NBFCs & Banks In INDIA

Debraj Das | Debayan Ray

Koushik Dutta | Anindya Mondal

School of Management Sciences

Indian Institute of Engineering Science and Technology,

Shibpur

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ADVANTAGE INDIA

Robust Demand• Increase in working

population and growing disposable incomes will raise demand for banking and related services

• Housing and personal finance are expected to remain key demand drivers

• Rural banking is expected to witness growth in the future

Innovation in services• Mobile, Internet banking and

extension of facilities at ATM stations to improve operational efficiency

• •Vast un-banked population highlights scope for innovation in delivery

Policy support• Wide policy support in the

form of private sector participation and liquidity infusion

• Healthy Regulatory oversight and credible Monetary Policy by the RBI have leaf strength and stability to the country’s banking sector.

Business fundamentals• Rising fee incomes improving

the revenue mix of banks• High net interest margins,

along with low NPA levels, ensure healthy business fundamentals

FY12Total asset size:

₹90.12 trillion

FY25ETotal asset size:

₹1712.28 trillion

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Evolution of the Indian banking sector

1921

1935

1936 - 1955

1956 - 2000

2000 onwards

• Closed market• State-owned

Imperial Bank of India was the only bank existing

• RBI was established as the central bank of country

• Quasi central banking role of Imperial Bank came to an end

• Imperial Bank expanded its network to 480 branches

• In order to increase penetration in rural areas, Imperial Bank was converted into State Bank of India

• Nationalisation of 14 large commercial banks in 1969 and 6 more banks in 1980

• Entry of private players such as ICICI intensifying the competition

• Gradual technology upgradation in PSU banks

• Number of banks increased to 27 public sector banks, 22 private sector banks and 41 foreign banks

• Advent of mobile and internet banking

• Growing FDI in the Indian banking sector

Source: Indian Bank’s Association, Aranca Research, BMI Notes: RBI - Reserve Bank of India, FDI – Foreign Direct Investment Note: The data on number of banks belongs to FY11

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Growth in deposits

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

489

665

822763

1030

1182 1170

1274

1453

Growth in deposits over the past few years ($ bn)

Series 1

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Asset Base of Banks

FY10 FY11 FY12

100 100 120

250 236300

9401000

1090

12901336

1510

Asset Base ($bn)

Foreign Banks Private Banks Public Banks Total Linear (Total)

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Growth in Money Supply

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Market Share by Deposits

FY05 FY12

78.2 77.5

17.1 18.2

4.7 4.3

Market Share by deposits

Public Banks Private Banks Foreign Banks

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Incomes of Banks

FY09 FY10 FY11 FY12

56.9 63.876.3

101

17.7 17.3 20.227.9

6.3 5.5 5.9 7.6

Incomes from interest ($ bn)

Public Banks Private Banks Foreign Banks

FY09 FY10 FY11 FY12

8.910.2 10 10.5

3.74.3 4.3

5.1

3.12.1 2.3 2.3

Other Income ($ bn)

Public Banks Private Banks Foreign Banks

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ROI of Banks

SBI & its as-sociate

Nationalised Banks

Public Banks Private Banks Foreign Banks

91%100% 97%

128% 126%

79%

103%96%

143%

175%

89% 88% 88%

153%

176%

Return on Asset

FY10 FY11 FY12

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ROI of Banks

SBI & its as-sociate

Nationalised Banks

Public Banks Private Banks Foreign Banks

77%

71%

73%

77%

70%

80%

74%

76%

80%81%

82%

76%

78%

82%83%

Loan-to-Deposit Ratio

FY10 FY11 FY12

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All About Indian Banks:RBI

(Apex Bank)

Scheduled Banks

Co-operative banks

Urban co-operative Banks (52)

State co-operative Banks (16)

Commercial Banks

Public Sector Banks (27)

Private Sector Banks (30)

Foreign Banks (40)

Regional Rural Banks

(196)

Unscheduled Banks

State Banks of Indian and associates (8 )and other nationalised bank

(19)

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Primary Functions• Accepting Deposits

1. Saving Deposits

2. Fixed Deposits

3. Current Deposits

4. Recurring Deposits

• Granting of Loans and Advances1. Overdraft2. Cash Credits3. Loans4. Discounting of Bill of Exchange

So, Profit of a Bank is = ∑ Loan amount x lending interest rate −

∑ Publics’ deposit amount x deposit interest rate

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Secondary functions• Agency Functions

The bank acts as an agent of its customers.

Transfer of Funds1. Collection of Cheque2. Periodic Payments3. Portfolio Management4. Periodic Collections5. Other Agency Function

• General Utility Functions

Issue of Drafts, Letter of Credits, etc.

1. Locker Facility2. Underwriting of Shares3. Dealing in Foreign Exchange4. Project Reports5. Social Welfare Programs6. Other Utility Functions

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Indian Banks:Public Sector Banks

Private Sector banks

Foreign Bank

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• A company registered Company Act -1956

• RBI Act, 1934- 45-IA - Every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution.

• NBFCs are financial intermediaries engaged primarily in the business ofLoans and advancesacquisition 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

• does not include any institution whose principal business that ofagriculture activityindustrial activitySale / purchase / construction of immovable property.

What are NBFC’s

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Exemption from Registration• Certain category of NBFCs which are regulated by other regulators

are exempted from the requirement of registration with RBI:

Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI

Insurance Company holding a valid Certificate of Registration issued by IRDA

Nidhi companies as notified under Section 620A of the Companies Act, 1956

Chit Funds Act, 1982, Sec 2 (b) Housing Finance Companies regulated by National Housing Bank.

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Features of NBFC’s• All the NBFC are not entitled to accept public deposits.

Only those NBFCs holding a valid Certificate of Registration (CoR) with authorisation to accept Public Deposits can accept/hold public deposits.

The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund and comply with the Directions issued by the Bank.

• Accept deposit for a period less than 12 months and more than 60 months

• They cannot accept deposits repayable on demand

• NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time (at present @12.5% © RBI)

• NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

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Features of NBFC’s• NBFCs (except certain AFCs) should have minimum investment grade credit

rating.

• The deposits with NBFCs are not insured

• The repayment of deposits by NBFCs is not guaranteed by RBI

• There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits

• If a NBFC defaults in repayment of deposit, the depositor can approach

A. Company Law Board

B. Consumer Forum

C. file a civil suit to recover the deposits.

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Types of NBFCs • NBFCs can be classified into two broad categories, viz.,

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

• Residuary Non-Banking Company

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Leasing, Hire-Purchase, Loan Company.

These companies are required to maintain investments as per directions of RBI, in addition to liquid assets.

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Major NBFCs in India • Birla Global Finance

• Cholamandalam Investment & Finance Co. Ltd

• First Leasing Company of India

• Sundaram Finance

• Countrywide Finance

• Housing Development Finance Company

• LIC Housing Finance

• CanFin Homes

• Sakura Capital India Ltd

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Why NBFC’s?• Only 34% of Indian individuals have access to banks.

• Banks have a lot of constraints in lending.

• Conditions for getting a loan.

• Proximity of financial services.

• Size of loans.

• Higher risk taking ability.

• Innovative business model.

• Expert skills.

• Relationship with customers.

• Single product and dedicated business.

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Some examples

• In infrastructure financing credit risk evaluation is the main job.

• For collecting the dues they use human resources and pay them lower than what banks pay. Banks lack here.

• In truck financing majority of the truck drivers don’t have proper papers to get the loans.

• Many SME’s in India are like truck drivers.

• In home finance, housing finance companies (HFC) flourish with higher focus and better customer service.

• NBFC’s are the top priority in the above sectors.

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BANKS Vs. NBFC’s• NBFC cannot collect deposits in the manner of a bank

• Interest rates for NBFC’s are different compared

• NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheque drawn on itself

• NBFC cannot issue Demand Drafts like banks

• While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956.

• Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

• NBFC cannot engage into - 1. agriculture activity,2. industrial activity, 3. sale/purchase/construction of immovable property

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Online & ATM usages

1988-94

1995-99

2001-2004

2004-2006

2007 onwards

• Deposit of Cash• Withdrawal of

Cash

• Mini-statement

• Balance Enquiry

• Coupon dispensing

• Fulfilling request from customers

• Account Transfer• Touch screen

menus

• Bill payments• Mobile

Recharging

• Check Deposit with scanning

• Customised ATMs

Source: IBA statistics, Aranca Research

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Growth in ATMs

2005 2006 2007 2008 2009 2010 2011 2012 2014 E

16750 21509 2708834789

43651

6015374743

104500

210000

Growth in ATMs – CAGR 29.9%

No of ATMs Exponential (No of ATMs)

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ADVANTAGE INDIA

2007 2008 2009 2010 2011 2012 20130.40%

9.20%

15.20%

24.30%

37.50%39.90% 40.80%

Rural Teledensity

Rural Teledensity

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New Banking Licences as on 04-04-2014• Bandhan Financial Services

• Infrastructure Development Finance Company (IDFC)

• A committee headed by former RBI governor Bimal Jalan had examined 25 applications for new banking licences,

L&T Finance an arm of engineering-to-IT conglomerate Larsen & Toubro Bajaj Finance Anil Ambani-controlled Reliance Capital Aditya Birla Financial Services.

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Notable trends in Banking Sector

Increasing focus on Women Banking

Wide usability of RGTS & NEFT

Know Your Client (KYC)

Technological Innovations

Diversification of Revenue stream

Improved Risk Management Practices

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Thank you all…