NBFC-Non Banking Finance Companies

Presented by:

03-Zaid Mohd. Shabbir

06-Priya Periwal

14-Malvi Gupta

21-Kamal Kishore Nag

26-Alka Rani Hembrom

42-Abhishek Singh

NBFCS- INTRODUCTION

• Registered under the Companies Act,1956

• Operates mainly in unorganised sector

• Minimum Net Owned Fund Rs.200 lakh

• Financial Intermediary

• Services offered:

a) Providing loans and advances

b) Acquisition of shares, debentures etc.

c) Leasing, hire purchase, insurance

DIFFERENCE BETWEEN BANKS AND NBFCS

BasisIndian ownership

Foreign Ownership

Provisioning

BanksNot more than 10% of capital can be acquired

Up to 74% capital can be acquired by foreign

owners

90 days in case of NPAs

NBFCsNo such limit

100% capital can be acquired

6 months - loans and exposure and 12 months lease and hire purchase

BasisLeasing and Hire

Purchase

Need for License

SLR / CRR Norms

Sectoral Exposure

BanksLimited to 10% of

the assets

Difficult to get License

Substantial part of assets is blocked

More Restriction

NBFCsNo limit

Easy to get License

Only 15% of the Deposits

Limited Restrictions

TYPES OF NBFCS

Hire Purchase Company

Equipment Leasing

Company

Investment Company

Loan CompanyHousing Finance

Company

Miscellaneous Non Banking

Company

ROLE OF NBFCS

• Development of sectors like transport and infrastructure

• Employment generation

• Supplement to bank credit in rural sector

• More focus on rural and semi-urban areas

• Effective financial intermediaries

• Economic Growth

AMENDMENTS FOR NBFCS

Period of Non-Performing Assets (NPAs) – should be decreased from 24 months to 18 months

Need for public notice before

• closure of the branch/office by any NBFC

• sale/transfer of ownership by an NBFC

Compulsory internal audit System & Constitution of Audit Committees

Borrowings from Mutual Funds to be exempted from the purview of public deposits

AMENDMENTS FOR NBFCS NBFCs barred from accepting NRI deposits

Trading in Currency Futures

Foreign NBFCs can set up subsidiaries without fresh FDI

NBFC’S EDGE OVER BANKS

• FLEXIBLE STRUCTURE

• SERVES TO THE UNDERSERVED SECTION OF THE SOCIETY

• FULFILL DIVERSE FINANCIAL NEEDS

• CUSTOMER ORIENTED

• LOWER TRANSACTION COSTS

• LICENSING

• ACCESS TO VARIED FUNDING RESOURCES

MAJOR NBFCS OF INDIA KOTAK MAHINDRA• Founded in 1986, it started off with the discounting of bills

• It made foray into the lease and hire purchase ltd

• In 1995 the brokerage and distribution business of the group gets incorporated into a separate company kotak securities, whereas the investment banking arm is incorporated into a separate company –Kotak Mahindra Capital Co.

• In 1998 KM Asset Mgmt. company is incepted and they enter into the mutual fund company

• The flagship of the co Kotak Mahindra group, Kotak Mahindra Finance ltd was established in 1985 and the same got converted into KMB Ltd in march 2003

• It also got converted into commercial bank in 2003

• The group buys 25% stake held by Goldman Sachs in Kotak Mahindra Capital Co and Kotak Securities.

DHANALAKSHMI BANK LTD.

• Founded in 14th Nov 1927 by a gathering of enterprising entrepreneur at Thrissur a

capital city of Kerala.

• In 1977 it became among the commercial banks of India

• It has 181 branches and 26 extensions that have spread over the state of kerela.

• It stress on customizing services and personalizing relations among them and their

client.

• It bought the use of international debit cards in a tie up with visa international.

IDFC (INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY)

• It was established in 1997 to act as a financier and catalyst for the development of private sector sponsored infrastructure project in India.

• Over the last 12 years and more so since the initial public offering in July 2005, IDFC has pursued a focused growth strategy to evolve rapidly into a one-stop-shop for infrastructure finance in India.

• Its infrastructure typically involves projects with long gestation periods, with each projects going through different phase of implementation.

• Full project is developed followed by financial closure.

• Then its executed where the under lying physical infrastructure is actually created .

LIC HOUSING FINANCE LTD

• It is one of the largest financing company in India.

• It was established on 19th June 1889 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 and are listed on Luxemburg Stock Exchange.

• The authorized capital of the company is Rs. 1500 million(150 crore) and its paid up capital is Rs. 8500 million(850crore).

• The company is recognized by National Housing Bank and listed on the National Stock Exchange & Bombay Stock Exchange

SHRIRAM TRANSPORT FINANCE• It was established in the year 1979 and is registered as a deposit taking NBFC with

RBI under sec 451A of the RBI act 1934.

• Shriram Conglomerate which has significant presence in financial services viz commercial bank finance business, consumer finance, life and general insurance, stock broking , chit funds and distribution of financial products such as LIC and GIC products and also units of Mutual Funds.

• Apart from these financial services the group is also present in non-financial services businesses such as property development engineering projects and information technology.

ROLE OF NBFCS IN MICROFINANCE• Started providing financial services to those people who are living in poverty.

• NBFC Microfinance Bandhan raises 10.7mn us doller from SIDBI.

• Self Employed Women Association(SEWA) a microfinance NBFC is looking at raising around Rs 200 crore through private placement.

• NMI Frontier Fund invests Rs 4 crore in Belstar Investment and Finance, a microfinance NBFC operates principally in the southern states of Tamil Nadu and Pondicherry.

• A German Development Bank(KFW) provides EUR86.7M to SIDBI and SIDBI is looking for effective NBFCs to give these funds in order to consolidate Indian Microfinance sector.

• World Bank’s IBRD(International Bank for Reconstruction and Development) gives a $200 million loan to SIDBI.

SCOPE FOR NBFC'S IN FUTURE-A DIFFERENT VIEWPOINT• Prediction of the future can be done on the basis of Past and Present Analysis

• Situation during the Crisis

• 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 NPA’s and several companies closed their operations. International NBFCs' still continue to close down or sell their back end operations in India. . Liquidity crunch, rising NPA’s and asset-liability mismatch are now a norm.

• 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 where during the last decade. Timely intervention of RBI helped reduce the negative effect of credit crunch on banks and NBFCs.

• 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)..

• The segment which was hit hardest was Vehicle Financing.

• Present Context

According to Delloite Survey of Financial Services Industry dated February 2010

The NBFCs as a whole account for 9.1 per cent of the assets of the total financial system. In the wake of the recent global financial crisis and its fallout, the RBI undertook measures to preserve financial stability and arrest the moderation in the growth momentum. The total number of NBFCs registered with the Reserve Bank declined. The ratio of deposits of reporting NBFCs to the aggregate deposits of SCBs dropped to 0.53 per cent in end-March 2009 from a level of 0.73 per cent in end- March 2008, mainly due to the decline in deposits of reporting NBFCs.

“NBFCs account for Rs4 trillion of assets in the Indian landscape and, therefore, are not an insignificant entity (in the financial system),” said Vikram Limaye, executive director at Infrastructure Development Finance Co. Ltd (IDFC).

DECLINING NO. OF NBFC’S

The measures undertaken by the Reserve Bank in respect of the NBFC sector following the financial crisis were as follows:

• i)NBFCs-ND-SI were permitted as a temporary measure to raise short-term foreign currency borrowings under the approval route subject to fulfillment of certain conditions. While the resources raised were to be used only for refinancing of short-term liabilities and not for creation of fresh assets, it was also advised that the maturity of such borrowing should not exceed three years and the maximum amount should not exceed 50 per cent of the NOF or US$10 million (or its equivalent), whichever was higher.

• ii) Banks were permitted, on a temporary basis, to avail of liquidity support through a relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL, exclusively for meeting the funding requirements of NBFCs and mutual funds.

• iii) The risk weight on banks’ exposure to NBFCs- ND-SI was reduced to 100 per cent from 125 per cent irrespective of credit rating, while exposure to AFCs which attracted a risk weight of 150 per cent was also reduced to 100 per cent.

• iv) NBFCs-ND-SI were permitted to augment their capital funds by the issue of (Perpetual debt instruments) PDIs. The amount of PDI raised by NBFCs-ND-SI would not be treated as ‘public deposit’ within the meaning of Reserve Bank directives.

• v) The proposed increase in the CRAR to be maintained by NBFCs-ND-SI to 12 per cent and subsequently to 15 per cent was deferred by one year, i.e. 12 per cent by March 31, 2010 and 15 per cent by March 31, 2011.

•

• vi) The RBI provided direct lending facility as a lender of last resort (LOLR) to NBFCs-ND-SI against their rated CPs through an SPV by subscribing to its bonds. The facility was operationalized in January 2009 through an SPV called

• ‘IDBI SASF Trust’ to provide liquidity support against investment grade paper of NBFCs, subject to their fulfilling certain conditions.. The facility has been availed of by only one NBFC so far, which has drawn Rs1,040 crore under the scheme and there is no outstanding balance as of date. The Government of India had extended the facility for any paper issued till September 30, 2009 and the SPV would cease to make fresh purchases after December 31, 2009 and would recover all dues by March 31, 2010.

• The NBFC sector has been witnessing a consolidation process in recent years, wherein the weaker NBFCs are gradually exiting, paving the way for a stronger NBFC sector

• A major player in the construction equipment financing sector that is aiming for nearly Rs.10,000 crore of business this year.

• Around 80 per cent of the construction equipment financing business is with NBFCs.

• This is a $4-billion market and growing, and mind you this is new equipment only. The growth this year is expected to be over 30 per cent and there is scope for serious competitors to enter the market.

• The government needs to aggressively give incentives to NBFC to promote leasing and reduce cumbersome indirect taxes. Higher depreciation allowance will enable new technologies to be introduced and thus enable faster completion of projects, with newer generation equipment. I am an advocate of the theory that once leasing for infra equipment is given a boost through incentives, we will see 10 per cent GDP growth soon.

• Our long-term strategy is distribution on a relationship platform and having a sectorial focus. We have been focusing on Infra sector since inception and the relationship that we enjoy with our customers, Manufacturer partners and Employees will make us the largest Infra equipment financier in India. We serve the entire value chain in Infrastructure in India and we are also part of the largest leasing group globally—the BNP Paribas Lease Group.

We will continue our focus on the infra sector, expand into healthcare equipment and technology equipment, and the farm equipment as we go along. Overall we are poised to grow very rapidly in a very robust and holistic way.

EXPERT’S TAKE

CEO SREI Equipment Finance Pvt.Ltd

12th June 2010 (Project Monitor Mag.)

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