclassification of NBFCs w.e.f. 6th December, 2006:

However in terms of the NBFC Acceptance of Public Deposits (Reserve Bank) Directions,

1988 with effect from December 6, 2006 the above NBFCs registered with RBI have been

reclassified as:

1. Loan Company (LC)

Loan company means any company which is a financial institution carrying on as its

principal business the providing of finance whether by making loans or advances or

otherwise for any activity other than its own but does not include an Asset Finance Company.

2. Investment Company(IC)

Investment Company is a company which is a financial institution carrying on as its

principal business the acquisition of securities.

Investment Companies are further divided into following sub- categories:

Core Investment Companies:

The Reserve Bank of India vide its Notification No. DNBS(PD)CC.No. 197/03.10.001/2010-

11 dated August 12, 2010, a new class of NBFCs by the name of Core Investment

Companies (CIC) was added

Core Investment Companies in terms of RBIs Notification means:

a non-banking financial company carrying on the business of acquisition of shares and

securities and which satisfies the following conditions as on the date of the last audited

balance sheet:-

(i) it holds not less than 90% of its net assets in the form of investment in equity shares,

preference shares, bonds, debentures, debt or loans in group companies;

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(ii) its investments in the equity shares (including instruments compulsorily convertible into

equity shares within a period not exceeding 10 years from the date of issue) in group

companies constitutes not less than 60% of its net assets

Net assets, for the purpose of this proviso, would mean total assets excluding

cash and bank balances;

investment in money market instruments and money market mutual funds

advance payments of taxes; and

deferred tax payment.

(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group

companies except through block sale for the purpose of dilution or disinvestment;

(iv) it does not carry on any other financial activity referred to in Section 45 I (c) and 45 I (f)

of the Reserve Bank of India Act, 1934 except:

a) investment in

i. bank deposits,

ii. money market instruments, including money market mutual funds,

iii. government securities, and iv. bonds or debentures issued by group companies;

b) granting of loans to group companies; and

c) issuing guarantees on behalf of group companies.

Other Companies

(i) Asset Finance Company (AFC)

AFC would be defined as any company which is a financial institution carrying on as its

principal business the financing of physical assets supporting productive / economic

activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and

material handling equipments, moving on own power and general purpose industrial

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machines. Financing of physical assets may be by way of loans, lease or hire purchase

transactions.

Principal business for this purpose is defined as aggregate of financing real/physical

assets supporting economic activity and income arising therefrom is not less than 60% of

its total assets and total income respectively.

(ii) Mutual Benefit Financial Company (MBFC)

Mutual Benefit Financial Company means a company which is a financial institution notified

by The Central Government under section 620A of The Companies Act 1956.

The above-mentioned types of NBFCs may be further classified into:

NBFCs accepting public deposit (NBFCs-D) and

NBFCs not accepting/holding public deposit (NBFCs-ND).

Operating leasing entities:

Operating leasing companies do not come under the RBI definition of NBFCs since operating

lease is not equipment leasing business as defined by the RBI. Only financial leasing is

included in the RBI definition of equipment leasing.

Further Classification of NBFCs-ND based on the Size of its Asset: NBFCs-ND may also be

classified into

(i) Systematic Investment and

(ii) Non- Systematic Investment NBFCs based on the size of its asset.

i.

Systemically Important NBFCs-ND

An NBFCND with an asset size of Rs.100 crore and more as per the last audited balance

Sheet is considered as systemically important NBFCsND (NBFC-ND-SI). However

NBFCsNDSI are required to maintain a minimum CRAR of 10 per cent. No NBFC

NDSI is allowed to:

a) lend to any single borrower/group of borrowers exceeding 15 per cent / 25 per

cent of its owned fund;

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b) invest in the shares of another company/ single group of companies exceeding 15

per cent /25 per cent of its owned fund;

ii. Non-Systematically Important NBFCs-ND

A NBFCND whose asset size does not exceed Rs.100 crore as per the last audited

balance sheet may be considered as Non-systemically important NBFCsND (NBFCND-

SI).

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fundcompanies etc. NBFCs can be classified into deposit accepting companies and non-deposit

accepting companies. NBFCs are small in size and are owned privately. The NBFCs have

grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as

service oriented companies. Their main companies are banks and financial institutions.

According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of

India.

The NBFCs in advanced countries have grown significantly and are now coming up in a very

large way in developing countries like Brazil, India, and Malaysia etc. The non-banking

companies when compared with commercial and co-operative banks are a heterogeneous

(varied) group of finance companies. NBFCs are heterogeneous group of finance companies

means all NBFCs provide different types of financial services.

Non-Banking Financial Companies constitute an important segment of the financial system.

NBFCs are the intermediaries engaged in the business of accepting deposits and delivering

credit. They play very crucial role in channelizing the scare financial resources to capital

formation.

NBFCs supplement the role of the banking sector in meeting the increasing financial need of

the corporate sector, delivering credit to the unorganized sector and to small local borrowers.

NBFCs have more flexible structure than banks. As compared to banks, they can take quick

decisions, assume greater risks and tailor-make their services and charge according to the

needs of the clients. Their flexible structure helps in broadening the market by providing the

saver and investor a bundle of services on a competitive basis.

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Size of the Sector

The share of NBFCs assets in GDP (at current market prices) in creased steadily from just 8.4 per

cent as on March 31, 2006 to 12.5 per cent as on March 31, 2013; while the share of bank assets

increased from 75.4 per cent to 95.5 per cent during the same period (Table 1).In fact, if the assets of

all the NBFCs below Rs.100 crore are reckoned, the share of NBFCs assets to GDP would go further.

Assets of NBFC and Banking (SCBs) Sectors

as a % to GDP Year

Ratio

2006 2007 2008 2009 2010 2011 2012 2013

NBFC Assets to GDP

(%)

8.4 9.1 10.1 10.3 10.8 10.9 11.9 12.5

Bank Assets to GDP (%) 75.4 80.6 86.8 93.0 93.0 92.2 92.7 95.5

Source: (i) Reports on Trend and Progress of Banking in India, 2006-2013; (ii) Hand Book of

Statistics on Indian Economy, 2012-13

Note: Assets of NBFC sector include assets of all deposit taking NBFCs and Non-Deposit Taking

NBFCs having assets size Rs. 100 crore and above (NBFCs-ND-SI)

In comparison to assets of the banking system (Scheduled Commercial Banks-SCBs), asset size of

NBFC sector was around 13 per cent; while deposits (including RNBCs) of the sector were less than

0.15 per cent of bank deposits (SCBs) as on March 31, 2013 (Chart 2). Public deposits held with the

NBFC sector declined in line with RBI policy directions. The decline in public deposits was largely

on account of RNBCs. Due to concerted efforts of RBI, the number of deposit taking NBFCs has

come down from 428 in June 2006 to 254 in June 2013.

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Non-Banking FinancialCompany

Registered with andregulated by the RBI

Loan Company

Investment Company

Equipment Leasingcompany

Hire PurchaseFinance Company

Residuary NonBanking Company

Not registered with the RBI,but the RBI issues directionsrelating to deposit acceptance

activity

Mutual BenefitFinance Company(Notified nidhis)

Mutual BenefitCompanies (Potential

nidhis)

Miscellaneous NonBanking Companies

(Chit funds)

Exempted from the RBIregulations including

requirement ofregistration

InsuranceCompanies

Stock Exchange,Stock Brokers,

Merchant BankingCompanies

Housing FinanceCompany

Micro FinanceCompany

Industry Structure

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The NBFCs accepting public deposits should furnish to RBI

Audited balance sheet of each financial year and an audited profit and loss account in

respect of that year as passed in the annual general meeting together with a copy of

the report of the Board of Directors and a copy of the report and the notes on accounts

furnished by its Auditors;

Statutory Annual Return on deposits - NBS 1;

Certificate from the Auditors that the company is in a position to repay the deposits as

and when the claims arise;

Quarterly Return on liquid assets;

Half-yearly Return on prudential norms;

Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and

above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;

Monthly return on exposure to capital market by companies having public deposits of

Rs. 50 crore and above; and

A copy of the Credit Rating obtained once a year along with one of the Half-yearly

Returns on prudential norms as at (v) above.

1

1https://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asp

Responsibilities
https://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asphttps://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asphttps://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asphttps://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asp

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Research is the systematized efforts to gain new knowledge. A Research Methodology

defines the purpose of the research, how it proceeds, how to measure progress and what

constitute success with respect to the objectives determined for carrying out the research

study. The appropriate research design being formulated is detailed below. A scientifically

carried out research project has a definite framework for data collection. This framework

constitutes the research design. It determines the data collection method, sampling method,

the fieldwork and so on.

The study was based on finding whether the NBFCs conversion to bank would help inbroadening economic growth; widen the coverage of banks in that area which are still

unbanked & what will be its Impact on achieving the objective of financial inclusions.

To analyze the market of NBFCs in India

To study the financial services of NBFCs

To study of Five Force of Porter Analysis of NBFC

To analysis the external factors which are affecting to the NBFC

Research Methodology

Objectives of the Study of Product Market Analysis

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The research design used for the study is both exploratory &descriptive research design as its

main objective is to describe something. In this research design it is assumed that researcher

is having prior knowledge of the field of study. The main emphasis is given on prior

formulation of hypothesis. The uses descriptive method as there was a clear specification

beforehand of who, what, when, where, why, and way six research. Its exploratory because

only few persons belonging to the industry are aware of the same. Since the research is for

industry analysis and it is structured for NBFCS. The research uses secondary data for

analysis and interpretation.

There are two methods of data collection that can be considered when collecting data for

research purpose. These data collection types include the following:

1. Primary data

2. Secondary data

The secondary data collection method is used in the study.

Secondary Data

The secondary data for the research was collected from journals, research articles, books and

internet websites, annual reports etc whose details and references has been given in The

secondary data in this project has been collected from the Indian banker journal, The RBI

bulletin, RBI Discussion papers, and journals of finance.

Research Design

Data Collection and Sources

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The role of the NBFC is defined as the financial intermediary and the particular task has been

well recognized by the finance sector as well as the customers. The key drivers of this sector

are the quick decision making abilities, risk management and the intricate understanding of

the customer needs. The way the NBFC players have managed to spread their operations in

urban as well as semi-urban areas in the span of a few years, is simply commendable. Today,

the role of NBFC has become important from the macro as well as the Indian economic point

of view.

The NBFC sector is dominated by the construction, equipment and the commercial vehicle

market and the other assets included under this. This industry has been growing consistently

at a rate of 20-25% barring the negative fall in the year 2008, which was due to the global

scenario. However, the industry has revived very quickly and has crossed volumes of more

than that of 2007. The expected growth of return from this sector in the near future looks to

be about 30-35%.There is more than three and half lakh crore non-deposits taking place in theNBFC sector and around 85,000 crore deposits taking place."

The most drastic change that has been seen recently in the NBFC segment is that of the big

international companies setting shop in the NBFC sector. Till sometime back, no big

company would have even thought about investing and trading in this sector.

Sustainable growth is possible only with the right dynamics which suit the market demand

and requirement. Many experts feel that the bad economic phase which shadowed the world,

has taught a few valuable lessons to the players in the NBFC sector. As in the case of any

sector, the recession made it apparent that it is difficult to maintain a consistent growth

pattern if the growth is not planned.

International players are trying to set foot in the Indian market, but I am not sure if they will

get the Indian environing right. We have had a similar situation where MNC's have tried their

best to set foot in the Indian NBFC market and place them in the urban sector. But,

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surprisingly, the NBFC sector has now occupied the semi-urban and rural markets and the

dynamics involved in both the markets are very different.

In the NBFC sector commercial and private vehicle market is going to grow but the tractor

market is going to be one of the fastest growing components, as it is no longer an agro project

but also an infrastructure investment.

NBFCs have traditionally been the secondary borrowing institutes and their main source of

borrowing has been the banks, mainly the public sector banks. This is the main reason why

the borrowing rate in the NBFC sector is a few percent higher than the public sector banks. In

terms of business establishment and rate on return (RoI), NBFC have a neat 2% RoI as

compared to the 1.2 - 1.4% of a public sector bank.

2

2http://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-

nbfc-industry-finance-sector
http://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-nbfc-industry-finance-sectorhttp://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-nbfc-industry-finance-sectorhttp://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-nbfc-industry-finance-sectorhttp://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-nbfc-industry-finance-sectorhttp://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-nbfc-industry-finance-sectorhttp://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-nbfc-industry-finance-sector

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Global credit crisis followed by increase in interest rates in October and November 2008

resulted in widespread crisis of confidence. Chain of events after the collapse of Lehman

Brothers is still fresh in the minds of investors. Non-Banking Finance Companies (NBFCs)

in India were severely impacted due to economic slowdown coupled with fall in demand for

financing as several businesses deferred their expansion plan. Stock prices of NBFCs

crashed on the back of rising non-performing assets and several companies closed their

operations. International NBFCs still continue to close down or sell their back end

operations in India.

The positive news however is that, this crisis has forced NBFCs to improve their operations

and strategies. Industry experts opine that they are much more mature today than they were

during the last decade. Timely intervention of RBI helped reduce the negative effect of credit

crunch on banks and NBFCs. In fact, aggressive strategies helped LIC Housing Finance to

grab new customers (including customers of other banks) and increase its market share in

national mortgage market. Surprisingly it was able to maintain its profitability in 2009

(around 37%). HDFC, the largest NBFC in India, however experienced a slowdown in

customer growth due to stiff competition, especially from LIC Housing Finance and tight

monetary conditions.

Other NBFCs that were stable during this period of credit crunch are Infrastructure

Development Finance Company (IDFC) Power Finance Corporation (PFC) and Rural

Electrification Corporation (REC). Growth prospects are strong for these companies given

the acute shortage of power in the country and expected increase in demand for infrastructure

projects.

The segment which was hit hardest was Vehicle Financing. Companies financing new vehicle

purchases experienced a drastic reduction in new customer numbers. Fortunately, since

vehicle finance is asset-based business, their asset quality did not suffer as against other

consumer financing businesses. Contrary to this, Shriram Transport Finance, the only NBFC

which deals in second-hand vehicle financing was able to maintain its growth primarily dueto its business model which does not entirely depends on health of the auto industry.

Characteristics of Global Industry

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The radical and ongoing changes occurring in society create an uncertain environment and

have an impact on the function of the whole organization. A PEST analysis is merely a

framework that categorizes environmental influences as political, economic, social and

technological forces. The analysis examines the impact of each of these factors (and their

interplay with each other) on the business. The results can then be used to take advantage of

opportunities and to make contingency plans for threats when preparing business and

strategic plans.

PEST analysis is a useful strategic tool for understanding market growth or decline, business

position, potential and direction for operations. The use of PEST analysis can be seen

effective for business and strategic planning, marketing planning, business and product

development and research reports. PEST also ensures that companys performance is aligned

positively with the powerful forces of change that are affecting business

environment. PEST is useful when a company decides to enter its business operations into

new markets and new countries. The use of PEST, in this case, helps to break free of

unconscious assumptions, and help to effectively adapt to the realities of the new

environment.

Political Factors

Focus on Regulations

Government interference

Economic Factors

Growing Economy

Low Interest Rates

PEST Analysis of Industry in world Market.

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Social Factors

Loyalty Factor

Increased Penetration of Cards

Increased Usage of Online Banking

Technological Factors

IT Services

Mobile Banking

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Non-banking financial companies (NBFCs) form an integral part of the Indian financial

system. The history of the NBFC Industry in India is a story of under-regulation followed by

over-regulation. Policy makers have swung from one extreme position to another in their

attempt to set controls and then restrain them so that they do not curb the growth of the

industry.

Non-Banking Financial Companies or NBFC in India are registered companies conductingbusiness activities similar to regular banks. Their banking operations include making loans

and advances available to consumers and businesses, acquisition of marketable securities,

leasing of hard assets like automobiles, hire-purchase and insurance business.

Though they are similar to banks, they differ in a couple of ways. NBFCs cannot accept

demand deposits (deposits that can be withdrawn at immediate notice), they cannot issue

checks to customers and the deposits with them are not insured by the DICGC (the India

equivalent of FDIC in the US system). Either the RBI (Reserve Bank of India) or the SEBI

(Securities and Exchange Board of India) or both regulate NBFCs.

Though the NBFCs have been around for a long time, they have recently gained popularity

amongst institutional investors, since they facilitate access to credit for semi-rural and rural

India where the reach of traditional banks has traditionally been poor.

Historical Background of NBFC

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Credit Growth

Credit growth across NBFC and banking sectors is presented in Chart 4. NBFC - credit grew

more rapidly as compared with the banking sector. NBFC credit witnessed a CAGR of 24.3

per cent during the period between March 2007 and March 2013 as against 21.4 per cent by

the banking sector.

Although Indian economy is slowing down in the recent past, the robust NBFC credit growth

is largely on account of significant growth in infrastructure credit and retail finance.

Financing of Infrastructure

By financing infrastructure projects, NBFCs broaden capital formation of the country and

thereby contribute to the overall economic growth and development of the country.

Indian Scenario of the NBFC Industry

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The quantum of infrastructure finance provided by the NBFC sector witnessed a CAGR of

26.2 per cent during the period between March 31, 2010 and March 31, 2013. In absolute

terms, NBFC finance to infrastructure increased from Rs.2228 billion on March 31, 2010 to

Rs. 4479 billion as on March 31, 2013 (Chart 4A).

NBFC finance to infrastructure accounted for 35.8 % of their assets as on March 31, 2013

while in case of banks it was 7.6%.

Public Deposits

In line with RBI directions, the public deposits of NBFC sector (including RNBCs) declined

considerably from Rs. 247 billion as on March 2007 to Rs.106 billion as on March 2013

(Chart 5).

The decline in public deposits is largely on account of RNBCs, which are going to exit from

NBFC business model by June 2015. The public deposits of RNBCs decreased from Rs. 202

billion as on March 31, 2007 to just Rs. 35 billion as on March 31, 2013.

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Micro Finance Institutions

NBFC-MFIs provide access to basic financial services such as loans, savings, money transfer

services, micro-insurance etc. to poor people and attempt to fill the void left between the

mainstream commercial banks and money lenders.

Over the last few years NBFC-MFIs have emerged as a fast growing enablers in providing

the financial services to the poor people by providing capital inputs to poor which generates

self-employment, and thereby promotes inclusive growth.

The credit provided by the NBFCs - MFIs11 increased from just Rs. 105 billion as on March

2010 to Rs.151 billion as on March 2011 and declined to Rs.117billion on account of the

ordinance passed by the AP Government that stopped all MFIs from collecting payments by

force or even disbursing loans by the MFIs. However, in March 2013, the outstanding credit

disbursed by the MFIs increased to Rs.144 billion due to partial resumption of MFI activities,

owing to implementation of the Malegam Committee recommendations and certain Supreme

Court orders favourable for MFIs.

To encourage MFIs, as per the Malegam committee recommendations, RBI has created

separate category under NBFCs. As on date, around 33 MFIs have been registered with RBI.

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To encourage MFIs, as per the Malegam committee recommendations, RBI has created

separate category under NBFCs. As on date, around 33 MFIs have been registered with RBI.

Monetisation of Gold

Gold loan NBFCs provide loans against security of gold jewellery. Although banks are also

involved in gold loan business, NBFCs gold loans witnessed phenomenal growth due to

their customer friendly approaches like simplified sanction procedures, quick loan

disbursement etc.

Branches of gold loan NBFCs increased significantly during the last couple of years mostly

housed at semi-urban and rural centres of the country.

Gold loan NBFCs help in monetisation of idle gold stocks in the country and facilitate in

creating productive resources. Credit extended by the gold loan NBFCs witnessed a CAGR of

86.7 per cent during the period March 2009 to March 2013. In absolute terms, NBFC gold

loans increased from just Rs. 39 billion as on March 31, 2009 to Rs.475 billion as on March

31, 2013.

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To study the issues related to the gold loans by NBFCs a working group was set up under the

chairman ship of K.U.B. Rao which submitted its report in January 2013. Several

recommendations have since been accepted and acted upon.

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In all fairness, the NBFC sector was not in regulatory shadows as RBI has, over the years,

tweaked and implemented a differentiated regulatory regime for depositaccepting,

systemically important, and other non-bank institutions. A few famous failures of deposit-

accepting institutions in the 1990s led to legal and regulatory measures to curb and regulate

the activities of looselyregulated institutions that garnered substantial deposits from areas

where banking could not, and indeed would not, reach.

New generation private sector banks and newly-energised and technology-powered public

sector banks helped by filling in the gap and the situation was quickly contained. Regulatory

focus then shifted to the non-deposit accepting NBFCs and attendant issues relating to

classification, public funds and core investment companies. Once the framework for suchlenders was put in place with a bank-like prudential and capital regime, it gave the market the

confidence required for growth.

Indeed, the past two decades have witnessed the evolution of multiple types of NBFCs and

NBFCs can be said to have partnered the India growth story as sanguinely as banks. From

financing long-term infrastructure and running the financial ecosystem around construction,

leasing, equipment, real estate, second-hand machinery, vehicles and creation of small asset

backed loans, NBFCs came to be synonymous with local growth stories, often maintaining

good capital adequacy, asset quality and growth. So, why the need to look at something that

seemed to be doing just fine? For one thing, the problem of plenty had to be addressed.

In the nineties, with the new regulatory framework, the net was cast wide, leading to

registration of NBFCs with extremely basic capital and infrastructure (sometimes no more

than a paper folder and a rented registered address), probably motivated by the typical Indian

proclivity for cornering licences. The recommendations address this issue boldly; balancing

delicately the existing legal framework based on net worth and the proposed asset criteria.

Growth and Evaluation of Industry in India

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Definitions are modified, exemptions are created, but with the end goal to deregister non-

serious players.

Trading in licences is set to become outdated as rules on change in control become strict,

providing opportunity for due diligence to regulators. There are many interesting

recommendations around governance, including approval for CEO remuneration for large

NBFCs, adherence to listing conditions, improved disclosures and greater responsibility of

directors.

Overall, the guidelines seem to converge further towards banking regulation on the important

parameters of capital and liquidity, thereby mitigating potential concerns around stability and

systemic risk. The NPA classification is also set to converge to banking after a transition

time. Real estate and capital markets attract higher risk, weight and disclosures. However,

this creates some significant issues for the sector to deal with. Access to bank finance has

been cut over the past few years through various measures on bank lending, assignment,

securitisation and such.

Alternative mechanism of raising debt locally is not so swift to develop, making it difficult

for even the best-managed NBFCs to fund growth. On the equity front, although leasing and

finance have been put under automatic route for FDI, multiple issues persist in establishing

presence and developing viable business models.

Largely, Indian NBFCs are engaged in consumer financing and asset creation, both being

relevant activities in the current phase of growth. Two scenarios are possible: better

regulation will create better opportunities and better NBFCs will adapt as they have done in

the past and deliver. On the other hand, many of them may not find the business viable in the

absence of the opportunity space between banks and borrowers and shut shops.

http://articles.economictimes.indiatimes.com/2012-12-

26/news/36007959_1_nbfc-sector-sector-banks-regulatory-regime
http://articles.economictimes.indiatimes.com/2012-12-26/news/36007959_1_nbfc-sector-sector-banks-regulatory-regimehttp://articles.economictimes.indiatimes.com/2012-12-26/news/36007959_1_nbfc-sector-sector-banks-regulatory-regimehttp://articles.economictimes.indiatimes.com/2012-12-26/news/36007959_1_nbfc-sector-sector-banks-regulatory-regimehttp://articles.economictimes.indiatimes.com/2012-12-26/news/36007959_1_nbfc-sector-sector-banks-regulatory-regimehttp://articles.economictimes.indiatimes.com/2012-12-26/news/36007959_1_nbfc-sector-sector-banks-regulatory-regime

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List of major products offered by NBFCs in India:

Funding of commercial vehicles

Deciding not to grow is a tough call that any business is forced to take during any

period of its life cycle. The chief executives of non-banking finance companies

(NBFCs), particularly those funding commercial vehicles and equipment, did exactly

that when the economy came to a grinding halt some time back. And that decision is

yet to be revoked, in a telling sign that the core of the economy is still to get out of the

woods."The disbursements have slowed down and have plateaued primarily because

of the fact it was a conscious decision. But even for those offering loans for

commercial vehicles, things are yet to look up.

Sales of commercial vehicles is key barometer of economic activity in a country:

more sales of trucks usually indicate more goods being transported for consumptionor more capital equipment being taken to project sites to start construction.

Funding of infrastructure assets

NBFCs also increased their lending sharply as the credit demand for power and roads

expanded. The major Infrastructure Finance Companies (IFCs) which could be

considered for estimating infrastructure finance are Power Finance Corporation

(PFC), Rural Electrification Corporation Limited (REC), IDFC Limited, India

Infrastructure Finance Company Limited (IIFCL), L&T Infrastructure Finance

Company Limited and IFCI Ltd.Going forward, high historical growth rates observed

in the past may not be feasible since NBFCs would need to take up further capital

raising exercise to be able to lend significant amounts. Hence, for the purpose of

estimation the growth rate for FY11-17 is assumed at ~20 percent per annum which is

at the same levels as commercial banks.

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NBFCs are typically into funding of:

Construction equipment

Commercial vehicles and cars

Gold loans

Microfinance

Consumer durables and two wheelers

Loan against shares, etc.

Types of instrument generally executed:

Loans

Hire purchase

Financial lease

Operating lease

http://indiabudget.nic.in/es2010-11/echap-05.pdf
http://indiabudget.nic.in/es2010-11/echap-05.pdfhttp://indiabudget.nic.in/es2010-11/echap-05.pdfhttp://indiabudget.nic.in/es2010-11/echap-05.pdf

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SWOT analysis of NBFC

Strengths

n High on service aspect

n Strong last-mile approach

n Focus on recovery

n Easy and fast appraisal & disbursements

n Regional kshatraps

n Able to generate higher yield on assets

n Attained critical mass in terms of size

n Own employees vs DSAs

Opportunities

n Augmentation of capital and leveraging for growth

n Large untapped market, both rural & urban and also

geographically

n Demographic changes and under-penetration

nNew opportunities in credit card, personal finance,

home equity, etc 2

-

n Tie-up with global financial sector giants

n Blurring gap with banks in terms of cost of funds

n Securitisation, to liberate funds to fuel asset growth

Weakness

n Weak in urban market

n Weak credit history of most NBFCs

n Largely restricted to the south India market

n Weaker risk-management & technology systemsn Too much of diversification from core business

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n Higher regulatory restrictions

Threats

n Weak financial health of many of the NBFCs

n High cost of funds

n Asset quality deterioration may not only wipe out profits

but also networth\

n Entry of foreign players in post-2009 scenario

n Growing retail thrust within banks

Documents

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