effect of nbfc

8/12/2019 effect of nbfc

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LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT

Capstone Project Report on Effects of Non-Banking Financial Corporations on PrivateSector Commercial Banks

Lovely Professional University

In partial fulfillment of the Requirements for the award of Degree of Master of Business

Administration

Submitted by:SHANTUN BENIWAL (11209222)

SUDEEP BARATAULA (11209327)

ABOOZAR KARIMI (11209411)DEBOJIT PHUKAN (11208782)

Submitted to

Vishal Goyal, Assistant Professor


DEPARTMENT OF MANAGEMENTLOVELY PROFESSIONAL UNIVERSITY JALANDHAR, NEW DELHI GT ROAD

PHAGWARA

PUNJAB


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ACKNOWLEDGMENT

A research project is a golden opportunity for learning and self-development. We considerourselves very lucky and honoured to have so many wonderful people who lead us through incompletion of this project.

We wish to express our indebted gratitude and special thanks to our Capstone Mentor-

"Mr. Vishal Goyal, Assistant Professor, Lovely Professional University" who in spite of beingextraordinarily busy with his duties, took time out to hear, guided and kept us on the correct pathand allowed us to carry out this research project work.A humble Thank you Sir. He inspired usgreatly to work for this project. His willingness to motivate us contributed tremendously to ourproject. We would also like to thank him for sharing the valuable knowledge related to the topicof the project

AboozarShantun Beniwal

Sudeep BartaulaDebojit Phukan


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DECLARATION

We hereby declare that the subject matter of this research project on title Effects of

NBFCs on Private Sector Commercial Banks, is the record of the work done by us and thatthe contents of this research piece did not form the basis of award of any previous degrees or to

the best of our knowledge to anybody else, and that it has not been submitted by us for any

research or other degrees in any other university/institute.

This is being submitted to the Department of Management, Lovely Professional

University for the fulfillment of Master of Business Administration.

It is certified that this project has been prepared and submitted under my guidance.

Date: Mr. Vishal Goyal

Place: Lovely Professional University (Assistant Professor)



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TABLE OF CONTENTS

Sr. No. Particular Page No.

1.1.11.21.2.11.2.21.2.31.2.41.2.51.2.61.2.71.31.3.11.3.21.3.31.3.41.3.51.41.4.11.4.1.11.4.1.1.11.4.1.1.21.4.1.1.31.4.1.21.4.1.2.11.4.1.2.2

IntroductionNBFC an IntroductionTypes of NBFCAsset finance companyInvestment companyLoan companyInfrastructure finance companySystematically important core investment companyInfrastructure debt fundNBFC-FFunctions of NBFCFinancial IntermediationEconomic basis of Financial IntermediationInducement to saveMobilization of savingInvestment of fundsCommercial bank: an introductionFunctions of commercial bankPrimary functionAcceptance of depositsAdvancing of loansCredit creationSecondary functionsAgency functionsGeneral utility service

6777888899101010111111121212121417181819

2 Objectives of the study 233 Review of literature 2344.14.24.3

Research methodologyData sourceMethodsTechniques of data collection and analysis

29292929

55.1

Scope of studyExpected outcomes

3030

6. Common Services 31

77.17.27.37.3.17.3.27.3.3

Data analysis and presentationCo-relationT-TestComparison by ratio analysisFinancial structureProfitabilityEfficiency

31313235353638


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8 Recommendations 409 Limitation 4110 Conclusion 421111.1

11.2

AppendicesReferences

Financial statements

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Table and Bar Charts

Sr. No. Particular Page No.1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

1.10

Lending of Banks and NBFCs Co-Relation

Deposits of banks and NBFCs Co-Relation

Deposit of banks and NBFCs data T-Test

T-Test Results on data

Lending of banks and NBFCs data T-Test

T-Test Results on data

Total Debt to Owners Fund

Return on Assets Including Revaluations

Net Profit Margin

Return on long term funds

32

32

33

33

34

34

35

36

37

38

2.12.2

2.3

2.4

Bar Chart Total Debt to Owners FundBar Chart Return on Assets Including Revaluations

Bar Chart Net Profit Margin

Bar Chart Return on long term funds

3536

37

38


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Effects of NBFCs on Private sector commercial banks in India

Introduction:

The financial system in India has been enlarged by variety of banks, financial institutions, capital

and money market institutions, non-banks and different indigenous banking and financial

institutions. Banks are the predominant and the most influential intermediaries in the country.

For the past few decades a large number of Non-banking financial companies have emerged in

India having many para banking activities which influence the profitability of banks in a great

extent, however the regulators still consider them as a step-child.

The banking system in India covers the commercial banks and co-operative banks, the first

which includes foreign banks, are the pre-dominant segment. Besides, government-owned post

offices mobilize deposits but they do not undertake any lending activity.

Banks play a critical role in development and prosperity of an economy by mobilizing funds

from public and investing in variety of projects which drives the machine of economy. Banks

ensures financial stability and liquidity in an economy by developing other financial

intermediaries and markets, proving finance to other corporate sectors and finally cater to the

needs of public savers from household sector, who prefer assured income and liquidity and

safety of funds.

Forms and activities of banks have changed over the years matching the needs of the economy

and adapting to the deregulation, technological innovation and globalization. As banks have been

expanding into para banking activities which were traditionally out of bounds for them, non-bank

intermediaries and NBFCs have begun to perform many of commercial activities which results

into market war and stiff competition between banks and NBFCs. Feeling this competition

important the researchers want to study the effect of NBFCs on commercial banks in depth inIndian context.


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NBFC AN INTRODUCTION

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

Act, 1956, b) its principal business is lending, investments in various types of

shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, chitbusiness, and c) its principal business is receiving deposits under any scheme or arrangement in

one lump sum or in installments. However, a Non-Banking Financial Company does not include

any institution whose principal business is agricultural activity, industrial activity, trading

activity or sale/purchase/construction of immovable property. (Section 45 I (c) of the RBI Act,

1934). One key aspect to be kept in view is that the financial activity of loans/advances as stated

in 45 I (c), should be for activity other than its own. In the absence of this provision, all

companies would have been NBFCs.

Traditionally Banks and NBFCs are rivals in fixed deposit mobilization and in lending. Most of

the NBFCs specialize in consumer lending and they have reported relatively low NPAs as

compared with banks. Recently a large number of foreign finance companies are entering the

market. Most of them are either merchant bankers or investment bankers. (Dr. Ajit, 2013).

In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be

registered with RBI to commence or carry on any business of non-banking financial institution as

defined in clause (a) of Section 45 I of the RBI Act, 1934.

TYPES

NBFCs are categorized

a) In terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,

b) Non deposit taking NBFCs by their size into systemically important and other non-deposit

holding companies (NBFC-NDSI and NBFC-ND)

c) By the kind of activity they conduct. Within this broad categorization the different types of

NBFCs are as follows:

Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying

on as its principal business the financing of physical assets supporting productive/economic


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Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): IDF-NBFC is a

company registered as NBFC to facilitate the flow of long term debt into infrastructure projects.

IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5

year maturity. Only Infrastructure Finanace Companies (IFC) can sponsor IDF-NBFCs.

Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a

non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets

which satisfy the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income notexceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs.

1,20,000;

b. loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequentcycles;

c. total indebtedness of the borrower does not exceed Rs. 50,000;d. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000

with prepayment without penalty;

e. loan to be extended without collateral;f. aggregate amount of loans, given for income generation, is not less than 75 per cent of

the total loans given by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of theborrower

Non-Banking Financial Company Factors (NBFC-Factors):NBFC-Factor is a non-deposit

taking NBFC engaged in the principal business of factoring. The financial assets in the factoring

business should constitute at least 75 percent of its total assets and its income derived from

factoring business should not be less than 75 percent of its gross income


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FUNCTIONS OF NBFCS

The role and importance of non-bank financial intermediaries is clear from the various functionsperformed by these institutions. Major functions of the NBFIs are as follows:

1. Financial Intermediation:

The most important function of the non-bank financial intermediaries is the transfer of fundsfrom the savers to the investors.

Financial intermediation is economical and less expensive to both small businesses and smallsavers,

(a) It provides funds to small businesses for which it is difficult to sell stocks and bonds becauseof high transaction costs,

(b) It also benefits the small savers by pooling their funds and diversifying their investments.

2. Economic Basis of Financial Intermediation:

Handling of funds by financial intermediaries is more economical and more efficient than that bythe individual wealth owners because of the fact that financial intermediation is based on

(a) The law of large numbers, and

(b) Economies of scale in portfolio management.

(i) Law of Large Numbers:Financial intermediaries operate on the basis of the statistical law of large numbers. According tothis law not all the creditors will withdraw their funds from these institutions. Moreover, if somecreditors are withdrawing cash, some others may be depositing cash. Again, the financialintermediaries also receive regular interest payments on loans or investments made by them. Allthese factors enable the financial intermediaries to keep in cash only a small fraction of the fundsprovided by the creditors and lend or invest the rest.

(ii) Economies of Scale:Large size of the asset portfolios enables the financial intermediaries to reap various economies

of scale in portfolio management. The main economies are:

(a) Reduction of risk through portfolio diversification:

(b) Employment of efficient and professional managers; and

(c) Low administrative cost of large loans and


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(d) Low costs of establishment, information and transactions.

3. Inducement to Save:

Non-bank financial intermediaries play an important role in promoting savings in the country.

Savers need stores of value to hold their savings in. These institutions provide a wide range offinancial assets as store of value and make available expert financial services to the savers. Asstores of value, the financial assets have certain special advantages over the tangible assets (suchas, physical capital, inventories of goods, etc.). They are easily storable, more liquid, more easilydivisible, and less risky. In fact, saving- income ratio is positively related to both financialinstitutions and financial assets; financial progress Induces larger savings out of the same level ofreal income.

4. Mobilization of Saving:Mobilization of savings takes place when the savers hold savings in the form of currency, bank

deposits, post office savings deposits, life insurance policies, bills, bond's equity shares, etc.NBFI provides highly efficient mechanism for mobilizing savings. There are two types ofNBFTs involved in the mobilization of savings;

(a) Depository Intermediaries, such as savings and loan associations, credit unions, mutualsaving banks etc. These institutions mobilize small savings and provide high liquidity of funds.

(b) Contractual Intermediaries, such as life insurance companies, public provident funds, pensionfunds, etc. These institutions enter into contract with savers and provide them various types ofbenefits over the long periods.

5. Investment of Funds:

The main objective of NBFIs is to earn profits by investing the mobilised savings. For thispurpose, these institutions follow different investment policies. For example, savings and loanassociations, mutual saving banks invest in mortgages, while insurance companies invest inbonds and securities.


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COMMERCIAL BANK AN INTRODUCTION

The Reserve bank of India in the Banking and Regulation Act, 1949 {section 5(b)}, defines the

business of banking as, "accepting, for the purpose of lending or investment, of deposits of

money from the public, repayable on demand or otherwise, and withdraw able, by cheques, draft,order of otherwise." According to Section 5(c) of the BR Act, 'a banking company is a company

which transacts the business of banking in India.'

FUNCTIONS OF COMMERCIAL BANK

The commercial banks serve as the king pin of the financial system of the country. They rendermany valuable services. The important functions of the Commercial banks can be explained withthe help of the following chart.

Primary Functions

The primary functions of the commercial banks include the following:

A. Acceptance of Deposits

1. Time Deposits:

These are deposits repayable after a certain fixed period. These deposits are not withdrawn ableby cheque, draft or by other means. It includes the following.

(a)Fixed Deposits:

The deposits can be withdrawn only after expiry of certain period say 3 years, 5 years or 10years. The banker allows a higher rate of interest depending upon the amount and period of time.Previously the rates of interest payable on fixed deposits were determined by Reserve Bank.

Presently banks are permitted to offer interest as determined by each bank. However, banks arenot permitted to offer different interest rates to different customers for deposits of same maturityperiod, except in the case of deposits of Rs. 15 lakhs and above.

These days the banks accept deposits even for 15 days or one month etc. In times of urgent needfor money, the bank allows premature closure of fixed deposits by paying interest at reducedrate. Depositors can also avail of loans against Fixed Deposits. The Fixed Deposit Receipt cannotbe transferred to other persons.


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(b)Recurring Deposits:

In recurring deposit, the customer opens an account and deposit a certain sum of money everymonth. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount alongwith interest is paid to the customer. It is very helpful to the middle and poor sections of the

people. The interest paid on such deposits is generally on cumulative basis. This deposit systemis a useful mechanism for regular savers of money.

(c)Cash Certificates:

Cash certificates are issued to the public for a longer period of time. It attracts the people becauseits maturity value is in multiples of the sum invested. It is an attractive and high yieldinginvestment for those who can keep the funds for a long time.

It is a very useful account for meeting future financial requirements at the occasion of marriage,education of children etc. Cash certificates are generally issued at discount to face value. It

means a cash certificate of Rs. 1, 00,000 payable after 10 years can be purchased now, say forRs. 20,000.

2. Demand Deposits:

These are the deposits which may be withdrawn by the depositor at any time without previousnotice. It is withdraw able by cheque/draft. It includes the following:

(a)Savings Deposits:

The savings deposit promotes thrift among people. The savings deposits can only be held by

individuals and non-profit institutions. The rate of interest paid on savings deposits is lower thanthat of time deposits. The savings account holder gets the advantage of liquidity (as in currenta/c) and small income in the form of interests.

But there are some restrictions on withdrawals. Corporate bodies and business firms are notallowed to open SB Accounts. Presently interest on SB Accounts is determined by RBI. It is 4.5per cent per annum. Co-operative banks are allowed to pay an extra 0.5 per cent on its savingsbank deposits.

(b)Current Account Deposits:

These accounts are maintained by the people who need to have a liquid balance. Current accountoffers high liquidity. No interest is paid on current deposits and there are no restrictions onwithdrawals from the current account.

These accounts are generally in the case of business firms, institutions and co-operative bodies.Nowadays, banks are designing and offering various investment schemes for deposit of money.These schemes vary from bank to bank.


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It may be stated that the banks are currently working out with different innovative schemes fordeposits. Such deposit accounts offer better interest rate and at the same time withdraw ablefacility also. These schemes are mostly offered by foreign banks. In USA, Current Accounts areknown as 'Checking Accounts' as a cheque is equivalent to check in America.

B. Advancing of Loans

The commercial banks provide loans and advances in various forms. They are given below:

1. Overdraft:

This facility is given to holders of current accounts only. This is an arrangement with the bankersthereby the customer is allowed to draw money over and above the balance in his/her account.This facility of overdrawing his account is generally pre-arranged with the bank up to a certainlimit.

It is a short-term temporary fund facility from bank and the bank will charge interest over theamount overdrawn. This facility is generally available to business firms and companies.

2. Cash Credit:

Cash credit is a form of working capital credit given to the business firms. Under thisarrangement, the customer opens an account and the sanctioned amount is credited with thataccount. The customer can operate that account within the sanctioned limit as and when required.

It is made against security of goods, personal security etc. On the basis of operation, the periodof credit facility may be extended further. One advantage under this method is that bank charges

interest only on the amount utilized and not on total amount sanctioned or credited to theaccount.

Reserve Bank discourages this type of facility to business firms as it imposes an uncertainty onmoney supply. Hence this method of lending is slowly phased out from banks and replaced byloan accounts. Cash credit system is not in use in developed countries.

3. Discounting of Bills:

Discounting of Bills may be another form of bank credit. The bank may purchase inland andforeign bills before these are due for payment by the drawer debtors, at discounted values, i.e.,

values a little lower than the face values.

The Banker's discount is generally the interest on the full amount for the unexpired period of thebill. The banks reserve the right of debiting the accounts of the customers in case the bills areultimately not paid, i.e., dishonored.

The bill passes to the Banker after endorsement. Discounting of bills by banks provideimmediate finance to sellers of goods. This helps them to carry on their business. Banks can


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discount only genuine commercial bills i.e., those drawn against sale of goods on Credit. Bankswill not discount Accommodation Bills.

4. Loans and Advances:

It includes both demand and term loans, direct loans and advances given to all type of customersmainly to businessmen and investors against personal security or goods of movable orimmovable in nature. The loan amount is paid in cash or by credit to customer account which thecustomer can draw at any time.

The interest is charged for the full amount whether he withdraws the money from his account ornot. Short-term loans are granted to meet the working capital requirements where as long-termloans are granted to meet capital expenditure.

Previously interest on loan was also regulated by RBI. Currently, banks can determine the ratethemselves. Each bank is, however required to fix a minimum rate known as Prime Lending Rate

(PLR).

Classification of Loans and Advances

Loans and advances given by bankers can be classified broadly into the following categories:

(i) Advances which are given on the personal security of the debtor, and for which no tangible orcollateral security is taken; this type of advance is given either when the amount of the advanceis very small, or when the borrower is known to the Banker and the Banker has completeconfidence in him (Clean Advance).

(ii)Advances which are covered by tangible or collateral security. In this section of the study weare concerned with this type of advance and with different types of securities which a Bankermay accept for such advances (Secured Advance).(iii) Advances which are given against the personal security of the debtor but for which theBanker also holds in addition the guarantee of one or more sureties. This type of advance is oftengiven by Banker to persons who are not known to them but whose surety is known to the Banker.Bankers also often take the personal guarantee of the Directors of a company to whom they agreeto advance a clean or unsecured loan.

(iv) Loans are also given against the security of Fixed Deposit receipts.

5. Housing Finance:

Nowadays the commercial banks are competing among themselves in providing housing financefacilities to their customers. It is mainly to increase the housing facilities in the country. StateBank of India, Indian Bank, Canara Bank, Punjab National Bank, has formed housingsubsidiaries to provide housing finance.


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The other banks are also providing housing finances to the public. Government of India alsoencourages banks to provide adequate housing finance.

Borrowers of housing finance get tax exemption benefits on interest paid. Further housingfinance up to Rs. 5 lakh is treated as priority sector advances for banks. The limit has been raised

to Rs. 10 lakhs per borrower in cities.

6. Educational Loan Scheme:

The Reserve Bank of India, from August, 1999 introduced a new Educational Loan Scheme forstudents of full time graduate/post-graduate professional courses in private professional colleges.

Under the scheme all public sector banks have been directed to provide educational loan up toRs. 15,000 for free seat and Rs. 50,000 for payment seat student at interest not more than 12 percent per annum. This loan is on clean basis i.e., without calling for security.

This apart, some of the banks have other educational loan schemes against security etc., one cancheck up the details with the banks.

7. Loans against Shares/Securities:

Commercial banks provide loans against the security of shares/debentures of reputed companies.Loans are usually given only up to 50% value (Market Value) of the shares subject to amaximum amount permissible as per RBI directives. Presently one can obtain a loan up to Rs.10lakhs against the physical shares and up to Rs. 20 lakhs against dematerialized shares.

8. Loans against Savings Certificates:

Banks are also providing loans up to certain value of savings certificates like National SavingsCertificate, Fixed Deposit Receipt, Indira Vikas Patra, etc. The loan may be obtained forpersonal or business purposes.

9. Consumer Loans and Advances:

One of the important areas for bank financing in recent years is towards purchase of consumerdurables like TV sets, Washing Machines, Micro Oven, etc. Banks also provide liberal Carfinance.

These days banks are competing with one another to lend money for these purposes as default ofpayment is not high in these areas as the borrowers are usually salaried persons having regularincome? Further, bank's interest rate is also higher. Hence, banks improve their profit throughsuch profitable loans.


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10. Securitization of Loans:

Banks are recently trying to securities a part of their part of loan portfolio and sell it to anotherinvestor. Under this method, banks will convert their business loans into a security or adocument and sell it to some Investment or Fund Manager for cash to enhance their liquidity

position.

It is a process of transferring credit risk from the banker to the buyer of securitized loans. Itinvolves a cost to the banker but it helps the bank to ensure proper recovery of loan.Accordingly, securitization is the process of changing an illiquid asset into a liquid asset.

11. Others:

Commercial banks provide other types of advances such as venture capital advances, jewelloans, etc.

1. Effective October 18, 1994 banks were free to determine their own prime lending rates (PLRs)for credit limit over Rs. 2 lakh. Data relate to public sector banks.

2. The stipulation of minimum maturity period of term deposits was reduced from 30 days to 15days, effective April 29, 1998. Data relate to public sector banks.

3. The change in the Bank Rate was made effective from the close of business of respective datesof change except April 29, 1998.

4. Effective April 29, 1998.

C. Credit Creation

Credit creation is one of the primary functions of commercial banks. When a bank sanctions aloan to the customer, it does not give cash to him. But, a deposit account is opened in his nameand the amount is credited to his account. He can withdraw the money whenever he needs.

Thus, whenever a bank sanctions a loan it creates a deposit. In this way the bank increases themoney supply of the economy. Such functions are known as credit creation.


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Secondary Functions

The secondary functions of the banks consist of agency functions and general utility functions.

A. Agency Functions

Agency functions include the following:

(i) Collection of cheques, dividends, and interests:

As an agent the bank collects cheques, drafts, promissory notes, interest, dividends etc., onbehalf of its customers and credit the amounts to their accounts.

Customers may furnish their bank details to corporate where investment is made in shares,debentures, etc. As and when dividend, interest, is due, the companies directly send thewarrants/cheques to the bank for credit to customer account.

(ii)Payment of rent, insurance premiums:

The bank makes the payments such as rent, insurance premiums, subscriptions, on standinginstructions until further notice. Till the order is revoked, the bank will continue to make suchpayments regularly by debiting the customer's account.

(i i i)Dealing in foreign exchange:

As an agent the commercial banks purchase and sell foreign exchange as well for customers asper RBI Exchange Control Regulations.

(iv)Purchase and sale of securities:

Commercial banks undertake the purchase and sale of different securities such as shares,debentures, bonds etc., on behalf of their customers. They run a separate 'Portfolio ManagementScheme' for their big customers.

(v)Act as trustee, executor, attorney, etc:

The banks act as executors of Will, trustees and attorneys. It is safe to appoint a bank as a trusteethan to appoint an individual. Acting as attorneys of their customers, they receive payments andsign transfer deeds of the properties of their customers.

(vi)Act as correspondent:

The commercial banks act as a correspondent of their customers. Small banks even get traveltickets, book vehicles; receive letters etc. on behalf of the customers.


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(vii)Preparations of Income-Tax returns:

They prepare income-tax returns and provide advices on tax matters for their customers. For thispurpose, they employ tax experts and make their services, available to their customers.

B. General Utility ServicesThe General utility services include the following:

(i )Safety Locker facility:

Safekeeping of important documents, valuables like jewels are one of the oldest servicesprovided by commercial banks. 'Lockers' are small receptacles which are fitted in steel racks andkept inside strong rooms known as vaults. These lockers are available on half-yearly or annualrental basis.

The bank merely provides lockers and the key but the valuables are always under the control ofits users. Any customer cannot have access to vault.

Only customers of safety lockers after entering into a register his name account number and timecan enter into the vault. Because the vault is holding important valuables of customers in lockers,it is also known as 'Strong Room'.

(ii)Payment Mechanism or Money Transfer:

Transfer of funds is one of the important functions performed by commercial banks. Chequesand credit cards are two important payment mechanisms through banks. Despite an increase infinancial transactions, banks are managing the transfer of funds process very efficiently.

Cheques are also cleared through the banking system. Correspondent banking is another methodof transferring funds over long distance, usually from one country to another. Banks, these daysemploy computers to speed up money transfer and to reduce cost of transferring funds.

Electronic Transfer of funds is also known as 'Cheque less banking' where funds are transferredthrough computers and sophisticated electronic system by using code words. They offer MailTransfer, Telegraphic Transfer (TT) facility also.

(iii) Travelers' cheques:

Travelers Cheques are used by domestic travelers as well as by international travelers. Howeverthe use of traveler's cheques is more common by international travelers because of their safetyand convenience. These can be also termed as a modified form of traveler's letter of credit.

A bank issuing travelers cheques usually have banking arrangement with many of the foreignbanks abroad, known as correspondent banks. The purchaser of traveler's cheques can encase thecheques from all the overseas banks with whom the issuing bank has such an arrangement.


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Thus traveler's cheques are not drawn on specific bank abroad. The cheques are issued in foreigncurrency and in convenient denominations of ten, twenty, fifty, one hundred dollar, etc. Thesignature of the buyer/traveler is written on the face of the cheques at the time of their purchase.

The cheques also provide blank space for the signature of the traveler to be signed at the time of

encashment of each cheque. A traveler has to sign in the blank space at the time of drawingmoney and in the presence of the paying banker.

The paying banker will pay the money only when the signature of the traveler tallies with thesignature already available on the cheque.

A traveler should never sign the cheque except in the presence of paying banker and only whenthe traveler desires to encash the cheque. Otherwise it may be misused. The cheques are alsoaccepted by hotels, restaurants, shops, airlines companies for respectable persons.

Encashment of a traveler cheque abroad is tantamount to a foreign exchange transaction as it

involves conversion of domestic currency into a foreign currency.

When a traveller cheque is lost or stolen, the buyer of the cheques has to give a notice to theissuing bank so that stop order can be issued against such lost/stolen cheques to the banks wherethey are permitted to be encased.

It is also difficult to the finder of the cheque to draw cash against it since the encasher has to signthe cheque in the presence of the paying banker. Unused travellers cheques can be surrendered tothe issuing bank and balance of cash obtained.

The issuing bank levies certain commission depending upon the number and value of travellers

cheques issued.

(iv)Circular Notes or Circular Letters of Credit:

Under Circular Letters of Credit, the customer/traveller negotiates the drafts with any of thevarious branches to which they are addressed. Thus the traveller can obtain funds from many ofthe branches of banks instead only from a particular branch. Circular Letters of Credit aretherefore a more useful method for obtaining funds while travelling to many countries.

It may be noted that travellers letter of credit are usually paid for in advance. In other words, thetraveller first makes payments to the issuing bank before obtaining the Circular Notes.

(v)Issue "Travellers Cheques":

Banks issue travellers cheques to help carry money safely while travelling within India orabroad. Thus, the customers can travel without fear, theft or loss of money


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(vi)Letters of Credit:

Letter of Credit is a payment document provided by the buyer's banker in favour of seller. Thisdocument guarantees payment to the seller upon production of document mentioned in the Letterof Credit evidencing dispatch of goods to the buyer.

The Letter of Credit is an assurance of payment upon fulfilling conditions mentioned in theLetter of Credit. The letter of credit is an important method of payment in international trade.There are primarily 4 parties to a letter of credit.

The buyer or importer, the bank which issues the letter of credit, known as opening bank, theperson in whose favor the letter of credit is issued or opened (The seller or exporter, known as'Beneficiary of Letter of Credit'), and the credit receiving/advising bank.

The Letter of Credit is generally advised/sent through the seller's bank, known as Negotiating orAdvising bank. This is done because the conditions mentioned in the Letter of Credit are, in the

first instance; have to be verified by the Negotiating Bank. It is mostly used in internationaltrade.

(vii)Acting as Referees:

The banks act as referees and supply information about the business transactions and financialstanding of their customers on enquiries made by third parties. This is done on the acceptance ofthe customers and help to increase the business activity in general.

(viii)Provides Trade Information:

The commercial banks collect information on business and financial conditions etc., and make itavailable to their customers to help plan their strategy. Trade information service is very usefulfor those customers going for cross-border business. It will help traders to know the exactbusiness conditions, payment rules and buyers' financial status in other countries.

(ix)ATM facilities:

The banks today have ATM facilities. Under this system the customers can withdraw theirmoney easily and quickly and 24 hours a day. This is also known as 'Any Time Money'.Customers under this system can withdraw funds i.e., currency notes with a help of certainmagnetic card issued by the bank and similarly deposit cash/cheque for credit to account.

(x)Credit cards:

Banks have introduced credit card system. Credit cards enable a customer to purchase goods andservices from certain specified retail and service establishments up to a limit without makingimmediate payment. In other words, purchases can be made on credit basis on the strength of thecredit card.


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The establishments like Hotels, Shops, Airline Companies, Railways etc., which sell the goods orservices on credit forward a monthly or fortnightly statements to the bank.

The amount is paid to these establishments by the bank. The bank subsequently collects the duesfrom the customers by debit to their accounts. Usually, the bank receives certain service charges

for every credit card issued. Visa Card, BOB card are some examples of credit cards.

(xi)Gift Cheques:

The commercial banks offer Gift cheque facilities to the general public. These cheques receiveda wider acceptance in India. Under this system by paying equivalent amount one can buy giftcheque for presentation on occasions like Wedding, Birthday.

(xii)Accepting Bills:

On behalf of their customers, the banks accept bills drawn by third parties on its customers. Thisresembles the letter of credit. While banks accept bills, they provide a better security for paymentto seller of goods or drawer of bills.

(xiii)Merchant Banking:

The commercial banks provide valuable services through their merchant banking divisions orthrough their subsidiaries to the traders. This is the function of underwriting of securities. Theyunderwrite a portion of the Public issue of shares, Debentures and Bonds of Joint StockCompanies.

Such underwriting ensures the expected minimum subscription and also convey to the investingpublic about the quality of the company issuing the securities. Currently, this type of services canbe provided only by separate subsidiaries, known as Merchant Bankers as per SEBI regulations.

(xiv)Advice on Financial Matters:

The commercial banks also give advice to their customers on financial matters particularly oninvestment decisions such as expansion, diversification, new ventures, rising of funds etc.

(xv)Factoring Service:

Today the commercial banks provide factoring service to their customers. It is very much helpfulin the development of trade and industry as immediate cash flow and administration of debtors'accounts are taken care of by factors. This service is again provided only by a separate subsidiaryas per RBI regulations.


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OBJECTIVES OF THE STUDY

1. To identify the common services between Non-banking financial corporations andPrivate commercial Banks.

2. To compare the performance of NBFCS with Private Sector Commercial Banks onbanks on the basis of financial structure, profitability and efficiency

3. To determine whetherNBFCS have impact on Private commercial banks.

Review of Literature:

1. F.No.17/7/2011-BO.II,Government of India, Ministry of Finance, Department ofFinancial Services, and REPORT OF THE KEY ADVISORY GROUP (KAG) ON

THE NON-BANKING FINANCE COMPANIES (NBFCs), NBFCs have been playing

a complementary role to the other financial institutions including banks in meeting the

funding needs of the economy. They help fill the gaps in the availability of financial

services that otherwise occur in bank-dominated financial systems. The gaps are in

regards the product as well customer and geographical segments. The number of NBFCs

has decreased from 13,014 in FY06 to 12,409 in FY11 however the sector has grown by

2.6 times between FY06 and FY11 at a CAGR of 21%. It accounted for 10.8% in termsof outstanding advances and 13% in terms of assets of the banking system in FY06. This

share has risen to 13.2% and 13.78% respectively in FY11. In terms of deposits the share

of public deposits held by NBFCs as compared to deposit base of banks has decreased

from 1.05% in FY06 to 0.22% in FY11.

2. Srinivasan Gumparthi SSn, International Journal of Trade, Economics andFinance, Vol. 1, No. 1, June, 2010, 2010-023X, Risk Assessment Model for Assessing

NBFCs (Asset Financing) Customers, 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. This report covers the industry.


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Most of this NBFCs are operating with high risk of lending and more often NBFCs lend

credit to Small and Medium size enterprises, which are categorized as high risk class of

Assets. To assess such high risk assets we need to have a comprehensive model. This

paper aim is to build Risk Assessment Model for NBFCs based both qualitative and

quantitative aspects of the client.

3. Viral V. Acharya, New York University Stern School of Business, NBER and CEPR,Hemal Khandwala, Centre for Advanced Financial Research and Learning, Reserve

Bank of India And T. Sabri nc, Centre for Advanced Financial Research and

Learning, Reserve Bank of India, Studied the determinants of the growth of those non

deposit taking nonbank financial corporations (NBFCs) which are regarded by the

Reserve Bank of India as being systemically important and have grown substantially in

India over the past decade. They documented that bank lending to these NBFCs forms a

significant proportion of their liabilities, and fluctuates in line with bank allocation to

priority lending sectors. Bank lending to these NBFCs also appears to be greater for

banks that have lower branching in semiurban areas relative to metropolitan areas.

However, bank lending to these NBFCs is virtually nonexistent for the largest state

owned bank, State Bank of India (SBI), and its affiliates. Starting with the financial crisis

of fall 2008, bank lending to these NBFCs experienced a permanent contraction shock

that is related to the shift of term deposits towards SBI away from other banks. These

bankNBFC linkages are present primarily for those NBFCs that do loans or asset

financing and not for investment companies, and also affect the credit growth of these

NBFCs. Overall, the findings suggest that NBFCs represent a completeness of credit

allocation in nonmetropolitan areas of the Indian economy by banks with less than fully

developed branching networks, but that this role has been potentially constrained bydistortions in bank deposit base arising from a lack of levelplaying field in the perceived

government support of different banking groups. Investigated the rapid growth of the

nonbank finance corporations (NBFCs) in India as a laboratory to understand incentives

underlying the growth of shadow banking institutions in emerging markets.


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4. International Business and Economics Research Journal September 2010 Volume9, Planning And Pricing Of Financial Services: A Study On Perceptions And

Practices Of Non-Banking Finance Companies M. R. Shollapur, Siddaganga

Institute of Technology, India, The study aimed to fulfill the following objectives to

trace the unique features of financial products offered by NBFCs. NBFCs in India have

attached a considerable importance to safety and security of their funds as well as the

long-term growth of their customers. Product differentiation is more typical of the present

day financial service industry. NBFCs have tried to be distinct by offering personalized

services as well as improving service quality. They have adopted comprehensive

techniques such as opinion survey of existing customers and formal market research for

eliciting ideas on innovative products. Open suggestions are also invited on how can

these NBFCs perform in a satisfying manner. Interest as a form of price is popular withNBFCs and the cost continues to strongly influence their pricing. They have also

considered the competitors price while determining the price of their financial products.

It is interesting to note that their commitment to customers satisfaction precedes the

objective of survival. A majority NBFCs has accepted the presence of large and

aggressive competitors in the financial service industry. They perceive price as an index

of image as well as a technique of product differentiation. The NBFCs believe in raising

funds at lower costs so as to achieve cost effectiveness in their operations. The reduction

in interest rates in the economy as a whole will help NBFCs to access the resources at

low costs.

5. C.S.Balasubramaniam, Professor, Babasaheb Gawde Institute of ManagementStudies, Mumbai, VOLUME NO.1, ISSUE NO.7, ISSN 2277-1166,the Indian Banks

have overall demonstrated a trend of continued good performance and profitability

despite rising interest rates, increase in operating costs and the spillover effects of recent

global financial Crisil. This is reflected in higher credit growth deposit record, better

return on assets, and return on equities. (ROE) The capital position improved

significantly as the banks were able to mobilize substantial funds. Maintaining

profitability is a challenge to commercial banks especially in a highly competitive era and

opening up of banking business to NBFC and foreign banks in general. This assumes


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significance in a period of rising interest rates and operating costs of borrowers in

general.

6. Zohra Bi and Shyam Lal Dev Pandey; COMPARISON OF PERFORMANCE OFMICROFINANCE INSTITUTIONS WITH COMMERCIAL BANKS IN INDIA,

Australian Journal of Business and Management Research Vol.1 No.6 [110-120],

September-2011. The paper aims to study the performance and efficiency of

microfinance institutions. The researchers have made extensive use of secondary data,

research papers and journals to measure and compare the performance of MFIs with the

commercial banks. The study uses tools like ratio analysis and one way Annova to

measure and analyze the performance. The various parameters used for comparison of

performance between banks and MFIs include: financial structure, profitability and

efficiency. The researchers come to the conclusion that microfinance institutions have

been playing an important role as a tool for poverty alleviation by serving the population

who have been considered un-bankable or are excluded by the commercial banking

activities. Although these 24 MFIs show an impressive growth, they suffer from

inadequacy of capital to expand their outreach and services compared to commercial

banks.

7. Alain de CROMBRUGGHE, Michel TENIKUE and Julie SUREDA,PERFORMANCE ANALYSIS FOR A SAMPLE OF MICROFINANCE

INSTITUTIONS IN INDIA, Annals of Public and Cooperative Economics 79:2

2008,The researchers objective is to analyze the sustainability and outreach of the MFIs.

The researcher paper uses regression analysis to study the determinants of self-

sustainability of a sample of microfinance institutions in India. The sample institutions

have been taken on the basis of their ability and willingness to report financial andoperational data to Sa Dhan. Sa Dhan is common know-how sharing organization. The

study focuses on three variables of sustainability: cost coverage by revenue, repayment of

loans and cost-control. They have come to the conclusion that the challenge of covering

costs on small and partly unsecured loans can indeed be met, without necessarily

increasing the size of the loans or raising the monitoring cost. The analysis suggests other


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ways to improve the financial results. They further explain by giving examples like a

better targeting of the interest rate policy or increasing the number of borrowers per field

officer especially in collective delivery models.

8. Rajarshi Ghosh, Microfinance in India: A critique, the researcher relates to NBFCsas the tool for poverty alleviation and women empowerment. She uses field survey,

longitudinal surveys to examine how powerful microfinance as a tool for inclusive

finance in India is. She also raises questions on the viability of Microfinance institutions.

The survey results revealed that they are unable to expand their outreach, have limited

access to funding, capital and investments and require continuous support from

government and other agencies. Their operating expenses are higher than that of

commercial banks and at the same time strengthen the bond between MFIs and formalfinancial system.

9. Pankaj K. Agarwal and S.K. Sinha, FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS OF INDIA, A CROSS-SECTIONAL STUDY, Delhi

Business Review X Vol. 11, No. 2 (July - December 2010), the researchers consider five

star rated 22 MFIs for the purpose of study. The data on MFIs are very difficult to find,

therefore the paper takes data from MIXMARKET as the only reliable source of data.

The rating is based on the basis of their level of disclosure, vintage, quality of disclosure,

financial parameters etc. The researchers have chosen six parameters of financial

performance, VIZ.financial structure, revenue, expenses, efficiency, productivity and

risk. Overall performance is measured on three ratios viz. Return on Assets, Return on

Equity and Operational Efficiency. Data analysis is done on the basis of these ratios. The

researchers conclude that best performing MFIs are following different business models,

i.e. 13 out of 22. The MFIs rely on time tested models that have been sustained for years.

Each organization have its difference on managerial capacity based on its learning curve.


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10.Jonathan Morduch, The Microfinance Promise, Journal of Economic Literature,Vol. XXXVII (December 1999), pp. 15691614. Morduch in his research paper

explores various literature on Microfinance from its history to the present context of

financial soundness of this system. The author considers theoretical perspectives, the

financial sustainability, and issues surrounding the benefits and cost of subsidization, the

econometric evaluations of impacts and finally saving. The paper concludes with impact

of micro finance on broader economic development. The study stresses on various

literatures around the globe entailing the pioneers of microfinance and financial inclusion

to the un-bankable thus challenging the status quo of the traditional banks many of which

are adopting the models to integrate microfinance with traditional banking services. In the

Monetary Policy Statement 2013-14, it was announced that the Reserve Bank will review

the extant banking structure in India and prepare a policy Discussion Paper keeping inview the recommendations of, inter alia, the Committee on Banking Sector Reforms,

1998 (Chairman:Shri M. Narasimham), the Committee on Financial Sector Reforms,

2009 (Chairman: Shri Raghuram Rajan) and a few other relevant viewpoints. The

Discussion Paper has since been released for starting a public debate


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Research Methodology:

Data Source

The data collected for the purpose of the study are secondary data the researchers have

used research papers, journals articles, interviews, annual reports of the company and

mined data from various sources like the website of RBI, the micro finance information

exchange, money control, and Rediff.

Methods

The Researchers have used extensive collection of secondary data from research articles

and journal to determine the methodology to be used for comparison of performance

between NBFCS and Private Commercial Banks in IndiaThe secondary data thus collected is further analyzed to draw upon the various statistical

tools to be used, thus are the result obtained and conclusions drawn

The researchers have taken 10 Banks and 10 NBFCS for the purpose of the study, these

samples have been taken on the basis of the market capitalization.

Techniques of data collection and analysis

The statistical tools and techniques used are two sample T-Test, Co-Relation and variousratio analysis

1. The two sample T-Test helps the researcher to compare the differences between themean of the variables. Thus it will help to compare the performance of NBFCS over

the banks

2. The ratio analysis is financial tools that are most commonly used to compare thefinancial performance of various organizations

3. The Co-Relation test compares shows the measure of the strength and direction oflinear relationship between variables.it is a measure to explain how well a statistical

tool fits observations.


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SCOPE OF STUDY

The scope of the research is limited to the deposit taking non-banking financial corporations and

Private Commercial Banks in India.

The sample have been taken on the basis of market capitalization only based on this sample the

impact of NBFCS on the private commercial Banks in India is analyzed and measured.

The study does not take into account the NBFCS and Commercial Banks whose market

capitalization is smaller, similarly the study also does not take into account various NBFCS

whose data and information are not publicly available.

Expected outcomes

The various parameters are calculated over a period of 10 years which help us to analyze the

growth of NBFCS in comparison withPrivate Commercial banks in India.

The performance are analyzed based on certain parameters like

a. Financial structureb. Profitabilityc. Efficiency

The results obtained would help the researchers identify if there exist a significant difference

between the NBFCS and commercial banks based on above parameters.


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Common Services of NBFCs and Banks

LOANS AND ADVANCES DEPOSITS

Two wheeler loan Savings Account

Personal Loan Current account

Home Loan Fixed DepositsLoans for workingprofessionals Sweep - In / Out Deposit Vehicle Loans Young Saver Deposit Loan for Business Senior Citizen Scheme

Educational LoanRegular RecurringDeposit

Agricultural finance Flexi Recurring Deposit Craft finance Safety deposits locker

NRI Housing loansInstitutional Accounts

NRI Car loans Gift Cheque SchemeNRI Gold loans Priority Banking Loan against securities Preferred Banking Loan against property Demat Account Construction Equipment loan Term Deposits Loan against shares Debit Cards

Forex Services Corporate SalaryAccounts

DATA ANALYSIS AND PRESENTATION

Co-Relation

This test measures the degree of association between two variables

Analysis

1. Here the coefficient of co-relation lies in between +1 and -1
http://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/sweep-in-sweep-out-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/sweep-in-sweep-out-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/young-saver-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/young-saver-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/senior-citizen-scheme/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/senior-citizen-scheme/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/regular-recurring-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/regular-recurring-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/regular-recurring-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/flexi-recurring-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/flexi-recurring-deposit/index.htmlhttp://www.ingvysyabank.com/personal-banking/products/bank/institutional-accounts.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/institutional-accounts.aspxhttp://www.federalbank.co.in/priority-bankinghttp://www.federalbank.co.in/priority-bankinghttp://www.ingvysyabank.com/personal-banking/products/bank/preferred-banking.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/preferred-banking.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/demat-account.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/demat-account.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/term-deposits.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/term-deposits.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/debit-card.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/debit-card.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/forex.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/forex.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/corporate-salary-accounts.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/corporate-salary-accounts.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/corporate-salary-accounts.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/corporate-salary-accounts.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/corporate-salary-accounts.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/forex.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/debit-card.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/term-deposits.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/demat-account.aspxhttp://www.ingvysyabank.com/personal-banking/products/bank/preferred-banking.aspxhttp://www.federalbank.co.in/priority-bankinghttp://www.ingvysyabank.com/personal-banking/products/bank/institutional-accounts.aspxhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/flexi-recurring-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/regular-recurring-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/regular-recurring-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/senior-citizen-scheme/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/young-saver-deposit/index.htmlhttp://www.indusind.com/indusind/wcms/en/home/personal-banking/deposits/sweep-in-sweep-out-deposit/index.html


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No. of

Years

Lending of

Banks

Lending of

NBFCs

No. of

Years

Deposits of

Banks

Deposits of

NBFCs

2004 13964.93778 497.746 2004 18112.929 231.456

2005 17927.03 824.191 2005 24032.503 345.687

2006 26069.736 1460.38 2006 34506.574 642.204

2007 35581.792 2021.15 2007 46229.092 991.295

2008 44433.471 2937.812 2008 56478.585 1514.281

2009 51054.562 3335.098 2009 63136.688 2088.942

2010 55235.187 4164.513 2010 70268.897 2160.304

2011 70317.535 5428.937 2011 86864.158 2422.474

2012 84875.556 7937.08 2012 101602.918 2483.081

2013 100493.376 10377.624 2013 120672 3157.993

Column 1 Column 2 Column 1 Column 2

Column1 1

Column1 1

Column

2 0.9852025 1

Column

2 0.97250307 1

Table 1.1 Table 1.2

Here the correlation coefficient between lending of banks and Nbfcs is 0.98 and between

deposits of banks and Nbfcs is 0.97. This indicates that there is a strong positive co-relation

between lending of banks and Nbfcs. Similarly there is also a strong positive co -relation

between deposits of banks andNbfcs. The data therefore illustrates that in the span of 10 yearsboth lending and deposits of banks andNbfcs growth has been increasing.

T-Test

Since the sample is small and samples are independent and at the same time the population

standard deviation is unknown, the T statistic can be used to test hypothesis for the difference

between two variable means (Bajpayi 2012).

Hypothesis:

H0:There is no significant difference between the means of NBFCs and private commercialbanks.H1:There is significant difference between the means of NBFCs and private commercial banks.


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Table 1.4

The T statistic is computed as 5.71. This value is greater than the critical value of T statistic

(+1.83). Hence the null hypothesis is rejected and the alternate hypothesis is accepted.

Hence we can conclude that there is a significant difference between the means of NBFCs and

private commercial banks. This suggests that the deposits of NBFCs have effect on the depositsof private commercial banks.

No. of Years Deposits of banks Deposits of NBFCs2004 18112.929 231.4562005 24032.503 345.687

2006 34506.574 642.2042007 46229.092 991.2952008 56478.585 1514.2812009 63136.688 2088.9422010 70268.897 2160.304

2011 86864.158 2422.4742012 101602.918 2483.0812013 120672 3157.993

Table 1.3Variable 1 Variable 2

Mean 62190.4344 1603.7717Variance 1122336331 1019772.978Observations 10 10Hypothesized MeanDifference 0Df 9t Stat 5.716343343P(T


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Hypothesis:

H0:There is no significant difference between the means of NBFCs and private commercialbanks.

H1:There is significant difference between the means of NBFCs and private commercial banks.

No. of Years Lending of Banks Lending of NBFCs2004 13965 4982005 17927 8242006 26070 14602007 35582 20212008 44433 2938

2009 51055 33352010 55235 4165

2011 70318 54292012 84876 79372013 100493 10378

Table 1.5Variable 1 Variable 2

Mean 49995.32 3898.4531Variance 8.16E+08 10269766.17Observations 10 10

Hypothesized MeanDifference 0Df 9t Stat 5.070537P(T


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Comparison by ratio analysis

1. Financial Structure Total debt to owners fund

It is measurement of companys financial leverage. Debt includes all short term

and long term obligations. Total capital includes companys debt and

shareholders equity.

(Total debt / Total shareholder equity + debt)

Total Debt to

Owners Fund '13 '12 '11 '10 '09 '08 '07 '06 '05 '04

Banks (Average) 8.75 8.9 9.2 9 10 11 12 12 12 13.2

NBFCs (Average) 2.39 2.6 3.5 3 3 3.4 3.5 3.5 3.7 3.79

Table 1.7

Bar chart 2.1 Total Debt to Owners Fund

Higher the debt equity ratio implies a risky investment because higher the debt higher the interest

has to be paid by the company.

From the graph it can be seen that the NBFCs have lower debt to owner fund ratios compared to

banks. This might be basically because NBFCs are socially oriented micro finance institutions

that depend upon grant and donations. They do not have much access to capital whereas with

increased competition banks have intensified both their capacity to leverage and at the same time

0

2

4

6

8

10

12

14

'13 '12 '11 '10 '09 '08 07 '06 '05 '04

Banks (Average)

NBFCs (Average)


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gained access to the funds from the public. Hence NBFCs have lower debt to equity in compared

to private commercial banks.

2. Profitability Return on assets

It indicates how effectively a management can generate earning from the

investments made. The ratio tells us how profitable a company is related to its

total assets. It is expressed as a percentage, it is also known as return on

investments.

Return on AssetsIncludingRevaluations '13 '12 '11 '10 '09 '08 '07 '06 05 '04

Banks (Average) 380 321 318 297 ## 219 158 168 188 211NBFCs (Average) 213 189 152 126 ## 114 96 81 66 54.5

Table 1.8

Bar chart 2.2 Return on Assets Including Revaluations

The above graph suggests that at an average the return on assets for both NBFCs and Private

Commercial banks have grown significantly in the past ten years. There is a significant

difference between the ROA of NBFCs and private commercial banks.

0

50

100

150

200

250

300

350

400

'13 '12 '11 '10 '09 '08 '07 '06 05 '04

Banks (Average)

NBFCs (Average)


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High ROA and ROE is required to attract P/E funds, Private capital so that the NBFCs could be

more financially inclusive for the un-bankable who are excluded from services by traditional

banks.

This is basically because the NBFCs have small asset base that impacts their profitability whereas private commercial banks asset based and outreach has led to this significant difference.

Therefore the above data suggest that the NBFCs are still lagging behind in terms of profitability.

Net profit marginIt indicates the companys effectiveness in converting its revenue into actual

profits; it is an indication of how effective is company at its cost control and the

margin is calculated by dividing the net income by revenue or by dividing the net

profit by sales, it is expressed as a percentage.

Net Profit Margin(%) '13 '12 '11 '10 '09 '08 '07 '06 '05 04

Banks (Average) 14.1 14 15 14 11 11 11 11 10 15.7

NBFCs (Average) 18.6 19 23 20 5 19 21 24 22 21.1

Table 1.9

Bar Chart 2.3 Net Profit Margin

The net profit margin of NBFCs have reported higher compared to the private commercial

banks, it is basically attributed to the higher interest rates charged by NBFC.

0

5

10

15

20

25

30

'13 '12 '11 '10 '09 '08 '07 '06 '05 04

Banks (Average)

NBFCs (Average)


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The graph also shows that during the year 2009 the net profit margin of NBFCs was significantly

lower than private commercial banks. This could be due to the economic crisis that started in

2008, which led to divestment of investor interest to various macroeconomic factors.

3. Efficiency Return on long term funds

It is amount of long term debt on companys balance sheet for the promise to

return those funds in the future for a price known as interest, interest here is also

known as cost of debt. Organizations that are able to generate higher return at a

lower cost are termed as more efficient.

Return on Long Term

Funds(%) 13 '12 '11 '10 '09 '08 '07 '06 '05 '04

Banks (Average) 89.7 88 74 74 93 88 87 74 73 105

NBFCs (Average) 19.6 17 13 13 14 13 13 14 13 13.1

Table 1.10

Bar Chart 2.4 Return on Long Term Funds (%)

The graph shows that banks have higher return on long term funds in comparison to NBFCs.

This is generally because banks can mobilize huge amount of public deposits as borrowings and

at the same time diversify its risk. More over banks lend after explicitly carrying out the

feasibility on return and risk for any specific investments. On the other hand the NBFCs have a

0

20

40

60

80

100

120

13 '12 '11 '10 '09 '08 '07 '06 '05 '04

Banks (Average)

NBFCs (Average)


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limited function of deposit and lending. The gestation period for NBFCs is very high, which

increases their cost of capital. The risk of default, non-payment of interest is equally high for

NBFCs. NBFCs lend small amounts to economically backward individuals which indicate that

compared to the loans mobilized the cost for mobilizing the loan is very high. Therefore banks

have higher return on long term funds in comparison to NBFCs.


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RECOMMENDATIONS

NBFCs have been viewed as an important tool for financial inclusiveness to the population at the

bottom of the economic pyramid. On the other hand, Private commercial banks have been

viewed as pillar of economic development. The increasing number of NBFCs and other micro-finance institutions in the past several years have challenged the concept of traditional banking.

The concept of para banking, shadow banking emerged making the traditional commercial banks

apply more social thinking to go beyond the bankable, credit worthy mass to cater to the poor.

The researchers therefore have tried to study how the growth of NBFCs, that are accepting

deposits in India are impacting the private commercial banks.

The different accounting standards of NBFCs from the private commercial banks posed various

challenges to the researches. The availability of data is the biggest hurdle for such a research.However, the researchers have come up with various tools and techniques both quantitative and

qualitative to determine whether there is impact of NBFCs over private commercial banks or not.

The Correlation test suggested that over the period of ten years both NBFCs andprivate commercial banks have shown positive growth in terms of their lending

and deposits. This might be the result of economic growth, growth in the market,

investments and increasing outreach and access to capital. The Indian economy is

often termed as a saving economy. The T-test suggested that there is significant difference in the mean between

variables of the banks and NBFCs. Therefore, there must be some effect of

NBFCs over the private commercial banks over the period of ten years. This

might be because major chunk of population are still deprived from the traditional

banking services. In the past ten years, NBFCs have helped in the process of

financial inclusion by catering to those unbankable mass. Thus their direct reach

to the poor led to greater mobilization of deposits and lending in NBFCs.

Similarly, the ratio analysis compared the performance of private commercialbanks against the NBFCs on various financial indicators. These indicators were

divided into three parameters viz. financial structure, profitability and efficiency.


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The ratio analysis could explicitly probe into various qualitative research papersto identify the possible causes of what the ratio analysis showed to the

researchers. Thus the cause, effect and the probable consequences were identified.

Most researchers have done works to explore the sustainability and profitability ofthe NBFCs in the due course of time. The various models of NBFCs used around

the globe have not only stirred hope among the population at the bottom of the

economic pyramid, they have brought change in rules and regulations in various

nations enforcing traditional banks to go beyond serving the rich masses. Thus a

new school of thought swept the world and various further researches have been

done around the globe on socially sustainable businesses empowered by the role

played by NBFCs and MFIs.

The Private commercial banks have a great outreach in comparison to NBFCs,and because of that they incurring less cost of funds.

Limitations of study:

1. The research is limited to the geographical region of India only.2. The study is limited to the deposit taking NBFCs and the private commercial banks in

India only.3. The researchers have taken a sample of ten NBFCs and ten Private Commercial Banks

only.

4. The Research is restricted by unavailability of enough research studies in the field.Moreover, the different accounting standards and reporting mechanism led to

unavailability of data of NBFCs and on the topic. Therefore, the researchers have to limit

much of their studies to the qualitative research.


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CONCLUSION

Although the microfinance sector has reported an impressive growth, with the ordinances passed

by the government, there is a lack of capital for some of the NBFCs in the country. Therefore,

continuous efforts are required to diversify the sources of funding available for the NBFCs inorder to attract foreign investments for well-established NBFCs in order to serve the rural low

income population, increase efficiency of staff members, alleviate poverty and also make them

profitable.

The large ten NBFCs dominating the sector, the other small NBFCs can adopt their business

models, policies and practices in order to increase their outreach and to operate on a sustainable

basis. The awareness in promoting the NBF sector and to incorporate financial inclusion, many

banks have become committed in providing their service. The government has also taken anincreasing interest in promoting the sector.

The NGO-MFIs transforming themselves into NBFC-MFIs are on the increase. There are a lot of

innovations in the NBF sector so as to overcome the issues faced by them. The government plays

a major role in the development of the NBF sector. Macroeconomic stability, liberalized interest

rates, alternate funding options, mobilization of savings, opportunities for institutionalization are

some of the issues which require government attention. The government is required to develop

legal and regulatory framework for the sector in order to promote its growth and in turn achievethe objective of poverty alleviation and thus contributing to the development of the country.

Though the performance of NBFCs have improved significantly over the past years, sufficient

regulatory and governance would help achieve the goal of poverty alleviation and financial

inclusion and this could be achieved with the combined cooperation of banks, government and

other players in the country. Thus with development of effective strategies and with the

combined effort of all players in the society such as donors, government, banks, corporations,

NGOs, etc. the long term goal of the government to achieve financial inclusion and povertyalleviation would be attained.


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Appendices

References

1. F.No.17/7/2011-BO.II,Government of India, Ministry of Finance, Department ofFinancial Services, and REPORT OF THE KEY ADVISORY GROUP (KAG) ON THE

NON-BANKING FINANCE COMPANIES (NBFCs)

2. Srinivasan Gumparthi SSn, International Journal of Trade, Economics and Finance, Vol.1, No. 1, June, 2010, 2010-023X

3. Viral V. Acharya, New York University Stern School of Business, NBER and CEPR,Hemal Khandwala, Centre for Advanced Financial Research and Learning, Reserve Bank

of India And T. Sabri nc, Centre for Advanced Financial Research and Learning,

Reserve Bank of India

4. International Business & Economics Research JournalSeptember 2010 Volume 9,Planning And Pricing Of Financial Services: A Study On Perceptions And Practices Of

Non-Banking Finance Companies M. R. Shollapur, Siddaganga Institute of Technology,

India

5. C.S.Balasubramaniam, Professor, Babasaheb Gawde Institute of Management Studies,Mumbai, VOLUME NO.1, ISSUE NO.7, ISSN 2277-1166

6. Zohra Bi and Shyam Lal Dev Pandey; COMPARISON OF PERFORMANCE OFMICROFINANCE INSTITUTIONS WITH COMMERCIAL BANKS IN INDIA,

Australian Journal of Business and Management Research Vol.1 No.6 [110-120],

September-2011

7. Alain de CROMBRUGGHE, Michel TENIKUE and Julie SUREDA, PERFORMANCEANALYSIS FOR A SAMPLE OF MICROFINANCE INSTITUTIONS IN INDIA,

Annals of Public and Cooperative Economics 79:2 2008

8. Jonathan Morduch, The Microfinance Promise, Journal of Economic Literature, Vol.XXXVII (December 1999), pp. 15691614

effect of nbfc

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