NBFCsNBFCsAND THEIR ROLE IN THEAND THEIR ROLE IN THE

EMERGING GLOBAL FINANCIAL MARKETSEMERGING GLOBAL FINANCIAL MARKETS

THE AREAS OF FOCUS IN OUR PROJECT ARE-

What primarily are NBFCs?

When and why had they been introduced in the financial markets?

How has their performance been till date?

What are the major functions performed by them?

What significance do they have in the global context?

What has been the impact of the inflation on the role of this sector?

What role are they expected to play in the future in the context of the financial markets?

"Non-banking financial company" means-

(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 manner, or lending in any manner;

(iii) 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, specify.

NBFCs as described by RBI in points are-

EQUIPMENT-LEASING COMPANY; HIRE-PURCHASE COMPANY; LOAN COMPANY; INVESTMENT COMPANY

They are also categorized in a different format among 8 categories-

LOAN COMPANY

HIRE PURCHASE COMPANY

INVESTMENT COMPANY

MUTUAL BENEFIT COMPANY

MISCELLANEOUS NON-BANKING FINANCIAL COMPANY-CHIT FUNDS

RESIDUARY FINANCE COMPANY

HOUSING FINANCE COMPANY

EQUIPMENT LEASING COMPANY

Another and recent way of categorizing NBFCs is as under-

ASSET FINANCING COMPANY(AFC)

INVESTMENT COMPANY(IC)

LOAN COMPANY(LC)

(This is with effect from december,2006)

Loan company means a company which is a financial institution carrying on as it’s 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 equipment leasing company or a hire-purchase finance company.

Hire purchase (frequently abbreviated to HP) is the legal term for a contract developed in the United Kingdom.

In cases where a

buyer cannot afford to pay the asked price for an item of property as a lump sum

But,

can afford to pay a percentage as a deposit,

a hire-purchase contract allows the buyer to hire the goods for a monthly rent.

•When sum equal to the original full price plus interest has been paid in equal installments

•the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner.

Investment Company is a company which is a financial institution carrying on as it’s principal business the acquisition of securities.

An investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses.

Mutual Benefit Financial Company

means a company which is a financial institution notified by The Central Government under The Companies Act 1956.

•A mutual fund is a professionally managed type of collective investment scheme in which money is pooled from many investors and invests it in many kinds of securities by a fund manager.

•Currently, the worldwide value of all mutual funds totals more than $26 trillion.

•Mutual funds can invest in many kinds of securities.

The most common securities in which the mutual funds invest the money of the investors are-

Cash instruments

Stock

Bonds

but there are hundreds of sub-categories.

For example-

Stock funds can invest primarily in the shares of a particular industry, such as technology or utilities.

CHIT FUNDS CHIT FUNDS

CHIT means a transaction whether called chit, chit fund, chitty, kury or by any other name or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount.

Good source of finance-for all sections of society

Good means of savings for any contingency

Serves all persons-whether the desire is for savings or for contingency or for some expense

Residuary Non-Banking Company-class of NBFC-principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being investment, asset financing, loan company.

Investments as per directions of RBI, in addition to liquid assets.

The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds.

NO CEILING ON THE AMOUNT OF DEPOSITS WITH RNBC-A BIT RISKY.

If the RNBCs are safe or not?

Although it is true-no ceiling on raising of deposits by RNBCsBut every RNBC has to ensure that the amounts deposited and investments made by the company are not less that the aggregate amount of liabilities to the depositors. To secure the interest of depositor, such companies are required to invest in a portfolio comprising of highly liquid and secured instruments viz. Central/State Government securities, fixed deposit of scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units of Mutual Funds, etc.

Indian Real Estate-on its way to donning the image of an organized industry-global standards-as fragmentation, disorganization, poor governance and inefficient infrastructure; take a backseat.

Most financial institutions- home loans to both Indian and NRI customers- floating and fixed rate of interest or blended ones- customized packages- purposes of constructing/ buying a new house, vacant plot or extension and even home improvement.

BRIEF BACKGROUND Housing Finance has accumulated expert experience spanning over 40 years in construction/project finance with emphasis in multiple housing developments.

Products and services offered include

Short-term construction loan of 4 to 6 months for construction of single dwelling units.

Short-term multiple development construction loans and bridging loan facilities for a period of up to 24 months.

Long-term financing of a wide spectrum of commercial and residential properties for rental.

Evaluation of construction projects proposals for project concept, commercial, technical and financial viability.

Marketing support through availing developer’s access to website link, display of properties in ultra modern property point for wide reach.

Means a company which is a financial institution carrying on as it’s principal business, the activity of leasing of equipment. EQUIPMENT LEASE - An agreement that specifies the rights and obligations between a lessor (who owns equipment) and a lessee (to whom the lease gives certain rights to possess and use the equipment). Obtaining the use of machinery, vehicles or other equipment on a rental basis. This avoids the need to invest capital in equipment. Ownership rests in the hands of the financial institution or leasing company, while the business has the actual use of it.

...then and now....then and now.

The deposit base of NBFCs grew rapidly in early-mid nineties

0

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8

YEAR

DE

PO

SIT

BA

SE

DEPOSITBASE(Rs. Inbillions)

YEAR NO.

YEAR

1 1988

2 1989

3 1990

4 1991

5 1992

6 1993

7 1994

8 1995

Initial years of NBFCs- not a good response in terms of performance- seen in terms of their deposit base and share in the financial services sector.

Banks-very popular at that time-enjoyed a much more larger share as compared to the NBFCs.

Later-improvement in performance-

In 1981, number of NBFCs =>

In 1990, number shot upto =>

In 1995, number of NBFCs was =>

In terms of deposit base, it could be traced as

From April 1991 to March 1997, the deposit base grew at an average rate of 88.57%. The public deposits managed in 1997 were of value of about Rs.15000 crores.

Since 1998, due to stringent government regulations, the deosits with the NBFCs have gone down.

Today the deposits managed by the sector has shrunk to about Rs.3000crores.

7063

24009

55995

Also the performance of the NBFCs-studied in terms of the asset baseasset base they hold.

• As of 2000, the collective asset base of all the NBFCs was about Rs.400 billion.

• This was a huge fall in the figures as there was a sharp fall in the companies with an asset base of <Rs.5 million.

Generally speaking-core profitability of the NBFCs-rose in 2002-03

since the last two years the status of the NBFCs has increased,

although since the depression in the world economy-the growth and performance of the NBFCs-gone down-compared to just previous performance.

BANKS-financial institutions-reached the major section of every country of the world

still there were some rural, under-privileged and under-served sections in each of the nations

NEED OF BETTER FINANCIAL SERVICES

UNDER-SERVICED SEGMENTS

Requirement of the services of some financial institution which could cater to their needs.Lead to the creation of the NON-BANKING FINANCIAL COMPANIES or simply NBFCs.

UNTOUCHED AREAS

IMPORTANT ROLE TO BE PLAYED

It makes a study of what special is there in NBFCs that provide them an edge over the Banking sector.

If the NBFCs can prosper and flourish in the future or would it be subsided due to the Banking sector?

Banks-covered major section of the nation-but still some under-served sections exist -need for financial institutions for them-NBFCs CAME INTO PICTURE.

BANKS-focus on the METRO-BASED MODEL-but NBFCs’ concern NON-METRO-FOCUSSED MODEL.

NBFCs –concentrate their activities on areas NOT ENTERTAINED by the BANKING sector -like-

1. HIRE-PURCHASE

2. LEASING

3. EQUIPMENT-LEASING

4. LOANS

5. CHIT FUNDING,etc.

Cost efficiency -NBFCs are better than Banks-greater LEEWAY on the balance sheet-WORLD OVER.

NBFCs-important role in the provision of QUALITY CUSTOMER SERVICES -much better than banks can ever do.

So to sum up we can define this section “BANKS OVER NBFCs” in the following points-

IMPORTANT ROLE IN MACRO ECONOMICS PERSPECTIVE

REACH THE UNDER-DEVELOPED SECTOR

AREAS UNTOUCHED BY BANKS-LEASING, LOANS, ETC.

HIGH QUALITY CUSTOMER SERVICE TO RETAIL CUSTOMERS.

FINANCING COMMERCIAL VEHICLES AND EVEN SMALL BUSINESSES.

Non-bank institutions frequently acts as:-

Suppliers of loans and credit. Supporting investments in property

Trading money market instruments

Funding private education,

Wealth management.

Underwrite stock and shares.

Retirement planning

Advisory functions.

Discounting services.

GLOBAL FINANCIAL MARKET is an institution or arrangement that facilitates the exchange of financial instruments, including deposits and loans, corporate stocks and bonds and other instruments across the world in a quick and easy manner………

In the present day world -innovation in their activities-lower cost and better efficiency-points to the growth of trend of mergers globally.

Sub-prime mortgage crisis in the US -temporary blip in the domestic financial sector and its impact on NBFC’s.

In the emerging scene, the market for retail customers is where all action is. Consumer credit remaining an under-served area — fuelled the rapid growth of financial services companies-implies a growth prospect for the NBFCs.

Declining interest of the NBFCs in the public deposits-RBI should look at the possibility of allowing only banks to take public deposits.

PRESENT CONTEXT

EFFECT OF CRISIS

RETAIL’S EFFECT

POINTS TO DISCUSS

POLICIES IN INDIA:

For a developing nation where infrastructure creation has been presently accorded highest priority -leasing-immense potential.

The market for financial loans-not determined solely by the cost of finance. Service -- loosely described as the convenience offered to the customer in terms of speed & product features -- critical role in volume growth. So the service sector has to be improved. And NBFCs-specially focused on customer services-higher potential to grow.

CONDITIONS FOR DEVELOPING WORLD

NEED OF THE HOUR

TODAY it’s the world of GLOBAL INTEGRATION. And the performance of each and every economy depends and reciprocally affects the other nation as well.

Hence the overview of the future of NON-BANKING FINANCIAL COMPANIES in the emerging global markets is very essential for us to have a look at.

To have an idea of this part of our project, we have divided the entire scope of our idea into some parts:

STATUS of NBFCs in the future.

ROLES expected to be assumed by NBFCs in future.

The status again has to be studied in 2 parts-

NBFCs in the NEAR FUTURE.

NBFCs in the LONG RUN.

PREDICTION OF THE FUTURE can be done on the basis of-

STUDY OF PAST

STUDY OF PRESENT

PREDICTION ABOUT FUTURE

For 3 different periods the statistics for the TSR for the NBFCs and BANKS has been shown below-

TSR for 2003-08(%)-• PSU BANKS-42• PRIVATE SECTOR BANKS-45.5(average)• NBFCs-85

TSR for 2005-08(%)-• PSU BANKS-21• PRIVATE SECTOR BANKS-30.5(average)• NBFCs-83

TSR for 2007-2008(%)-• PSU BANKS-47• PRIVATE SECTOR BANKS-18.5(average)• NBFCs-83

Seeing the other side of the coin i.e., we get a totally opposite picture!

The return on the total income of 383 NBFCs decreased during the period between APRIL and JUNE 2008.

The combined net profits of the 383 NBFCs have increased only 11.2% to Rs.2533 crore, resulting a decrease in return to total income from 22.35% in APRIL-JUNE2007 to 20.36% in APRIL-JUNE2008.

This does give a negative implication and is also depicting that in case of depression, NBFCs have been badly affected.THE LAST couple of years have seen significant developments in the financial sector that have raised competition across-the-board. Non-banking finance companies (NBFCs) have perhaps felt the pressure most.

• Banks have started looking at NBFCs as competitors.

• High-yielding segments such as consumer durables, two-wheelers and pre-owned CVs, where NBFCs have registered strong growth, still offer potential to grow.

The views of the market players about the FUTURE of NBFCs are-

A.C. SHAH-

“A shakeout in the non-banking finance sector is likely in the near future.” The public is not willing to park its funds with NBFCs due to the low rate of interest offered by them for deposits.

Credit Rating and Information Services of India Ltd (CRISIL)-

“Concern over the weak financial fundamentals of non-banking finance companies (NBFCs).”

RBI-

“The NBFCs have been declared to be the weakest link in the entire financial services sector.”

ROOPA KUDVA, managing director and chief executive officer, Crisil-

"The decline in business volume will mean a further marginalisation of the sector, a trend that has been accelerating over the past few years as banks have taken over the traditional NBFC stronghold of retail lending.“

HEMANT KANORIA, CMD, SREI Infrastructure Finance Ltd-

“Over the last 3-4 months, it had become extremely difficult for NBFCs to raise money in the domestic market. We have been awaiting the government’s and the RBI’s approval for access to the ECB market.”

R RAVI, executive director of the Mumbai-based Alpic Finance-

"The future belongs to strong financial service factories.“

R. VAIDYANATH-

“NBFCs — creditable but unrecognized role.”

The future of the NON-BANKING SECTOR cannot be easily predicted for the long run because it has seen through many ups and downs in it’s entire journey.

A merger between BANKS and NBFCs on the overall global front.

NBFC’s would convert into BANKS.

Here we would be faced with two of the VERY IMPORTANT QUESTIONS and those are-

WILL THE MERGERS AND CONVERSION OF NBFCs INTO BANKS WOULD LEAD TO ENLARGEMENT OF THE NON-BANKING FINANCIAL COMPANIES?

OR,

WILL IT CAUSE THE NBFCs TO BECOME JUST A SMALL SECTOR TO THE BANKING INDUSTRY?

NBFCsNBFCs BANKSBANKS

NBFCs + NBFCsNBFCs + NBFCs NBFCsNBFCs

A BRIEF SAY ON MERGERS AND ACQUSITIONS…

It is very clear that the gap between the banks and NBFCs has been narrowing lately. …. Other than deposit taking activity, their activities are largely similar. The NBFCs have an advantage in management of risks and reach.

NBFC’s are fast to adapt to the changes.

In the long-term, the gap between banks and NBFCs will narrow. In which case a different breed of NBFCs will emerge. For instance, a very focused entity catering to a small area.Some NBFCs have converted themselves into banks, while others have merged into banks.Given this scenario, does CRISIL foresee NBFCs as having a role to play in the Indian financial system over the medium to long term? Will there be any NBFCs left in the country in a few years?

ROLES FOR FUTURE...ROLES FOR FUTURE...Traditionally, the NBFCs have dominated the market for retail finance.With such new areas as insurance being opened up, top-rung NBFCs are presented with an opportunity to grow.

There have been occurring mergers between the NBFCs and BANKS but apart from mergers, other options waiting for NBFCs are to change the tracks and explore new areas.

They have to extend their product portfolio to include asset management companies, housing finance firms and to venture into newly opened insurance sector for private participation.

There are some areas where the NBFCs can expand themselves due to either the need of healthy customer service, or as they need to be explored or even due to the expertise of the NBFCs in those areas.

ENTRY INTO

Retail finance

Housing loans

Insurance business

Web-based services

High yielding segments

Personal loans & Credit cards

Portfolio-management services

Sale of products of other financial intermediaries

These are the areas that either haven’t been touched at all or still offer huge potential to grow.

Future Capital

Ashok Leyland Finance

Reliance Capital

ABN Amro Bank

Future Capital, the financial arm of Future Group, will soon start rolling out

Money Bazaarsacross the country. This one stop-shop would be providing numerous services like-

• Housing loans• Personal loans• Insurance• MFs• Credit cards

Traditionally, ALF has depended on commercial vehicle financing for a significant proportion of its revenue. However, recently the company initiated steps to broadbase its revenue stream by entering new areas of finance.

• The other segment they are concentrating on is passenger cars.

• The other segment they have is multi-utility vehicles (MUVs). It is more or less on the pattern of commercial vehicles vis-à-vis risk. There we certainly have considerable scope.

• The other segment is construction equipment...will take time for others to get in.

• They are also at an advanced stage of developing a loan portal by which they will have the capability to distribute loan products of other intermediaries.

• The move of Ashok Leyland Finance to launch a finance portal that would be used to sell products of other financial intermediaries and to use its skill in collection to derive a pure service income.

Reliance Capital, an arm of the Anil Dhirubhai Ambani Group, will set up a separate housing financial subsidiary and non-banking financial company (NBFC) for the consumer finance sector. Ambani said his company is also planning to selectively expand its

• asset management• life insurance, and • broking operations

in emerging markets across Asia, Africa and the Middle East.

ABN Amro BankABN Amro Bank

“ABN Amro Bank will use its NBFC to complement its retail distribution business.”

Ms Meera Sanyal, Country Executive-ABN Amro Bank, India.

The future of the Non-Banking Financial Companies would depend largely on their performance in the present slowdown. It will be a deciding factor for their future scope and role in the emerging global

financial markets.

In the PRESENT SCENARIO, it is very essential for them to come up with best of customer services round-the-world because this is the

basic strength of this sector.

They need to explore all possible opportunities but also need to strengthen their BASICS too!!!