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The Indian financial sector consists of a wide variety of institutions which cater to different
market segments. At the apex level are scheduled commercial banks which follow universal
banking model. Next, there is the cooperative banking sector with two different strands.
While the three Tier rural co-operative structure (State/District/grassroot level outfits), takes
care predominantly of agriculture and allied activities; the urban co-operative banking
structure provides succour mainly to the small customers at the bottom of pyramid in urban
areas. On the other hand, Non-Bank Financial Companies (NBFCs) are largely involved in
serving those classes of borrowers who are generally excluded from the formal banking
sector. However, progressively over the years, the exclusiveness between the banks and
NBFCs has somewhat blurred. More recently, NBFCs are competing with banks in providing
financial services such as infrastructure finance and housing finance among others.

A Non-Banking Financial Company (NBFC) is a company registered under the Companies
Act, 1956 and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by Government or local authority or other
securities of like marketable nature, leasing, hire-purchase, insurance business, chit business
but does not include any institution whose principal business is that of agriculture activity,
industrial activity, sale/purchase/construction of immovable property. A non-banking
institution which is a company and which has its principal business of receiving deposits
under any scheme or arrangement or any other manner, or lending in any manner is also a
non-banking financial company (Residuary non-banking company).

NBFCs, historically are involved in providing financial services such as offering of small
ticket personal loans, financing of two/three wheelers, truck financing, farm equipment
financing, loans for purchase of used commercial vehicles/machinery, secured/unsecured
working capital financing, etc. Further, NBFCs also often take lead role in providing
innovative financial services to Micro, Small, and Medium Enterprises (MSME) most
suitable to their business requirements. The characteristics of NBFC financial services
include simpler processes and procedures in sanction and disbursement of credit; timely,
Introduction about Industry

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S.V. Institute of Management, Kadi
friendly and flexible terms of repayment aligned to the unique features of its clientele, albeit
at a higher cost.

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

(i) NBFC cannot accept demand deposits;
(ii) NBFC is not a part of the payment and settlement system and as such an NBFC
cannot issue cheques drawn on it; and
(iii) Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation
is not available for NBFC depositors unlike in case of banks.

Profile of NBFC Sector

Legal Definition of NBFC

A company is considered as an NBFC if it carries on as its business or part of its
business, any of the activities listed in Section 45 I (c ) of the RBI Act, 1934, viz.,
business of making loans/advances or acquisition of shares / securities, etc. or hire
purchase finance or insurance business or chit fund activities or lending in any manner
provided the principal business of such a company does not constitute any of the
following non-financial activities viz.

(a) agricultural operations
(b) industrial activity
(c) trading in goods (other than securities)
(d) providing services
(e) purchase, construction or sale of immovable property. Further in terms of section 45I
(f) of the RBI Act, a company would also be an NBFC, if its principal business is that of
receiving deposits under any scheme or arrangement.

Thus a company whose principal business is agricultural operations, industrial activity,
trading or real estate business is not a financial institution.


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

However in terms of the NBFC Acceptance of Public Deposits (Reserve Bank) Directions,
1988 with effect from December 6, 2006 the above NBFCs registered with RBI have been
reclassified as:

1. Loan Company (LC)
Loan company means any company which is a financial institution carrying on as its
principal business the providing of finance whether by making loans or advances or
otherwise for any activity other than its own but does not include an Asset Finance Company.

2. Investment Company(IC)
Investment Company is a company which is a financial institution carrying on as its
principal business the acquisition of securities.

Investment Companies are further divided into following sub- categories:

Core Investment Companies:

The Reserve Bank of India vide its Notification No. DNBS(PD)CC.No. 197/03.10.001/2010-
11 dated August 12, 2010, a new class of NBFCs by the name of Core Investment
Companies (CIC) was added

Core Investment Companies in terms of RBIs Notification means:
a non-banking financial company carrying on the business of acquisition of shares and
securities and which satisfies the following conditions as on the date of the last audited
balance sheet:-

(i) it holds not less than 90% of its net assets in the form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;


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S.V. Institute of Management, Kadi
(ii) its investments in the equity shares (including instruments compulsorily convertible into
equity shares within a period not exceeding 10 years from the date of issue) in group
companies constitutes not less than 60% of its net assets

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

cash and bank balances;
investment in money market instruments and money market mutual funds
advance payments of taxes; and
deferred tax payment.

(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment;

(iv) it does not carry on any other financial activity referred to in Section 45 I (c) and 45 I (f)
of the Reserve Bank of India Act, 1934 except:

a) investment in
i. bank deposits,
ii. money market instruments, including money market mutual funds,
iii. government securities, and iv. bonds or debentures issued by group companies;
b) granting of loans to group companies; and
c) issuing guarantees on behalf of group companies.

Other Companies

(i) Asset Finance Company (AFC)

AFC would be defined as any company which is a financial institution carrying on as its
principal business the financing of physical assets supporting productive / economic
activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and
material handling equipments, moving on own power and general purpose industrial

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S.V. Institute of Management, Kadi
machines. Financing of physical assets may be by way of loans, lease or hire purchase
transactions.
Principal business for this purpose is defined as aggregate of financing real/physical
assets supporting economic activity and income arising therefrom is not less than 60% of
its total assets and total income respectively.

(ii) Mutual Benefit Financial Company (MBFC)
Mutual Benefit Financial Company means a company which is a financial institution notified
by The Central Government under section 620A of The Companies Act 1956.

The above-mentioned types of NBFCs may be further classified into:
NBFCs accepting public deposit (NBFCs-D) and
NBFCs not accepting/holding public deposit (NBFCs-ND).

Operating leasing entities:
Operating leasing companies do not come under the RBI definition of NBFCs since operating
lease is not equipment leasing business as defined by the RBI. Only financial leasing is
included in the RBI definition of equipment leasing.

Further Classification of NBFCs-ND based on the Size of its Asset: NBFCs-ND may also be
classified into
(i) Systematic Investment and
(ii) Non- Systematic Investment NBFCs based on the size of its asset.

i. Systemically Important NBFCs-ND

An NBFCND with an asset size of Rs.100 crore and more as per the last audited balance
Sheet is considered as systemically important NBFCsND (NBFC-ND-SI). However
NBFCsND SI are required to maintain a minimum CRAR of 10 per cent. No NBFC
NDSI is allowed to:

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

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b) invest in the shares of another company/ single group of companies exceeding 15
per cent /25 per cent of its owned fund;

ii. Non-Systematically Important NBFCs-ND

A NBFCND whose asset size does not exceed Rs.100 crore as per the last audited
balance sheet may be considered as Non-systemically important NBFCsND (NBFCND-
SI).

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund
companies etc. NBFCs can be classified into deposit accepting companies and non-deposit
accepting companies. NBFCs are small in size and are owned privately. The NBFCs have
grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as
service oriented companies. Their main companies are banks and financial institutions.
According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of
India.
The NBFCs in advanced countries have grown significantly and are now coming up in a very
large way in developing countries like Brazil, India, and Malaysia etc. The non-banking
companies when compared with commercial and co-operative banks are a heterogeneous
(varied) group of finance companies. NBFCs are heterogeneous group of finance companies
means all NBFCs provide different types of financial services.
Non-Banking Financial Companies constitute an important segment of the financial system.
NBFCs are the intermediaries engaged in the business of accepting deposits and delivering
credit. They play very crucial role in channelizing the scare financial resources to capital
formation.
NBFCs supplement the role of the banking sector in meeting the increasing financial need of
the corporate sector, delivering credit to the unorganized sector and to small local borrowers.
NBFCs have more flexible structure than banks. As compared to banks, they can take quick
decisions, assume greater risks and tailor-make their services and charge according to the
needs of the clients. Their flexible structure helps in broadening the market by providing the
saver and investor a bundle of services on a competitive basis.


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S.V. Institute of Management, Kadi
Size of the Sector
The share of NBFCs assets in GDP (at current market prices) increased steadily from just 8.4 per
cent as on March 31, 2006 to 12.5 per cent as on March 31, 2013; while the share of bank assets
increased from 75.4 per cent to 95.5 per cent during the same period (Table 1).In fact, if the assets of
all the NBFCs below Rs.100 crore are reckoned, the share of NBFCs assets to GDP would go further.

Assets of NBFC and Banking (SCBs) Sectors
as a % to GDP Year
Ratio
2006 2007 2008 2009 2010 2011 2012 2013
NBFC Assets to GDP
(%)
8.4 9.1 10.1 10.3 10.8 10.9 11.9 12.5
Bank Assets to GDP (%) 75.4 80.6 86.8 93.0 93.0 92.2 92.7 95.5
Source: (i) Reports on Trend and Progress of Banking in India, 2006-2013; (ii) Hand Book of
Statistics on Indian Economy, 2012-13
Note: Assets of NBFC sector include assets of all deposit taking NBFCs and Non-Deposit Taking
NBFCs having assets size Rs. 100 crore and above (NBFCs-ND-SI)

In comparison to assets of the banking system (Scheduled Commercial Banks-SCBs), asset size of
NBFC sector was around 13 per cent; while deposits (including RNBCs) of the sector were less than
0.15 per cent of bank deposits (SCBs) as on March 31, 2013 (Chart 2). Public deposits held with the
NBFC sector declined in line with RBI policy directions. The decline in public deposits was largely
on account of RNBCs. Due to concerted efforts of RBI, the number of deposit taking NBFCs has
come down from 428 in June 2006 to 254 in June 2013.



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S.V. Institute of Management, Kadi
Non-Banking Financial
Company
Registered with and
regulated by the RBI
Loan Company
Investment Company
Equipment Leasing
company
Hire Purchase
Finance Company
Residuary Non
Banking Company
Not registered with the RBI,
but the RBI issues directions
relating to deposit acceptance
activity
Mutual Benefit
Finance Company
(Notified nidhis)
Mutual Benefit
Companies (Potential
nidhis)
Miscellaneous Non
Banking Companies
(Chit funds)
Exempted from the RBI
regulations including
requirement of
registration
Insurance
Companies
Stock Exchange,
Stock Brokers,
Merchant Banking
Companies
Housing Finance
Company
Micro Finance
Company































Industry Structure


pg. 9
S.V. Institute of Management, Kadi



The NBFCs accepting public deposits should furnish to RBI

Audited balance sheet of each financial year and an audited profit and loss account in
respect of that year as passed in the annual general meeting together with a copy of
the report of the Board of Directors and a copy of the report and the notes on accounts
furnished by its Auditors;
Statutory Annual Return on deposits - NBS 1;
Certificate from the Auditors that the company is in a position to repay the deposits as
and when the claims arise;
Quarterly Return on liquid assets;
Half-yearly Return on prudential norms;
Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and
above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;
Monthly return on exposure to capital market by companies having public deposits of
Rs. 50 crore and above; and
A copy of the Credit Rating obtained once a year along with one of the Half-yearly
Returns on prudential norms as at (v) above.



1






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

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S.V. Institute of Management, Kadi



Research is the systematized efforts to gain new knowledge. A Research Methodology
defines the purpose of the research, how it proceeds, how to measure progress and what
constitute success with respect to the objectives determined for carrying out the research
study. The appropriate research design being formulated is detailed below. A scientifically
carried out research project has a definite framework for data collection. This framework
constitutes the research design. It determines the data collection method, sampling method,
the fieldwork and so on.
The study was based on finding whether the NBFCs conversion to bank would help in
broadening economic growth; widen the coverage of banks in that area which are still
unbanked & what will be its Impact on achieving the objective of financial inclusions.






To analyze the market of NBFCs in India
To study the financial services of NBFCs
To study of Five Force of Porter Analysis of NBFC
To analysis the external factors which are affecting to the NBFC







Research Methodology
Objectives of the Study of Product Market Analysis


pg. 11
S.V. Institute of Management, Kadi



The research design used for the study is both exploratory &descriptive research design as its
main objective is to describe something. In this research design it is assumed that researcher
is having prior knowledge of the field of study. The main emphasis is given on prior
formulation of hypothesis. The uses descriptive method as there was a clear specification
beforehand of who, what, when, where, why, and way six research. Its exploratory because
only few persons belonging to the industry are aware of the same. Since the research is for
industry analysis and it is structured for NBFCS. The research uses secondary data for
analysis and interpretation.





There are two methods of data collection that can be considered when collecting data for
research purpose. These data collection types include the following:

1. Primary data
2. Secondary data

The secondary data collection method is used in the study.

Secondary Data
The secondary data for the research was collected from journals, research articles, books and
internet websites, annual reports etc whose details and references has been given in The
secondary data in this project has been collected from the Indian banker journal, The RBI
bulletin, RBI Discussion papers, and journals of finance.



Research Design


Data Collection and Sources



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S.V. Institute of Management, Kadi



The role of the NBFC is defined as the financial intermediary and the particular task has been
well recognized by the finance sector as well as the customers. The key drivers of this sector
are the quick decision making abilities, risk management and the intricate understanding of
the customer needs. The way the NBFC players have managed to spread their operations in
urban as well as semi-urban areas in the span of a few years, is simply commendable. Today,
the role of NBFC has become important from the macro as well as the Indian economic point
of view.
The NBFC sector is dominated by the construction, equipment and the commercial vehicle
market and the other assets included under this. This industry has been growing consistently
at a rate of 20-25% barring the negative fall in the year 2008, which was due to the global
scenario. However, the industry has revived very quickly and has crossed volumes of more
than that of 2007. The expected growth of return from this sector in the near future looks to
be about 30-35%.There is more than three and half lakh crore non-deposits taking place in the
NBFC sector and around 85,000 crore deposits taking place."
The most drastic change that has been seen recently in the NBFC segment is that of the big
international companies setting shop in the NBFC sector. Till sometime back, no big
company would have even thought about investing and trading in this sector.

Sustainable growth is possible only with the right dynamics which suit the market demand
and requirement. Many experts feel that the bad economic phase which shadowed the world,
has taught a few valuable lessons to the players in the NBFC sector. As in the case of any
sector, the recession made it apparent that it is difficult to maintain a consistent growth
pattern if the growth is not planned.
International players are trying to set foot in the Indian market, but I am not sure if they will
get the Indian environing right. We have had a similar situation where MNC's have tried their
best to set foot in the Indian NBFC market and place them in the urban sector. But,
Global Scenario of Industry






pg. 13
S.V. Institute of Management, Kadi
surprisingly, the NBFC sector has now occupied the semi-urban and rural markets and the
dynamics involved in both the markets are very different.
In the NBFC sector commercial and private vehicle market is going to grow but the tractor
market is going to be one of the fastest growing components, as it is no longer an agro project
but also an infrastructure investment.
NBFCs have traditionally been the secondary borrowing institutes and their main source of
borrowing has been the banks, mainly the public sector banks. This is the main reason why
the borrowing rate in the NBFC sector is a few percent higher than the public sector banks. In
terms of business establishment and rate on return (RoI), NBFC have a neat 2% RoI as
compared to the 1.2 - 1.4% of a public sector bank.









2





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


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S.V. Institute of Management, Kadi



Global credit crisis followed by increase in interest rates in October and November 2008
resulted in widespread crisis of confidence. Chain of events after the collapse of Lehman
Brothers is still fresh in the minds of investors. Non-Banking Finance Companies (NBFCs)
in India were severely impacted due to economic slowdown coupled with fall in demand for
financing as several businesses deferred their expansion plan. Stock prices of NBFCs
crashed on the back of rising non-performing assets and several companies closed their
operations. International NBFCs still continue to close down or sell their back end
operations in India.
The positive news however is that, this crisis has forced NBFCs to improve their operations
and strategies. Industry experts opine that they are much more mature today than they were
during the last decade. Timely intervention of RBI helped reduce the negative effect of credit
crunch on banks and NBFCs. In fact, aggressive strategies helped LIC Housing Finance to
grab new customers (including customers of other banks) and increase its market share in
national mortgage market. Surprisingly it was able to maintain its profitability in 2009
(around 37%). HDFC, the largest NBFC in India, however experienced a slowdown in
customer growth due to stiff competition, especially from LIC Housing Finance and tight
monetary conditions.
Other NBFCs that were stable during this period of credit crunch are Infrastructure
Development Finance Company (IDFC) Power Finance Corporation (PFC) and Rural
Electrification Corporation (REC). Growth prospects are strong for these companies given
the acute shortage of power in the country and expected increase in demand for infrastructure
projects.
The segment which was hit hardest was Vehicle Financing. Companies financing new vehicle
purchases experienced a drastic reduction in new customer numbers. Fortunately, since
vehicle finance is asset-based business, their asset quality did not suffer as against other
consumer financing businesses. Contrary to this, Shriram Transport Finance, the only NBFC
which deals in second-hand vehicle financing was able to maintain its growth primarily due
to its business model which does not entirely depends on health of the auto industry.
Characteristics of Global Industry





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S.V. Institute of Management, Kadi



The radical and ongoing changes occurring in society create an uncertain environment and
have an impact on the function of the whole organization. A PEST analysis is merely a
framework that categorizes environmental influences as political, economic, social and
technological forces. The analysis examines the impact of each of these factors (and their
interplay with each other) on the business. The results can then be used to take advantage of
opportunities and to make contingency plans for threats when preparing business and
strategic plans.

PEST analysis is a useful strategic tool for understanding market growth or decline, business
position, potential and direction for operations. The use of PEST analysis can be seen
effective for business and strategic planning, marketing planning, business and product
development and research reports. PEST also ensures that companys performance is aligned
positively with the powerful forces of change that are affecting business
environment. PEST is useful when a company decides to enter its business operations into
new markets and new countries. The use of PEST, in this case, helps to break free of
unconscious assumptions, and help to effectively adapt to the realities of the new
environment.

Political Factors

Focus on Regulations
Government interference

Economic Factors

Growing Economy
Low Interest Rates

PEST Analysis of Industry in world Market.






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Social Factors

Loyalty Factor
Increased Penetration of Cards
Increased Usage of Online Banking


Technological Factors

IT Services
Mobile Banking























pg. 17
S.V. Institute of Management, Kadi




Non-banking financial companies (NBFCs) form an integral part of the Indian financial
system. The history of the NBFC Industry in India is a story of under-regulation followed by
over-regulation. Policy makers have swung from one extreme position to another in their
attempt to set controls and then restrain them so that they do not curb the growth of the
industry.

Non-Banking Financial Companies or NBFC in India are registered companies conducting
business activities similar to regular banks. Their banking operations include making loans
and advances available to consumers and businesses, acquisition of marketable securities,
leasing of hard assets like automobiles, hire-purchase and insurance business.

Though they are similar to banks, they differ in a couple of ways. NBFCs cannot accept
demand deposits (deposits that can be withdrawn at immediate notice), they cannot issue
checks to customers and the deposits with them are not insured by the DICGC (the India
equivalent of FDIC in the US system). Either the RBI (Reserve Bank of India) or the SEBI
(Securities and Exchange Board of India) or both regulate NBFCs.

Though the NBFCs have been around for a long time, they have recently gained popularity
amongst institutional investors, since they facilitate access to credit for semi-rural and rural
India where the reach of traditional banks has traditionally been poor.








Historical Background of NBFC

pg. 18
S.V. Institute of Management, Kadi



Credit Growth

Credit growth across NBFC and banking sectors is presented in Chart 4. NBFC - credit grew
more rapidly as compared with the banking sector. NBFC credit witnessed a CAGR of 24.3
per cent during the period between March 2007 and March 2013 as against 21.4 per cent by
the banking sector.
Although Indian economy is slowing down in the recent past, the robust NBFC credit growth
is largely on account of significant growth in infrastructure credit and retail finance.




Financing of Infrastructure

By financing infrastructure projects, NBFCs broaden capital formation of the country and
thereby contribute to the overall economic growth and development of the country.
Indian Scenario of the NBFC Industry






pg. 19
S.V. Institute of Management, Kadi
The quantum of infrastructure finance provided by the NBFC sector witnessed a CAGR of
26.2 per cent during the period between March 31, 2010 and March 31, 2013. In absolute
terms, NBFC finance to infrastructure increased from Rs.2228 billion on March 31, 2010 to
Rs. 4479 billion as on March 31, 2013 (Chart 4A).
NBFC finance to infrastructure accounted for 35.8 % of their assets as on March 31, 2013
while in case of banks it was 7.6%.


Public Deposits

In line with RBI directions, the public deposits of NBFC sector (including RNBCs) declined
considerably from Rs. 247 billion as on March 2007 to Rs.106 billion as on March 2013
(Chart 5).
The decline in public deposits is largely on account of RNBCs, which are going to exit from
NBFC business model by June 2015. The public deposits of RNBCs decreased from Rs. 202
billion as on March 31, 2007 to just Rs. 35 billion as on March 31, 2013.

pg. 20
S.V. Institute of Management, Kadi

Micro Finance Institutions

NBFC-MFIs provide access to basic financial services such as loans, savings, money transfer
services, micro-insurance etc. to poor people and attempt to fill the void left between the
mainstream commercial banks and money lenders.
Over the last few years NBFC-MFIs have emerged as a fast growing enablers in providing
the financial services to the poor people by providing capital inputs to poor which generates
self-employment, and thereby promotes inclusive growth.
The credit provided by the NBFCs - MFIs11 increased from just Rs. 105 billion as on March
2010 to Rs.151 billion as on March 2011 and declined to Rs.117billion on account of the
ordinance passed by the AP Government that stopped all MFIs from collecting payments by
force or even disbursing loans by the MFIs. However, in March 2013, the outstanding credit
disbursed by the MFIs increased to Rs.144 billion due to partial resumption of MFI activities,
owing to implementation of the Malegam Committee recommendations and certain Supreme
Court orders favourable for MFIs.
To encourage MFIs, as per the Malegam committee recommendations, RBI has created
separate category under NBFCs. As on date, around 33 MFIs have been registered with RBI.



pg. 21
S.V. Institute of Management, Kadi


To encourage MFIs, as per the Malegam committee recommendations, RBI has created
separate category under NBFCs. As on date, around 33 MFIs have been registered with RBI.

Monetisation of Gold

Gold loan NBFCs provide loans against security of gold jewellery. Although banks are also
involved in gold loan business, NBFCs gold loans witnessed phenomenal growth due to
their customer friendly approaches like simplified sanction procedures, quick loan
disbursement etc.
Branches of gold loan NBFCs increased significantly during the last couple of years mostly
housed at semi-urban and rural centres of the country.
Gold loan NBFCs help in monetisation of idle gold stocks in the country and facilitate in
creating productive resources. Credit extended by the gold loan NBFCs witnessed a CAGR of
86.7 per cent during the period March 2009 to March 2013. In absolute terms, NBFC gold
loans increased from just Rs. 39 billion as on March 31, 2009 to Rs.475 billion as on March
31, 2013.


pg. 22
S.V. Institute of Management, Kadi


To study the issues related to the gold loans by NBFCs a working group was set up under the
chairman ship of K.U.B. Rao which submitted its report in January 2013. Several
recommendations have since been accepted and acted upon.












pg. 23
S.V. Institute of Management, Kadi






In all fairness, the NBFC sector was not in regulatory shadows as RBI has, over the years,
tweaked and implemented a differentiated regulatory regime for depositaccepting,
systemically important, and other non-bank institutions. A few famous failures of deposit-
accepting institutions in the 1990s led to legal and regulatory measures to curb and regulate
the activities of looselyregulated institutions that garnered substantial deposits from areas
where banking could not, and indeed would not, reach.
New generation private sector banks and newly-energised and technology-powered public
sector banks helped by filling in the gap and the situation was quickly contained. Regulatory
focus then shifted to the non-deposit accepting NBFCs and attendant issues relating to
classification, public funds and core investment companies. Once the framework for such
lenders was put in place with a bank-like prudential and capital regime, it gave the market the
confidence required for growth.
Indeed, the past two decades have witnessed the evolution of multiple types of NBFCs and
NBFCs can be said to have partnered the India growth story as sanguinely as banks. From
financing long-term infrastructure and running the financial ecosystem around construction,
leasing, equipment, real estate, second-hand machinery, vehicles and creation of small asset
backed loans, NBFCs came to be synonymous with local growth stories, often maintaining
good capital adequacy, asset quality and growth. So, why the need to look at something that
seemed to be doing just fine? For one thing, the problem of plenty had to be addressed.
In the nineties, with the new regulatory framework, the net was cast wide, leading to
registration of NBFCs with extremely basic capital and infrastructure (sometimes no more
than a paper folder and a rented registered address), probably motivated by the typical Indian
proclivity for cornering licences. The recommendations address this issue boldly; balancing
delicately the existing legal framework based on net worth and the proposed asset criteria.
Growth and Evaluation of Industry in India





pg. 24
S.V. Institute of Management, Kadi
Definitions are modified, exemptions are created, but with the end goal to deregister non-
serious players.
Trading in licences is set to become outdated as rules on change in control become strict,
providing opportunity for due diligence to regulators. There are many interesting
recommendations around governance, including approval for CEO remuneration for large
NBFCs, adherence to listing conditions, improved disclosures and greater responsibility of
directors.
Overall, the guidelines seem to converge further towards banking regulation on the important
parameters of capital and liquidity, thereby mitigating potential concerns around stability and
systemic risk. The NPA classification is also set to converge to banking after a transition
time. Real estate and capital markets attract higher risk, weight and disclosures. However,
this creates some significant issues for the sector to deal with. Access to bank finance has
been cut over the past few years through various measures on bank lending, assignment,
securitisation and such.
Alternative mechanism of raising debt locally is not so swift to develop, making it difficult
for even the best-managed NBFCs to fund growth. On the equity front, although leasing and
finance have been put under automatic route for FDI, multiple issues persist in establishing
presence and developing viable business models.
Largely, Indian NBFCs are engaged in consumer financing and asset creation, both being
relevant activities in the current phase of growth. Two scenarios are possible: better
regulation will create better opportunities and better NBFCs will adapt as they have done in
the past and deliver. On the other hand, many of them may not find the business viable in the
absence of the opportunity space between banks and borrowers and shut shops.
http://articles.economictimes.indiatimes.com/2012-12-
26/news/36007959_1_nbfc-sector-sector-banks-regulatory-regime





pg. 25
S.V. Institute of Management, Kadi



List of major products offered by NBFCs in India:

Funding of commercial vehicles

Deciding not to grow is a tough call that any business is forced to take during any
period of its life cycle. The chief executives of non-banking finance companies
(NBFCs), particularly those funding commercial vehicles and equipment, did exactly
that when the economy came to a grinding halt some time back. And that decision is
yet to be revoked, in a telling sign that the core of the economy is still to get out of the
woods."The disbursements have slowed down and have plateaued primarily because
of the fact it was a conscious decision. But even for those offering loans for
commercial vehicles, things are yet to look up.
Sales of commercial vehicles is key barometer of economic activity in a country:
more sales of trucks usually indicate more goods being transported for consumption
or more capital equipment being taken to project sites to start construction.
Funding of infrastructure assets

NBFCs also increased their lending sharply as the credit demand for power and roads
expanded. The major Infrastructure Finance Companies (IFCs) which could be
considered for estimating infrastructure finance are Power Finance Corporation
(PFC), Rural Electrification Corporation Limited (REC), IDFC Limited, India
Infrastructure Finance Company Limited (IIFCL), L&T Infrastructure Finance
Company Limited and IFCI Ltd.Going forward, high historical growth rates observed
in the past may not be feasible since NBFCs would need to take up further capital
raising exercise to be able to lend significant amounts. Hence, for the purpose of
estimation the growth rate for FY11-17 is assumed at ~20 percent per annum which is
at the same levels as commercial banks.


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S.V. Institute of Management, Kadi
Retail financing

Retail banking aims to be the one-stop shop for as many financial services as possible
on behalf of retail clients. Some retail banks have even made a push into investment
services such as wealth management, brokerage accounts, private banking and
retirement planning. While some of these ancillary services are outsourced to third
parties (often for regulatory reasons), they often intertwine with core retail banking
accounts like checking and savings to allow for easier transfers and maintenance.

Loan against shares

Loans against shares or securities are a great way of raising capital when one is in
need of funds. These types of loans are given by banks in the form of overdraft
against the shares held by the customer. The biggest benefit of this is that it enables
the customers to get instant liquidity without selling their securities and when one
repays the debt he or she gets back the shares from the bank thus there is no
liquidation of stocks.

Funding of plant and machinery
A plant or machinery lease is:
under which a lessor grants another person the right to use the plant and machinery
for a period of time; and
which is treated under generally accepted accounting practice as a lease;
an agreement or arrangement which is treated under generally accepted accounting practice
as a lease and conveys or would convey the right to use an asset which is plant or machinery;
the finance lease element of a sale and finance leaseback.
If a lease would satisfy the conditions for being a plant or machinery lease immediately after
the commencement of its term treat it as a plant or machinery lease from its inception.



pg. 27
S.V. Institute of Management, Kadi


NBFCs are typically into funding of:

Construction equipment
Commercial vehicles and cars
Gold loans
Microfinance
Consumer durables and two wheelers
Loan against shares, etc.

Types of instrument generally executed:
Loans
Hire purchase
Financial lease
Operating lease
http://indiabudget.nic.in/es2010-11/echap-05.pdf












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S.V. Institute of Management, Kadi


SWOT analysis of NBFC

Strengths
n High on service aspect
n Strong last-mile approach
n Focus on recovery
n Easy and fast appraisal & disbursements
n Regional kshatraps
n Able to generate higher yield on assets
n Attained critical mass in terms of size
n Own employees vs DSAs

Opportunities
n Augmentation of capital and leveraging for growth
n Large untapped market, both rural & urban and also
geographically
n Demographic changes and under-penetration
n New opportunities in credit card, personal finance,
home equity, etc 2

-
n Tie-up with global financial sector giants
n Blurring gap with banks in terms of cost of funds
n Securitisation, to liberate funds to fuel asset growth

Weakness
n Weak in urban market
n Weak credit history of most NBFCs
n Largely restricted to the south India market
n Weaker risk-management & technology systems
n Too much of diversification from core business

pg. 29
S.V. Institute of Management, Kadi
n Higher regulatory restrictions

Threats
n Weak financial health of many of the NBFCs
n High cost of funds
n Asset quality deterioration may not only wipe out profits
but also networth\
n Entry of foreign players in post-2009 scenario
n Growing retail thrust within banks