EXECUTIVE SUMMARY The study presents a comparative study of NBFC’s in India. There are almost 13000 registered NBFC’s in India. The study is aimed to provide an holistic view of the NBFC Industry. NBFC fulfills the financial gap by providing loan at a lower rate of interest. The major players of each field 1) Housing Finance Industry: LIC Housing Finance. 2) Infrastructure Finance Industry: IDFC 3) Asset Financing: Shriram Transport Finance 4) Composite: Reliance Capital The study also compared the Indian Banks v/s NBFC. It was found that at even at the time of the economic slowdown NBFC was more profitable. Porters Five forces was also used to analyse the industry and to find the competitiveness in the industry. The industry is not tightly regulated as there are many regulatory bodies. Hence, there was an important need to study the NBFC as the industry plays an important role in the financial Services market of INDIA.
It is encouraging that the NBFC sector‘s importance is finally being acknowledged across FS market constituents as well as the regulator. However, the importance attached to the sector is often transcending into misplaced exuberance. Over simplified and vague drivers for NBFC valuations such as strategic fit and customer base, can never substitute dispassionate business analytics. A rational assessment of the intrinsic values of NBFCs factoring issues such as past performance, structural weaknesses of the sector (for instance funding disadvantages), along with an identification of real capabilities are essential to ensure that the equilibrium between price paid and value realized is reached to the extent possible. In the absence of this, India is sure to witness the re-opening of the NBFC horror story albeit with a new chapter on the erosion of NBFC investment values affecting investors across categories.
CHAPTER-1
INTRODUCTION
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 are doing functions akin to that of banks; however there are a few differences: (i)an NBFC cannot accept demand deposits; (ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and (iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.
1.1 TYPES OF NBFC’S Originally, NBFCs registered with RBI were classified as: (i)equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company. However, with effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as (i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC)
1.2 REGULATIONS OF NBFC’S 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. However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank. A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit its application online by accessing RBI‘s secured website https://secweb.rbi.org.in/COSMOS/rbilogin.do (the applicant companies do not need to log on to the COSMOS application and hence user ids for these companies are not required). The company has to click on ―CLICK for Company Registration on the login page. A window showing the Excel application forms available for download would be displayed. The company can then download suitable application form (i.e. NBFC or SC/RC) from the above website, key in the data and upload the application form. The company may note to indicate the name of the correct Regional Office in the field ―C-8 of the ―Annx-Identification Particulars‖ worksheet of the Excel application form. The company would then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the application form (indicating the Company Application Reference Number of its on-line application), along with the supporting documents, to the concerned Regional Office. The company can then check the
status of the application based on the acknowledgement number. The Bank would issue Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.
1.3 GUIDELINES FOR NEW DEPOSITS Customer identification: 'Know The Customer' (KYC) should be the key guiding
principle for identification of an individual / corporate customer (depositor or borrower). Accordingly, the KYC framework should have two-fold objective, (i) to ensure customer identification and verifying his identity and residential address; and (ii) to monitor transactions of a suspicious nature. NBFCs should ensure that the identity of the customer, including beneficial owner
is done based on disclosures by customers themselves. Typically easy means of establishing identity would be documents such as
Permanent Account Number (PAN), ration card, driving licence, Election Commission's identity card, passport, et cetera in case of individuals and registration certificate, partnership deed/agreement, et cetera and other reliable documents in respect of companies, firms and other bodies. Verification through such documents should be in addition to the introduction by a
person known to the NBFC. Procedures for existing customers In respect of existing customers, NBFCs should ensure that gaps and missing
information in compliance of KYC guidelines on customer identification procedure is filled up and completed before June 30, 2004.
Ceiling and monitoring of cash transactions NBFCs would normally not have large cash withdrawals and deposits. However, wherever transactions of Rs 10 lakh (Rs 1 million) and above are
undertaken, they should keep record of these transactions in a separate register maintained at branch, as well as at Registered Office. Such information should be made available to regulatory and investigating
authorities, when demanded. Guidelines and monitoring procedures The board of directors of NBFCs should formulate policies and procedures to
operationalise the guidelines and put in place an effective monitoring system to ensure compliance by their branches. Early computerisation of branch/office reporting will facilitate prompt generation
of such reports and monitoring.
Internal control systems Duties and responsibilities should be explicitly allocated among the staff for
ensuring that policies and procedures are managed effectively and that there is full commitment and compliance to an effective KYC programme in respect of both existing and prospective customers/clients. Internal audit/inspection Internal auditors must specifically scrutinise and comment on the effectiveness of
the measures taken by branches / offices of NBFC in adoption of KYC norms and steps towards prevention of money laundering.
Specific cases of violation should be immediately brought to the notice of head /
controlling / registered office. Record keeping NBFCs should prepare and maintain proper documentation on their customer
relationships and cash transactions of Rs 10 lakh and above. The records of all such transactions should be retained for at least ten years after
the transaction has taken place and should be available for perusal and scrutiny by audit functionaries as well as regulators and law enforcement authorities; as and when required, at the branch as well as at registered office. Training of staff and management It is important that all the operating and management staff is made fully aware of
the implications and understand the need for strict adherence to KYC norms. NBFCs may take suitable steps to impart training to their operational staff on anti-
money laundering measures.
1.4 RESPONSIBILITIES The NBFCs accepting public deposits should furnish to RBI i. 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; ii. Statutory Annual Return on deposits - NBS 1; iii. Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise;
iv. Quarterly Return on liquid assets; v. Half-yearly Return on prudential norms; vi. 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 ; vii. Monthly return on exposure to capital market by companies having public deposits of Rs. 50 crore and above; and viii. A copy of the Credit Rating obtained once a year along with one of the Halfyearly Returns on prudential norms as at (v) above.
1.5 CURRENT SCENARIO
Nearly 11 years after the last of the two banking licences were issued by RBI to private sector entities, the government has again started the process of allowing the
better-managed non-banking finance companies (NBFCs) to graduate to full-fledged banks. FM Pranab Mukherjee‘s Budget proposal on Friday was the first step towards the same. The second step will be enacted on Tuesday morning. A select group of officials from top NBFCs, under the aegis of the Finance Industry Development Council (FIDC), the trade body for NBFCs in India, are meeting R Gopalan, the banking secretary in the finance ministry, to present a case for select NBFCs to be converted into full-fledged banks, sources said. About 12-15 NBFCs and corporate houses having presence in the financial sector are expected to join the race to float a bank. ‗‗The finance minister is convinced that there is a huge need for low-cost financing at the semi-urban and rural areas in India,‘‘ said a industry source. The financial services industry believes the Budget proposal was a reflection of the same. ‗‗In the finance ministry things are moving in the right direction and the banking secretary‘s meeting proves the same,‘‘ said the source. FIDC office bearers could not be contacted during the extended weekend. In the last Union Budget, the FM had announced that RBI is considering giving additional banking licences to private sector players, including NBFCs. This was ostensibly to further financial inclusion and also to improve the size and sophistication of the Indian banking system. The announcement set the financial markets on fire with a lot of conjecturing as to who would be the lucky few. The access to low-cost current account and savings accounts and the ability to offer all financial products under one roof were cited as major attractions for NBFCs to rush to seek banking licences. It was also expected that RBI would give new licences to private players very soon. But, an analysis reveals a different picture. Neither is RBI in a hurry to issue fresh licences nor are many NBFCs keen to get into commercial banking. The reasons for this are manifold. RBI rules are stringent for commercial banks as they are the visible face of the Indian financial system and commercial banks are
primarily the custodians of public money. RBI places restrictions on commercial banks in their lending operations. Out of Rs 100 taken in as deposits, approximately Rs 30 has to be set apart as statutory requirements towards CRR and SLR. This leaves the banks with Rs 70 to lend. Out of this, 40% has to be statutorily lent towards the priority sector as defined by RBI. This leaves banks with approximately Rs 42 to lend at their own discretion. Many NBFCs would definitely find this as restrictive to say the least. As per the guidelines of 2001, NBFCs seeking a banking licence should have a minimum paid-up capital of Rs 200 crore, which must be increased to Rs 300 crore within 3 years of conversion into a bank. Further, banks have to invest large funds in fixed assets and information technology primarily to facilitate financial inclusion, risk management, anti money laundering, etc. These huge capital expenditures increase the payback period for the investments made. Also, banking-as-a-business model is far more people-, process- and product-driven than a simple NBFC model. For example, in order to adopt universal banking, the staff needs to be multi-skilled in banking functions. So, the operating expenses will be substantially higher, which, in turn, would reduce the profitability of operations. Also, there are restrictions on ownership and voting rights. Current stipulations cap voting rights at 10%; higher rights require the specific approval of...
Chapter-2
Literature review
2.1 IMPORTANCE OF NBFC’S According to RBI Non Banking Finance Companies (NBFCs) is a constituent of the institutional structure of the organized financial system in India. NBFCs perform a significant and important role in our financial system. They facilitate the process of channelising of public savings and provide better return to the depositors. We are aware that due to liberalization and globalisation, banking industry and financial sector has gone through many reforms. In the present economic environment it is very difficult to cater need of society by Banks alone so role of Non Banking Finance Companies and Micro Finance Companies become indispensable. The activities of non-banking financial companies (NBFCs) in India have undergone qualitative changes over the years through functional specialisation. The role of NBFCs as effective financial intermediaries has been well recognised as they have inherent ability to take quicker decisions, assume greater risks, and customise their services and charges more according to the needs of the clients. While these features, as compared to the banks, have contributed to the proliferation of NBFCs, their flexible structures allow them to unbundle services provided by banks and market the components on a competitive basis. The distinction between banks and non-banks has been gradually getting blurred since both the segments of the financial system engage themselves in many similar types of activities. At present, NBFCs in India have become prominent in a wide range of activities like hire-purchase finance, equipment lease finance, loans, investments, etc. By employing innovative marketing strategies and devising tailor-made products, NBFCs have also been able to build up a clientele base among the depositors, mop up public savings and command large resources as reflected in the growth of their deposits from public, shareholders, directors and their companies, and borrowings by issue of non-convertible debentures, etc. According to KPMG survery The Indian Non Banking Finance Company (NBFC) sector has often been relegated to the shadows, in most discussions on the Indian
Financial Services (FS) industry. Banks, insurance companies and capital market players take centre stage and invariably, NBFCs attract public attention only during times of crisis. Little attention has been paid to the silent but effective manner in which NBFCs have spread their operations across the country. NBFCs have provided financial solutions to sections of society who hitherto were at the mercy of unorganized players for credit and savings products, which were delivered on economically and socially usurious terms. ronically, in recent times, NBFCs are once again in the spotlight for their perceived strengths and capabilities rather than their problems. While this re-rating ought to bring cheer to a much maligned sector, a degree of caution needs to be instilled within potential investors in NBFCs, who need to clearly understand the true drivers of value for finance companies. This understanding is imperative to enable a better judgment of the intrinsic worth of NBFCs. This article proceeds to illustrate the key factors responsible for the strong rerating of the NBFC sector, as well as discuss the validity of each of these factors, as actual drivers of value. Today, the NBFC sector is as financially sound as it has ever been.To an extent, this can be attributed to the very problems affecting the sector which have resulted in the purging of several players, leaving the fittest few to dominate the landscape. Taking the Reserve Bank of India‘s (RBI) definition of ‗reporting NBFCs‘ as a proxy for non-dormant players, a mere 24 NBFCs held 92.7 percent of the total assets of all NBFCs in 2005-2006. The balance assets, amounting to less than 8 percent of the total, were fragmented across 439 NBFCs. In addition to this consolidation, at present, NBFCs in general are well-capitalized with strong parent support. A majority of active NBFCs reported capital adequacy ratios exceeding 12 percent
2.2 ROLE OF NBFC’S
According to EPW Research Foundation (EPWRFThe Indian economy is going through a period of rapid `financial liberalisation'. Today, the `intermediation' is being conducted by a wide range of financial institution through a plethora of customer friendly financial products. The segment consisting of Non-Banking Financial Companies (NBFCs), such as equipment leasing/hire purchase finance, loan and investment companies, etc. have made great strides in recent years and are meeting the diverse financial needs of the economy. In this process, they have influenced the direction of savings and investment. The resultant capital formation is important for our economic growth and development. Thus, from both the macroeconomic perspective and the structure of the Indian financial system, the role of NBFCs has become increasingly important. The crucial role of Non Banking Finance Institutions (NBFIs) in broadening access to financial services, and enhancing competition and diversification of the financial sector has been well recognized. The main advantages of these companies lie in their ability to lower transactions costs of their operations, their quick decision-making ability, customer orientation and prompt provision of services. While NBFIs are sometimes seen as akin to banks in terms of the products and services offered, this is strictly not accurate, as more often, NBFIs play a range of roles that complement banks. Further, Status Note on NBFCs NBFIs can add to economic strength to the extent they enhance the resilience of the financial system to economic shocks. A well developed and properly regulated NBFI sector is thus an important component of broad, balanced, efficient financial system that spreads risks and provides a sound base for economic growth and prosperity.
2.3 ON GLOBAL CRISIS According to CARE: NBFC sector faced significant stresses on asset quality, liquidity and funding costs due to the global economic slowdown & its impact on the domestic economy. While all the NBFCs were affected, the impact varied according to the
structural features of each NBFC. Asset-liability maturity (ALM) profiles, type of assets financed and origination / collection models followed were the primary differentiators within NBFCs. The support provided by the Reserve Bank of India (RBI) highlighted the explicit acceptance of the systemic importance of the sector. FY10 was marked by re-aligning of the liability profiles, tightening of lending norms coupled with closing down of many of the unsecured loan segments. On a structural basis, the sector is now more robust due to the lessons learned by NBFCs from this crisis. Profitability is expected to be lower than historical levels due to conservative ALM management, higher provisioning and avoidance of high yielding unsecured loan segments. However profits are at the same time expected to be much more stable & less susceptible.
CHAPTER-3
RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN Since the research is for industry analysis and it is structured for NBFC‘S. The research uses secondary data for analysIs and interpretation.
3.2 OBJECTIVE The confined objectives of the present study are: To analyze the market of NBFC‘s in India To study the financials of NBFC‘s
3.3 SCOPE OF THE STUDY The study was limited to the Financial Service market of India which included NBFC‘s mainly from the . The study was completed within the time frame of 60 days(2 months) starting from 1st April, 2010 and ending on 1st June, 2010. The target group of the study were the NBFC‘s
3.4 DATA COLLECTION 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 Both the secondary and primary data collection methods were used in the study.
3.4.1 PRIMARY DATA The primary data required for this study was collected by visiting the financial services and analysing the information provided by them.
3.4.2 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 Chapter-2 and in ―References‖. The source of the secondary data was British Library, NBFC‘s and Internet. Secondary data was the main source in formulating the constructs of ― A comparative study of NBFC‘s in India‖
3.5 FIELD WORK PLAN The study was conducted in New Delhi (NCR and Bangalore visiting different institutions and analyzing the different NBFC‘s work.
CHAPTER-4 MAJOR PLAYERS AND SELECTED COMPANY FOR STUDY
4.1 LIC HOUSING FINANCE 4.1.1 Housing Finance Industry India‘s housing finance industry comprises of banks and housing finance companies. They have contributed to new residential home loans at a compounded annual growth rate (CAGR) of more than 30 percent during the period 2002-2007. This has been due to the combined effect of a booming economy and low interest rates. Further, steady prices and continuation of tax concessions to self-occupied residential home borrowers are contributors to the growth of the industry. The average age of borrowers has declined over the years, while the number of double income households has grown significantly enabling them to borrow higher loan amount due to higher repaying capacity. The scenario of unprecedented growth in housing finance, driven by low interest rates, increasing purchasing power and attraction of the yield in this sector has begun to show signs of change last year. There has been a decrease in demand during the last one year. Earlier to that i.e., during 2006 to 2007 home prices increased at a CAGR of 30 to 40 percent against a 20 percent increment in salaries witnessed in metros and large cities. This had affected the buyer‘s affordability. As the borrowing cost for banks and housing finance companies steadily increased in line with rising interest rates in the economy in the past two years up to Q3 of 200809, banks and housing finance companies resorted to hike in interest rates so as to maintain their interest spreads. Interest rates on new home loan originations have increased significantly by 200 basis points during April‗2008 to September October‘ 2008. As a result a higher proportion of monthly income was being paid out as home loan equated monthly installments (EMI). The combined effect of an increase in property prices and interest rates has meant that home loan buyers, who would have had to borrow less at an interest rate of 8.75 percent a year ago, now have to borrow more to buy the same property due to higher property prices at higher interest rates of
10.5 to 11 percent. This trend has resulted in both lower affordability i.e., an average home at a higher multiple of annual income, and higher debt burden (meaning that a larger proportion of income gets spent as home loan EMI). Further, the increase in interest rates on fresh loans to 10.5 to 11 percent from 8.75 percent meant increase in debt burden i.e., higher installment to income ratio. Along with, the economic down turn and consequential apprehensions of job insecurity and income reduction led to slump in the market. However, the scenario has taken the reverse turn in the last quarter of the financial year 2008-09, which was evident from the higher booking of flats, and sharp increase in the disbursements. Real estate developers have taken sensible decision in reducing or slashing rates in major centres specially Mumbai, Thane, Navi Mumbai, Delhi NCR and Bangalore to encash on the existing demand in the real estate market. The good deals might be offered for a few weeks or for the first ten properties or for a killer deal for a time-bound two days or similar schemes but yes, the writing is clear on the wall that the willingness to connect with the ―real‖ pricing has dawned on the developers to sell at reduced prices to encourage more and more sales. The sales teams in the builder/ developer offices are at their all-time creative best with sales tactics. They now understand clearly that with buyers unwilling to relent on unrealistic pricing, there is an even greater need to price competitively, maybe with a lower profit margin, than holding on to the price and project as the interest meter runs. These proactive steps should ensure renewed demands and increased volumes during the current year. The Indian economy, which was on a robust growth path up to 2007-08, averaging at 8.9 per cent during the period 2003-04 to 2007-08, witnessed moderation in 2008-09, with the deceleration turning out to be somewhat sharper in the third quarter. Industrial growth experienced a significant downturn and the loss of growth momentum was evident in all categories, viz., the basic, capital, intermediate and consumer goods.
However, the fiscal stimulus packages of the Government and the monetary easing of the Reserve Bank will, however, arrest the moderation in growth and revive consumption and investment demand, though with some lag, in the months ahead. Furthermore, prospects of the agricultural sector also remain bright, and this will continue to support the rural demand. Finally, in the wake of expected improvement in agricultural production as well as low international commodity prices, inflationary pressures are also anticipated to remain at a low level through the greater part of the 2009-10. 4.1.2 Indian Housing Finance scenario India‘s housing finance industry comprises of banks and housing finance companies. They have contributed to new residential home loans at a compounded annual growth rate (CAGR) of more than 30 percent during the period 2002-2007. The scenario of unprecedented growth in housing finance, driven by low interest rates and booming economy, has begun to show signs of change last year. There has been a decrease in home prices during the last one year. Earlier to that i.e., 2006 to 2008 home prices increased at a CAGR of 30 to 40 percent against a 20 percent increment in salariee witnessed in metros and larger cities. This had affected the buyer‘s affordability. The average home buyer spent around 4 times his net annual income for purchasing a new residential home in the 3-4 years till March 2005. (source CRISIL report 19th February, 2009) As the borrowing cost for banks and housing finance companies steadily increased in line with rising interest rates in the economy in the past two years upto September‘ 2008, banks and housing finance companies resorted to hike in interest rates so as to maintain their interest spreads. Interest rates on new home loan originations had increased significantly by 200 basis points during April‗ 2008 to August September‘ 2008. As a result a higher proportion of monthly incomes was paid as home loan equated monthly instalments (EMI). But, the scenario has taken the reverse turn in the last quarter of the financial
year 2008-09 which was evident from the higher booking of flats and sharp increase in the disbursements. As interest rates are heading southward, public sector banks have set the pace. Housing finance companies would follow the suit. It may be mentioned here that with the decline ininterest rates, LIC Housing Finance has passed on 150 basis points rate cut to the customers i.e. 75 basis points each on 1st January, 2009 and 1st April, 2009. Our interest rates are among the lowest in the industry. This has helped our company in retaining customers and maintaining high growth rates even in tough conditions. And interest rate is just one of the factors. Transparency, hassle-free services, property prices and buyer‘s repayment capacity are equally important. The customer would not arrive at a decision solely based on the reduction in interest rates for one year. LIC Housing Finance is one of the best players in the industry in terms of EMI as our company has no hidden costs. 4.1.3 LIC Housing Finance LIC Housing Finance Ltd. is one of the largest Housing Finance Company in India. Incorporated on 19th June 1989 under the Companies Act, 1956, the company was promoted by LIC of India and went public in the year 1994. The Company launched its maiden GDR issue in 2004. The Authorized Capital of the Company is Rs.1500 Million (Rs.150 Crores) and its paid up Capital is Rs.850 Millions (Rs.85 Crores). The Company is recognized by National Housing Bank and listed on the National Stock Exchange (NSE) & Bombay Stock Exchange Limited (BSE) and its shares are traded only in Demat format. The GDR's are listed on the Luxembourg Stock Exchange. The main objective of the Company is providing long term finance to individuals for purchase / construction / repair and renovation of new / existing flats / houses. The Company also provides finance on existing property for business / personal needs and
gives loans to professionals for purchase / construction of Clinics / Nursing Homes / Diagnostic Centres / Office Space and also for purchase of equipments. The Company possesses one of the industry's most extensive marketing network in India : Registered and Corporate Office at Mumbai, 6 Regional Offices, 13 Back Offices and 158 marketing units across India. In addition the company has appointed over 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777 Customer Relationship Associates (CRAs) to extend its marketing reach. Back Offices spread across the country conduct the credit appraisal and administrative functions. The Company has set up a Representative Office in Dubai and Kuwait to cater to the Non-Resident Indians in the GLCC countries covering Bahrain, Dubai, Kuwait, Qatar and Saudi Arabia. Today the Company has a proud group of over 10,00,000 prudent house owners who have enjoyed the Company's financial assistance. Profile & Progress Provides loans for homes, construction activities, and corporate housing schemes. Around 91% of the loan portfolio derived from the retail segment and the rest from large corporate clients Formed three new wholly owned subsidiaries in 2007-08 to promote marketing of financial products and venture capital fund. Rated ‗AAA‘ by CRISIL for the 8th consecutive time in 2008-09; maiden Fixed Deposit program received an FAAA/stable rating by CRISIL. An offshoot of Life Insurance Corporation of India (LIC), incorporate in 1989. Registered & Corporate Office at Mumbai with 6 regional offices, 13 Back Offices and 130 marketing units across the country .
1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777 Customer Relationship Associates (CRAs) comprise its pan-Indian marketing network. Representative overseas presence in Dubai and Kuwait.
4.1.4 Financial Performance
Interest income from housing loans increased 34.90 percent from Rs. 2036.79 crore in 2007- 08 to Rs. 2747.65 crore in 2008-09. The net interest income grew by 31.97 percent from Rs. 553.94 crore in 2007-08 to Rs. 731.04 crore in 2008-09. Profit after tax surged 37.30 percent from Rs. 387.19 crore in 2007-08 to Rs. 531.62 crore in 2008-09.
Operations: Funds mobilized grew 49.38 percent from Rs. 7489.70 crore in 2007-08 to Rs. 11,188.33 crore in 2008-09. Sanctions (Ind.+Proj.) increased 26.46 percent from Rs. 8617.88 crore in 2007-08 to Rs. 10898.47 crore in 2008-09. Disbursements (Ind.+Proj.) grew 23.90 percent from Rs. 7071.48 crore in 2007-08 to Rs. 8762.01 crore in 2008-09. Loan portfolio grew 26.18 percent from Rs. 21936.41 crore in 2007-08 to Rs. 27679.28 crore in 2008-09. Margins: Net interest margin improved by 10 basis points from 2.85 percent in 2007-08 to 2.95 percent in 2008-09. Return on equity grew by 267 basis points from 21.13 percent in 2007-08 to 23.80 percent in 2008-09. Net profit margin improved by 49 basis points from 17.82 percent in 2007-08 to 18.31 percent in 2008-09. Asset Quality: Gross NPA declined by 63 basis points from 1.70 percent in 200708 to 1.07 percent in 2008-09.Net NPA levels declined 43 basis points from 0.64 percent in 2007-08 to 0.21 percent in 2008-09. On funds On the performance of the Company : In the turbulent times when Housing sector was passing through rough patch, LIC Housing Finance largely could manage the environment well, inspite of various global as well as domestic economic challenges
and was successful in producing good business growth by its inherent strength in meeting difficult challenges through unceasing and untiring efforts. The Company has not only ensured consolidation of the gains achieved in the past years, but also ensured further growth and increased profitability. The year 2008-09 has been a year of further containment of defaults and NPA levels when compared to previous years. Lending operations The main thrust continues on individual loans with a growth of 25 percent as against 20 percent in the previous year. However, project loans were also given due weightage resulting in a modest growth of 20 percent over previous year. During the year, the Company sanctioned 67,886 individual loans for Rs. 8,186.02 crore and disbursed 67,237 loans for Rs. 7,351.09 crore during 2008-09. Individual retail loans constitute 75.11 percent of the total sanctions and 83.94 percent of the total disbursements for the year 2008-09 compared to the last year‘s figure of 75.84 percent and 83.47 percent respectively. The retail (individual) loan portfolio grew by over 22 percent from Rs. 20,618.78 crore as on 31st March, 2008 to Rs. 25,252.87 crore as on 31st March, 2009. The cumulative sanctions and disbursements since the incorporation, in respect of individual oans are: Amount sanctioned : Rs. 45,624.24 crore Amount disbursed : Rs. 42,993.98 crore.
Non-Performing Assets and provisions:
The amount of gross Non-Performing Assets (NPA) as on 31st March, 2009 was Rs. 297 crores, which is equivalent to 1.07 percent of the housing loan portfolio of the Company, as against Rs. 372.92 crore i.e., 1.70 percent of the housing loan portfolio as on 31st March, 2008. The net NPA as on 31 st March, 2009 is reduced to Rs. 57 crore i.e. 0.21 percent of the housing loan portfolio vis-à-vis Rs. 140.90 crore i.e., 0.64 percent of the housing loan portfolio as on 31st March, 2008. The total cumulative provision towards housing loan as on 31st March, 2009 is Rs. 240.25 crore. During the year, the Company has written off Rs. 5.40 crore of housing loan portfolio as against Rs. 38.99 crore during the previous year. Fund raising The Company raised funds aggregating to Rs. 11,188.33 crore through term loans from banks, Non-Convertible Debenture (NCD), sub-ordinate debts, commercial paper, Public Deposit and others which were used for fresh disbursements as well as repayments/prepayments of past borrowings. The Company‘s NCD issue was rated ‗AAA‘ and Public Deposit was rated as FAAA/STABLE by CRISIL.
4.1.5 Macro Economic Analysis
Competition The Housing Finance Industry is one of the most keenly competitive segments of the Economy, with the Banking sector having a significant presence. However, Housing Finance Companies with a dedicated focus on the industry and better understanding of the underlying real estate markets stand on a better footing when it comes to understanding the needs and requirement of the customers as also assessing the risks in the industry. It may be mentioned here that with the decline in interest rates, LIC Housing Finance has passed on 150 basis points rate cut to the customers during the calendar year 2009 so far 75 basis points each on 1st January, 2009 and 1st April, 2009. Our interest rates are among the lowest in the industry. This has helped our company in retaining customers and maintaining high growth rates even in tough conditions. And interest rate is just one of the factors. Transparency, hassle-free services, property prices and customer affordability are equally important. NHB has lowered its interest rates on refinance to housing finance companies. Refinance for rural housing at concessional rate of 8 percent per annum for seven years has also been provided. Its‘ PLR has been reduced to 10.75 percent per annum. The refinance facility of Rs. 4,000 crore extended by RBI to NHB will be on-lent by NHB to housing finance companies with a cap of Rs. 400 crore per housing finance company with the condition that the refinance would be available at an interest of 8 percent, only for loans below Rs. 20 lakh. Housing Finance, the Company, through its competitive pricing, transparency in operations, wide distribution network and good customer service, has not only been able to show a good growth in new business, but has shown an improved retention rate, which is reflected in high growth of loan book.
Opportunities
There are many unique characteristics of housing distinguishing it from other goods. It is a universal necessity. Home ownership is a social goal, bringing social status to the buyer. Housing is also a relatively expensive asset, often soaking up a lifetime‘s savings. Housing properties have a downward sloping demand curve, which means that less people would effectively buy when prices are high and vice versa. At high prices, buyers postpone their buying decisions and opt for rented accommodation. At low prices, people often purchase more than one house. Disposable incomes determine purchasing power. Government policies relating to interest rates, mortgage subsidies, tax rebate and other taxes like stamp duty etc. also impact the housing property market. The housing sector is marked by a variety of taxes and regulations. These are meant to ensure the safety of houses for occupation and to confer rights of ownership to enable further transactions. Given that building or acquisition of a house usually involves several intermediary agents (either statutory like registration of various title documents or facilitating agents such as brokers, builders or financiers), the final cost of acquisition includes not just the price of the property that is paid to the seller (in case the property is purchased) but also all the intervening transaction costs. As for the housing property market in India, the residential housing property segment constitutes about 75 percent of the real estate market in terms of value. Real estate development activity has shifted from metros to their suburbs and tier-two cities. A gradual shift to tier-three cities and rural areas is taking place. Easy availability of finance from the housing finance companies and commercial banks at lower interest rates, increased salaries and availability of fiscal and tax benefits are propelling the demand for housing properties. The growth of the Information Technology Enabled Services (ITES), industry has been a significant contributor of housing property demand in recent years. ITES firms are moving from traditional centres like Mumbai, Delhi, Bangalore, Hyderabad and Chennai to the National Capital Region, Pune, Chandigarh, Jaipur, etc. in order to be cost effective. This is resulting in not only the boom in residential property markets but also in the
institutional property markets in these cities. There is great demand for modern office buildings and commercial spaces in India. Threats (bottlenecks) Impact of legal charges and documentation fees There are taxes / duties / fees payable to the state at the construction stage. There are two aspects of the cost namely: i) monetary cost and; ii) cost in terms of time devoted in obtaining various permissions and clearances. The number of permissions and documentation required can be quite large. Further, permissions have to be taken from different departments and that too sequentially. This delays the process of housing construction and occupation. The actual fees imposed by the government are not necessarily high but the time taken to obtain requisite permissions is very long, procedures cumbersome and sometimes involves extra payments to facilitate the movement of files and getting the transaction through, is significant vis-à-vis the statutory fees. The delays highlight the sluggishness of the market by increasing the gap between change in demand and the market response to it. Future Outlook: It is estimated that the housing finance industry will be able to maintain a higher growth in fresh origination of residential home loans over next three to five years mainly due to increased affordability of the borrower i.e. ratio of average property price to average annual income, on account of the falling loan interest rates and decrease in property prices. The average age of borrowers has declined over the years, while the number of double-income households has grown significantly thereby
enabling them to borrow higher loan quantum due to increased affordability and repayment capacity. The growth drivers will continue to increase demand for selfoccupied residential housing; Revival of economy will certainly lead to a steady increase in monthly incomes across key sectors. Rising proportion of double income households, renewed confidence in higher income generation, reassurance of job security and availability of variety of financing options should stimulate growth of the housing sector. All these factors will further boost the impact of increased affordability, leading to the sector‘s steady and comfortable growth. Looking forward, LIC Housing Finance would like to remain focused in end-user segment for growth and increased profitability and wish to make the coming year, a year of further consolidation and progress by crossing greater milestones.
CHAPTER-5
INDIAN BANKS V/S NBFC’S
2008-09 was a difficult year, especially for the financial segment across the globe. However, India‘s strong macro-economic fundamentals and financial policies have shielded it from the turmoil.. The study considered those banks that have announced their results between 15th April -20th May 2008- 09 posted on the website of Bombay Stock Exchange. The have analyzed in total 29 banks (both public & private sector) and 7 NBFCs The) study has examined and compared the profitability of banks with NBFCs during the financial year 2008-09. Simple average and profitability ratio of the two segments have been studied. Methodology - The AFP analysis of the Indian commercial banks & NBFCs profitability is calculated using two broad parameters including net profit and total income. Profitability Ratio is a class of financial metrics that is used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. Profitability is calculated as: (Net Profit/Total income)*100 NBFCs more profitable than commercial banks despite slowdown Even as the world wide financial crisis and slowdown in key sectors of the Indian economy led the Non Banking Financial Companies to face severe cash shortage during the financial year 2008-09, the overall profitability of NBFCs has remained higher than the scheduled commercial banks. During the financial year 2008-09, Non- Banking Financial Companies (NBFCs) average profitability stood higher at 18.90 per cent as compared to the banks with 10.08 per cent. The NBFCs generally operates on the model of lending to riskier projects with interest rates higher than offered by the banking institutions. As the financial markets faced the heat of global crisis during the financial year 2008-09, most of the NBFCs faced problems in fund raising. Among the seven NBFCs, in 2008-09 the highest profitability was reported by Infrastructure Development Finance Company Limited at 20.89 per cent, with total income stood at Rs.3626.38 crore and net profit at Rs.757.73 crore. It was followed by Housing Development Finance Companies Limited (HDFC) andPower Finance Companies
Limited (PFCL) at 20.76 per cent and 20.67 per cent respectively. ―The Reserve Bank of India (RBI) monetary measures by cutting interest rates during 2008-09 has benefited the NBFCs since many of them finance their operations through market borrowings‖ said Mr. Sajjan Jindal President. Aggregate net profit to total income ratio of 17 public sector banks and 12 private sector banks reported to be 10.08 per cent during 2008-09. 5.1 Top 5 Banks and NBFCs with highest profitability
Among the 17 public sector banks, the highest profitability was reported by Indian Bank and Bank of India at 15.83 per cent and 15.50 per cent respectively. Out of the private sector banks the top positions were occupied by Axis Bank and Yes Bank at 13.22 per cent and 12.46 per cent respectively, among others. The 7 NBFCs, aggregate total income grew by a whooping 57.3 per cent to Rs.28,208.72 crore in FY‘09 from Rs.17,906.84 crore in the previous fiscal. However, the aggregate total income of 29 banks have increased by 25.3 per cent from Rs 2,69,055 crore in 200708 to Rs 3,37,206.9 crore in 2008-09. Year-on-year performance of the 29 banks
regarding net profit to total income ratio at the aggregate level showed a marginal decline during FY‘09 with 10.08 per cent as against FY‘08 recorded at 10.52 per cent, while in the case of 7 major NBFCs, the ratio declined during 2008-09 at 18.90 per cent as against 21.80 per cent in FY‘08.
5.3 Banking versus NBFC regulatory arbitrage in India
Chapter-6
Porter’s five forces
PORTER‘S FIVE FORCES MODEL OF COMPETITION The nature of competition in the industry in large part determines the content of strategy, especially business level strategy .based it is on the fundamental economics of the industry, the very profit potential of an industry is determine by competition interaction. Where these interactions are intense, profittends to be whittled away by the activities of competing. Porter‘s model is based on the insight that a corporate strategy shouldmeet the opportunities and threats in the organizations external environment.Especially, competitive strategy should base on and understanding of industrystructures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in away that improve the position of the organization. Porter‘s model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry. Barriers to entry Product differentiation is very difficult: As most of the NBFC‘s offer similar types of loans which caters to same market. Innovation of a product plays a very important role in the market. Licensing requirement: There are already 13000 registered NBFC . So, the licensing requirement is also low. The regulations are not that stringent as that of a Bank.
Threat of substitute: Banks: Banks are important substitutes. As they are leaders in the markets. They have a quite strong brand presence and a good credit appraisal method also. Money Lenders: Small NBFC‘s cater to the rural areas where there is already a very strong presence. They dominate the market in the rural areas and its mostly the unorganised market they tap in. Bargaining Power of suppliers Many alternatives: The suppliers in this case are the depositors or the NBFC‘s funds. Suppliers have lots of alternatives to put their money. With the risk they can invest their money. E.g. Low Risks: Banks, Bonds etc. High Risk: Stocks, Investment RBI rules and regulations: RBI rules and regulations are not as stringent as of Banks. NBFC‘s are governed by many bodies. E.g. RBI, FIDC, NHB etc Bargaining power of consumer very high Large no. of alternatives Low switching costs Undifferentiated services Full information about the market Threat of competitors Large no of NBFC‘s High market growth rate Low switching costs Undifferentiated services
High fixed cost High exit barriers Rivalry among competitors is very fierce in Indian Non Banking Financial Industry. The services NBFC‘s offer is more of homogeneous which makes the Company to offer the same service at a lower rate and eat their competitor market‘s share. Market Players use all sorts of aggressive selling strategies and activities from intensive advertisement campaigns to promotional stuff. Even consumer switch from one bank to another, if there is a wide spread in the interest. Hence the intensity of rivalry is very high. The no of factors has contributed to increase rivalry those are. A large no of NBFC serving similar loan products: There is so many NBFC‘s and non financial institution fighting for same pie, which has intensified competition. High market growth rate: India is seen as one of the biggest market place and growth rate in Indian financial industry is also very high. This has ignited the competition. Homogeneous product and services: The services banks offer is more of homogeneous which makes the company to offer the same service at a lower rate and eat their competitor market‘s share. Undifferentiated services: Almost every NBFC provides similar services. Every bank tries to copy each other services and technology which increase level of competition. High exit barriers: High exit barriers humiliate banks to earn profit and retain customers by providing world class services.
CHAPTER-7
FINDINGS & MANAGERIAL IMPLICATIONS
7.1 FINDINGS Top-rated NBFCs have not only been successful in managing their market share but also in protecting their profitability. A combination of the factors cited earlier had helped these NBFCs earn better returns on their deployment. In fact, almost all the top-rated NBFCs enjoy a return on total assets that is higher than HDFC Bank's, one of the better-run banks. The higher return on assets was despite their operating cost ratio being similar to that of HDFC Bank. For example, operating expenses as a proportion of net margin worked out to 68 per cent for HDFC Bank. On an average, this was not significantly higher than the ratio for most top-rated NBFCs. If return on assets were still superior, then it was because of the higher return on their funds. For top NBFCs, the interest income worked out to 17-21 per cent of their total assets for the year ended FY. The liquidity in the banking system also helped these finance companies. Spreads over government securities for AAA rated corporate sector debt instrument are now only 50 basis points. In other words, if the cost of funds for banking companies has declined sharply, then top-rated NBFCs have also benefited from such a decline in interest rates. Some of these companies are now raising funds at 7-8 per cent. Also, these companies have displayed the ability to manage their portfolio without large incidence of non-performing assets. For instance, LIC Housing Finance, IDFC and Shriram Transport Finance boast of net non-performing assets to net advances ratio of less than 1 per cent. This again has helped them lower the overall cost of operations and, thereby, protect their profitability. Higher profitability and innovative financing options, such as securitization, have also helped in boosting the capital adequacy ratio of these NBFCs. among others, LIC Housing Finance, IDFC and Shriram Transport Finance, Reliance Capital, boast of capital adequacy ratios upwards of 15 per cent. In other words, their balance sheets continue to be strong to accommodate further growth in disbursements. 7.1.1 Disbursements - Sharp fall during the crisis
Disbursements were clearly hit during the crisis as is visible from Primary reason for this initial fall was lack of supply of funds after the market liquidity dried up. Impact however differed depending on the capital structure of the company, with NBFCs having larger ALM mismatches and those which had more dependence on mutual funds for funding were affected more severely as mutual funds themselves faced redemption pressure on their short term schemes. To support the sector, RBI undertook several measures to improve liquidity flow to the NBFC sector. This was a significant development as the regulator highlighted the systemic importance of the sector. RBI measures to improve liquidity of NBFCs The systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI) were permitted to raise short-term foreign currency borrowings. Allowed banks to avail liquidity support under the LAF for the purpose of meeting the funding requirements of NBFCs through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL. Risk weights on banks‘ exposures to claims on NBFCs-NDSI were reduced to 100 per cent from 150 per cent. Setting up of a special purpose vehicle (SPV) for addressing the temporary liquidity constraints of systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI). Deferring the higher CAR norms for NBFCs-ND-SI by 1 year. While liquidity conditions started improving from Q4 FY09, disbursements growth remained subdued for the sector till the first half of FY10. On a y-o-y basis the cumulative disbursements showed a fall during Q1 FY10 and H1 FY10. This period
saw deterioration in asset quality of most NBFCs, which was especially high in their unsecured loan portfolios. Lower disbursements were mainly because of the pull back of NBFCs out of unsecured lending segments. On a cumulative basis 9ME FY10 disbursements increased by more than 19%. Even if we consider the low base effect of Q3FY09 disbursements, there is clear indication of pick up in disbursements and a positive outlook for the sector. With improvement in overall economic activity and higher thrust on infrastructure financing by the government, the scenario is expected to improve further in FY11. 7.1.2 Cost of Funding - Shot up during the crisis due to short tenure borrowings, stabilized now & expected to be less volatile due to larger proportion of long term funding Many NBFCs took advantage of the lower interest rate regime at the shorter end of the yield curve by borrowing short term funds (3months – 1 year) at lower rates and lending for maturities ranging from 3-4 years at higher rates. However the level of mismatches differed between NBFCs and those with higher mismatch faced not only liquidity pressure, but their cost of funding also increased during this period due to inversing of the yield curve and a general rise in interest rates. Average borrowings costs1 (on an aggregate basis for CARE rated NBFCs) increased from around 9.510.0% in FY08 to 11.5-12.0% in FY09. This shows the severity of the impact as financial crisis affected funding costs in the second half of FY09 and led to a 200 bps increase for the entire year. The response by NBFCs was to gradually replace short term funding with long termsources. This is a significant structural change in the borrowing profiles that will bring more stability in profitability of the sector. However spreads will also be lower compared to historical levels due to this change. During the 9ME FY10 cost of borrowing reduced from the average of 11.5-12.0% of FY09 to 10.2 10.5% for the 9 month period and is expected to remain around these levels for
FY10. This however is still higher than the FY08 levels due to the structural move towards longer term borrowings. 7.1.3 Asset Quality – Deteriorated more due to unsecured loans which is now virtually stopped by most players, provisioning has improved & asset quality expected not to worsen further. Asset quality for the sector deteriorated significantly during the crisis. Aggregate Gross NPA ratio trended from around 1.1% for FY08 to around 2.1% in FY09. While there was deterioration in all asset classes, unsecured asset classes (Personal Loans, Unsecured SME loans) showed the maximum deterioration and were the key drivers for overall increase in NPAs. Apart from the asset-type financed, another differentiator between asset qualities was the origination & collection model followed. NBFC‘s which originated majority of their portfolio through branches & own employees showed better asset quality performance than those which used the DSA model. Aggregate Gross NPA ratio has further worsened to 3.0% at the end of 9M FY10, however it is close to peaking out. De-growth in unsecured portfolio segment has also lowered the portfolio outstanding growth thereby leading to a ‗base effect‘ on the Gross NPA ratio and adding to the rise in reported numbers. Provision coverage has increased from around 50% for FY09 to around 60% at the end of 9MFY10 as players have become more conservative. Unsecured lending has virtually stopped for many NBFCs and underwriting norms have also been tightened in general for other asset classes. These developments indicate positive structural changes.
CHAPTER-8
RECOMMENDATIONS AND CONCUSION
8.1 Recommendation: Domestic Financial markets can be integrated by making NBFC‘s Channel partners to Banks. It will help in better allocation and funds availability. It will also help in better management of Financial services sector in India.. Enhancing the credit delivery mechanisms: The credit delivery mechanism needs to be more transparent and hassle free. There should be more stringent norms for the defaulters. Strengthening the professionalism of NBFC sector through education and training: NBFC‘s are organized players. Regulatory body needs to educate people about NBFC. To reduce in interest cost and hence benefit the ultimate consumer. 8.2 Conclusion It is encouraging that the NBFC sector‘s importance is finally being acknowledged across FS market constituents as well as the regulator. However, the importance attached to the sector is often transcending into misplaced exuberance. Over simplified and vague drivers for NBFC valuations such as strategic fit and customer base, can never substitute dispassionate business analytics. A rational assessment of the intrinsic values of NBFCs factoring issues such as past performance, structural weaknesses of the sector (for instance funding disadvantages), along with an identification of real capabilities are essential to ensure that the equilibrium between price paid and value realized is reached to the extent possible. In the absence of this, India is sure to witness the re-opening of the NBFC horror story albeit with a new chapter on the erosion of NBFC investment values affecting investors across categories. Ratings of the NBFCs whose profitability and asset quality was affected due to the crisis
were supported by their strong parentage. Based on the parental strength some players have raised further equity and also managed to re-align their business models while maintaining their solvency. overall positive outlook on the sector due to the better ALM position, focus on relatively safer asset classes and the demonstrated acceptance of the sector as systemically important by the regulator. The crisis has imposed an overall sense of ‗caution‘ even for the newer entrants in the market. Also going forward higher capital adequacy norms will put a fairly conservative cap on the leverage of the sector thereby improving the credit profile of many entities (NBFCNDSI)
REFERENCES http://www.nbfc.rbi.org.in http://www.rediff.com/money/2007/jul/20nbfc.htm http://www.thehindubusinessline.com/2009/11/14/stories/2009111451870100.htm http://indiabudget.nic.in/es98-99/chap35.pdf http://www.banknetindia.com/finance/fbanking.htm http://www.mydigitalfc.com/news/nbfcs-again-doling-out-higher-dividend-fy10-732 www.livemint.com/2008/.../The-multiplicity-of-regulation.html http://www.coolavenues.com/know/fin/svs_nbfc_1.php3 www.thehindubusinessline.com/.../2005022800330800.htm Annual Reports: 1) LIC Housing Finance 2) IDFC 3) Reliance Capital 4) Shriram Transport Finance Research Papers: India Vantage by KPMG Indian Banks v/s NBFC’s NBFC Research by CARE
