ROLE OF NON BANKING FINANCIAL INTITUTIONS IN INDIAN FINANCIAL SYSTEM

A Major Project Report

Submitted in partial fulfillment of the requirements for BBA (General) programme of Guru Gobind Singh Indraprastha University, Delhi

Submitted by

BBA (General)Semester-VI

Enroll. No.: 0891221708

Delhi College Of Advanced Studies B-7, Shankar Garden, Vikaspuri New Delhi-110088

CONTENTS

S.No. 1 2 3 4 5 6 7 8 Declaration

Topic

Page No. -

Acknowledgement List of Tables List of Figures List Of Symbols List Of abbreviations Chapter-1: Introduction Chapter-2:Conceptual Framework Chapter-3: Summary and Conclusion References/Bibliography

10

LIST OF TABLES

Table No. 1 2 3

Title Business mix of Reliance Capital Weakening Demand For Transportation Services Top five banks and NBFCs with highest profitability

Page No.

Banking versus NBFCregulatory arbitrageinIndia

LIST OF FIGURES

Figure No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Title Financial Performance of LIC Housing finance Debt-Equity Ratio and RONW PBDTM and PAT ROG Sales Non-performing assets and provisions Financial performance PBDTM and RONW ROG Sales and PAT Financial Performance PBDTM and RONW Debt equity ratio and ROG Sales ROG and PAT Debt equity ratio and PBDTM RONW IDFC consolidated net profit at Rs.750 crore for FY 2009 ROG Sales PAT

Page No.

16 17

LIST OF SYMBOLS

Table No.

Title

Nomenclature & Meaning Percentage Dollar

1. 2.

% $

LIST OF ABBREVIATIONS

S.No. 1. IRDA

Title

Meaning Insurance Regulatory Development Act Credit Return Rate With effect from Certificate of Registration Securities Exchange Board of India Cosmopolitan Statutory Liquidity Ratio Gross Domestic Product

2. 3. 4. 5.

CRR w.e.f CoR SEBI

6. 7. 8.

COSMOS SLR GDP

DECLARATION

I hereby declare the major project report, entitled Role of Non-Banking Financial Institutions in Indian Financial System is based on my original study and has not been submitted earlier for award of any degree or diploma to any institute or university.

The work of author(s), wherever used, has been acknowledged at appropriate place(s).

Place:New Delhi Date: 2011 Enrol. No.: 0921221708

Candidates signature Name: ChhaviGoswami

Countersigned

Name: Ms. PriyankaRaoName: Prof.(Dr). J.P. Vashney Supervisor Delhi College Of Advanced Studies Director Delhi College Of Advanced Studies

ACKNOWLEDGEMENT

An independent project is a contradiction in terms. Every project involves contribution of many people. This project also bears the imprints of many people and it is a pleasure for me to acknowledge and thank all of them. I am deeply indebted to Ms. PriyankaRao who acted as a mentor and guide, providing knowledge and giving me their valuable time out of their busy schedule, at every step throughout the research. It is only because of her this project came into being. I also thank the Director of Delhi College Of Advanced Studies, for providing an opportunity of doing this project under his leadership. I also take the opportunity to express my sincere gratitude to each and every person, who directly or indirectly helped me throughout the project and without anyone of them the research would not have been possible.

The immense learning from this project would be indelible forever.

ChhaviGoswami Enrl.No.0921221708

CHAPTER 1 INTRODUCTION
Introduction to NBFCs 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 nonbanking 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 bank. Types of NBFCs Originally, NBFCs registered with RBI were classified as: (i)equipment leasing company; (ii) hirepurchase 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) A Comparative Study Of NBFC in India 2010

Importance of NBFCs 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 re-rating 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 Indias (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 Role of NBFCs According to EPW Research Foundation (EPWRF) The 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. 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. Assetliability 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.

Guidelines for new deposit Customeridentification:'KnowTheCustomer'(KYC)shouldbethekeyguiding identification of an individual / corporate customer (depositor orborrower). Accordingly, the KYC framework should have two-fold objective, (i) to ensure customeridentificationandverifyinghisidentityandresidentialaddress;and(ii)to transactions of monitor asuspicious principle for

nature.NBFCsshouldensurethattheidentityofthecustomer,includingbeneficialowneris donebased on disclosures bycustomers themselves. TypicallyeasymeansofestablishingidentitywouldbedocumentssuchasPermanent AccountNumber(PAN),rationcard,drivinglicence,ElectionCommission'sidentity card,passport,etceteraincaseofindividualsandregistrationcertificate,partnership deed/agreement,etceteraandotherreliabledocumentsinrespectofcompanies,firms otherbodies. Verificationthroughsuchdocumentsshouldbeinadditiontotheintroductionbya person known to theNBFC. and

Proceduresfor existingcustomers

In respect of existing customers, NBFCs should ensure that gaps and missing informationincomplianceofKYCguidelinesoncustomeridentificationprocedureis filled up and completed beforeJune30, 2004.

Ceilingand monitoringof cash transactions

NBFCs would normallynot havelargecash withdrawals and deposits. However, wherever transactions of Rs10 lakh (Rs1 million) and above are undertaken, they should keep record of these transactions in a separate register maintained at branch, aswellas at RegisteredOffice.

Such information shouldbemadeavailableto regulatoryand investigating authorities, when demanded.

Guidelines andmonitoringprocedures

Theboard of directors of NBFCs should formulate policies and procedures to operationalisetheguidelines andput in place an effectivemonitoringsystem to ensure compliancebytheirbranches.

Earlycomputerisationofbranch/officereportingwillfacilitatepromptgenerationof

suchreports and monitoring.

Internal controlsystems Duties andresponsibilitiesshouldbeexplicitlyallocatedamongthestaffforensuring that policies and procedures aremanaged effectivelyand that thereis full commitment andcompliancetoan effectiveKYCprogrammeinrespectofbothexisting and prospective customers/clients.

Internal audit/inspection Internalauditorsmustspecificallyscrutiniseandcommentontheeffectivenessofthe measurestakenbybranches/officesofNBFCinadoptionofKYCnormsandsteps prevention ofmoneylaundering. Specificcasesofviolationshouldbeimmediatelybroughttothenoticeofhead/ towards

controlling/ registered office. Record keeping NBFCs s h o u l d prepare a n d maintainproper documentation on their customer

relationships and cash transactions of Rs.10 lakh and above. Therecordsofallsuchtransactionsshouldberetainedforatleasttenyearsafterthe transactionhastakenplaceandshouldbeavailableforperusalandscrutinybyaudit functionariesaswellas regulatorsandlawenforcementauthorities;asandwhen required,at

thebranch aswellas at registered office.

Trainingof staffand management Itisimportantthatalltheoperatingandmanagementstaffismadefullyawareofthe implications and understand the needforstrict adherenceto KYC norms. NBFCsmaytakesuitablestepstoimparttrainingtotheiroperationalstaffonanti-

moneylaunderingmeasures.

Responsibilities TheNBFCs acceptingpublicdeposits should furnish to RBI i. Auditedbalancesheetofeachfinancialyearandanauditedprofitandlossaccountin respectofthatyearaspassedintheannualgeneralmeetingtogetherwithacopyof thereportoftheBoardofDirectorsandacopyofthereportandthenotesonaccounts byits Auditors; ii. iii. StatutoryAnnual Returnon deposits-NBS1; CertificatefromtheAuditorsthatthe companyisinapositionto repaythedeposits as andwhen the claims arise; iv. v. vi. QuarterlyReturn on liquid assets; Half-yearlyReturn onprudential norms; Half-yearlyALMReturnsbycompanieshavingpublicdepositsofRs.20croreand aboveor with assets of Rs. 100 croreand aboveirrespectiveof thesizeof deposits ; vii. Monthlyreturnonexposuretocapitalmarketbycompanies havingpublicdeposits ofRs. 50 croreand above; and viii. AcopyoftheCreditRatingobtainedonceayearalongwithoneoftheHalf-yearly Returns on prudential norms as at (v)above. furnished

Current Scenario

Nearly11years after thelast of thetwo bankinglicences wereissued byRBIto private sector entities,the governmenthasagainstartedtheprocessofallowingthebetter-managednonbanking

finance companies (NBFCs) to graduate to full-fledged banks. FM Pranab Mukherjee Budget proposal on Friday was thefirst steptowardsthesame.

ThesecondstepwillbeenactedonTuesdaymorning.Aselectgroupofofficialsfromtop NBFCs, under theaegisoftheFinanceIndustryDevelopment Council (FIDC), thetradebody

forNBFCsinIndia,aremeetingRGopalan,thebankingsecretaryinthefinanceministry,to presentacaseforselectNBFCstobeconvertedintofull-fledgedbanks,sourcessaid.About 12-15NBFCsandcorporatehouseshavingpresenceinthefinancialsectorareexpectedto join the raceto floatabank.

Thefinanceministerisconvincedthatthereisahugeneedforlow-costfinancingatthe urbanandruralareasinIndia,saidaindustrysource.Thefinancialservicesindustry believestheBudgetproposalwasareflectionofthesame.Inthefinanceministrythingsare movingintherightdirectionandthebankingsecretarysmeetingprovesthesame,saidthe source.FIDC officebearers could notbe contacted duringtheextended weekend.

semi-

InthelastUnionBudget,theFMhadannouncedthatRBIisconsideringgivingadditional bankinglicencestoprivatesectorplayers,includingNBFCs.Thiswasostensiblytofurther financialinclusionandalsoto improvethesizeandsophisticationoftheIndianbanking

system.Theannouncementsetthefinancialmarketsonfirewithalotofconjecturingasto whowouldbetheluckyfew.Theaccesstolow-costcurrentaccountandsavingsaccounts andtheabilitytoofferallfinancialproductsunderoneroofwerecitedasmajorattractions

forNBFCstorushtoseekbankinglicences.ItwasalsoexpectedthatRBIwouldgivenew licencestoprivateplayersverysoon.But,ananalysisrevealsadifferentpicture.Neitheris toissuefreshlicencesnoraremanyNBFCskeentogetintocommercial banking. RBIinahurry

Thereasonsforthisaremanifold.RBIrulesarestringentforcommercialbanksastheyare ofthe Indian financial system and commercial banks

thevisibleface areprimarilythe

custodiansofpublicmoney.RBI

placesrestrictionsoncommercialbanksintheirlending

operations.OutofRs100takeninasdeposits,approximatelyRs30hastobesetapartas statutoryrequirementstowardsCRRandSLR.ThisleavesthebankswithRs70tolend.Out ofthis,40%hastobestatutorilylenttowardstheprioritysectorasdefinedbyRBI.This leavesbankswithapproximatelyRs42tolendattheirowndiscretion.ManyNBFCswould definitelyfind this as restrictiveto saythe least.

Aspertheguidelinesof2001,NBFCsseekingabankinglicenceshouldhaveaminimum

paid-

upcapitalofRs200crore,whichmustbeincreasedtoRs300crorewithin3yearsof conversion intoa bank. Further, banks have to invest large funds in fixed assets and information technology primarily to facilitate financial inclusion, risk management, anti investments

moneylaundering,etc.Thesehugecapitalexpendituresincreasethepaybackperiodforthe made. Also, banking-as-a-business model is far more people-,

process- and product-

driventhanasimpleNBFCmodel.Forexample,inordertoadoptuniversalbanking, thestaffneedstobemulti-skilledinbankingfunctions.So,theoperatingexpenseswillbe substantiallyhigher,which,inturn,wouldreducetheprofitabilityofoperations.Also,there arerestrictionsonownershipandvotingrights.

Objectives of the study

Theconfined objectivesofthe present studyare:

To analyzethemarket ofNBFCs inIndia. To study the financial structure of NBFCs in Indian financial system. NBFCspossessoneoftheindustry'smostextensivemarketingnetworkinIndia.BackOfficessprea dacrossthecountryconductthe creditappraisal and administrative functions. One of the main objectives is to analyse these functions. TheCompanyhassetupaRepresentativeOfficeinDubai and KuwaittocatertotheNon-

ResidentIndians intheGLCCcountriescoveringBahrain,Dubai, Kuwait,Qatar and Saudi Arabia.TodaytheCompany hasaproudgroupofover10,00,000prudenthouseownerswho have enjoyed theCompany's financial assistance.

Scope of the study

ThestudywaslimitedtotheFinancialServicemarketofIndiawhichincludedNBFCs. Thestudywascompletedwithinthetimeframeof60days(2months) startingfrom1stApril,2010and endingon1stJune,2010.

To conduct the analysis on the NBFCs , secondary data from the published sources has been collected.

Research Methodology
Research design SincetheresearchisforindustryanalysisanditisstructuredforNBFCS.Theresearchuses secondarydata for analysIsandinterpretation.

Data collection Therearetwomethodsofdatacollectionthatcanbeconsideredwhencollectingdatafor research purpose. Thesedata collection types includethe following: 1.Secondarydata Thesecondarydatacollection methods wereused in thestudy.

Secondary data

Thesecondary

datafortheresearchwascollectedfromjournals,researcharticles,booksand

internet

websites, annualreportsetcwhosedetails andreferences has beengiven in Chapter2andinReferences.ThesourceofthesecondarydatawasBritishLibrary, NBFCsand Internet. Secondarydatawasthemainsourceinformulatingtheconstructsof Acomparativestudy inIndia ofNBFCs

Field Work Plan ThestudywasconductedinNewDelhi(NCRandBangalorevisitingdifferentinstitutions and analyzingthe different NBFCswork.

CHAPTER 2 CONCEPTUAL FRAMEWORK

Regulations of NBFCs 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 RBIs 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 wC-8 of the wAnnx-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. IntermsofSection45-IAoftheRBIAct,1934,itismandatorythateveryNBFC shouldberegisteredwithRBItocommenceorcarryonanybusinessofnon-banking financialinstitutionas definedinclause(a)ofSection45IoftheRBIAct,1934.

However,toobviatedualregulation,certaincategoriesofNBFCswhichareregulated byotherregulatorsareexemptedfromtherequirementofregistrationwithRBIviz. Capital Fund/Merchant Banking companies/Stock broking Venture companies

registeredwithSEBI,InsuranceCompanyholdingavalidCertificateofRegistration issuedbyIRDA,NidhicompaniesasnotifiedunderSection620AoftheCompanies Act,1956,Chitcompaniesasdefinedinclause(b)of Section2oftheChitFundsAct,

1982orHousing FinanceCompanies regulated byNational Housing Bank. A company incorporated under the Companies Act, 1956 and desirous of

commencingbusiness ofnon-bankingfinancial institution as defined under Section 45 I(a)oftheRBIAct,1934shouldhaveaminimumnetownedfundofRs25lakh (raised to Rs 200 lakh w.e.f April 21, 1999). Thecompany isrequiredtosubmititsapplication onlineby accessingRBIssecured websitehttps://secweb.rbi.org.in/COSMOS/rbilogin.do(the

applicantcompaniesdo not need to log on to the COSMOS application and hence user ids for these companiesarenotrequired).Thecompanyhastoclickon CLICKforCompany

Registration onthelogin page. A window showing the Excel application forms available for download would be displayed. The company can then download

suitableapplicationform(i.e.NBFCorSC/RC)fromtheabovewebsite,keyinthe dataanduploadtheapplicationform.Thecompanymaynotetoindicatethenameof

thecorrectRegionalOfficeinthefieldC-8oftheAnnexIdentificationParticularsworksheetoftheExcelapplicationform.Thecompanywould thengetaCompany line.Thereafter,the ApplicationReferenceNumberfortheCoRapplicationfiledoncompanyhas to submit thehardcopyof theapplication

form(indicatingtheCompany lineapplication),alongwiththesupporting Thecompanycanthencheckthestatus theacknowledgementnumber.TheBankwouldissue

ApplicationReferenceNumberofitsondocuments,totheconcernedRegional Office.

oftheapplicationbasedon

CertificateofRegistrationaftersatisfyingitselfthattheconditionsasenumeratedin Section 45-IA ofthe RBI Act, 1934 aresatisfied. AllNBFCsarenotentitledtoacceptpublicdeposits.OnlythoseNBFCsholdinga validCertificate ofRegistrationwithauthorisationtoacceptPublicDepositscan accept/holdpublicdeposits.NBFCsauthorisedtoaccept/holdpublicdepositsbesides havingminimumstipulatedNetOwned Fund(NOF)shouldalsocomplywiththe

Directionssuchasinvestingpartofthefundsinliquid assets,maintainreserves, rating etc. issued bytheBank. Presently,themaximumrateofinterestanNBFCcanofferis12.5%.Theinterest may be paid or compounded at rests not shorter than monthly rests.

TheNBFCsareallowedtoaccept/renewpublicdepositsforaminimumperiodof12 monthsandmaximumperiodof60months.They cannotacceptdepositsrepayable on demand. TheNBFCsareallowedtoaccept/renewpublicdepositsforaminimumperiodof12 monthsandmaximumperiodof60months.They cannotacceptdepositsrepayable on demand. NBFCscannotofferinterestrateshigherthantheceilingrateprescribedbyRBIfrom timetotime.Thepresentceilingis12.5percentperannum.Theinterestmaybepaid or compounded at restsnot shorter than monthlyrests. NBFCs cannot offergifts/incentives or anyother additional benefit to the depositors.

NBFCs (except certain AFCs) should haveminimum investment grade creditrating. Thedeposits with NBFCs arenot insured. The repayment of deposits byNBFCs isnot guaranteed byRBI. CertainmandatorydisclosuresaretobemadeaboutthecompanyintheApplication Form issued bythe companysolicitingdeposits.

EffectivefromApril24,2004,NBFCscannotacceptdepositsfromNRIsexcept depositsbydebittoNROaccountofNRIprovidedsuchamountdoesnotrepresent inwardremittanceortransferfromNRE/FCNR(B)account. However,theexisting NRIdeposits can berenewed.

LICHousing Finance Housing Finance Industry Indiashousingfinanceindustrycomprisesofbanksandhousingfinancecompanies.They havecontributedtonewresidentialhomeloansatacompoundedannualgrowthrate(CAGR) ofmorethan 30 percentduringthe period 2002-2007. This has been duetothe combined effect of aboomingeconomyand low interest rates. Further,steadypricesandcontinuationoftaxconcessionstoself-occupiedresidentialhome borrowersarecontributorstothegrowthoftheindustry.Theaverageageofborrowershas declined over the years, while the number of double income households has grown significantlyenablingthem to borrow higher loanamountdueto higher repaying capacity. Thescenario ofunprecedented growth in housingfinance, drivenbylow interest rates,

increasingpurchasingpowerandattractionoftheyieldinthissectorhasbeguntoshowsigns ofchangelastyear.Therehasbeenadecreaseindemandduringthelastoneyear.Earlierto thati.e.,during2006to2007homepricesincreasedataCAGRof30to40percentagainsta 20percentincrementinsalarieswitnessedinmetrosandlargecities.Thishadaffectedthe buyers affordability.

Astheborrowingcostforbanksandhousingfinancecompaniessteadilyincreasedinline interestratesintheeconomyinthepasttwoyearsuptoQ3of2008-09,banksand housingfinancecompaniesresortedtohikeininterestratessoastomaintaintheirinterest spreads.Interestratesonnewhomeloanoriginations basispointsduringApril2008toSeptember

withrising

haveincreasedsignificantlyby200 October2008.Asaresultahigherproportion (EMI).

ofmonthlyincomewasbeingpaidoutashomeloanequatedmonthlyinstallments Thecombinedeffectofanincreaseinpropertypricesandinterestrateshasmeantthathome loanbuyers,whowouldhavehadtoborrowlessataninterestrateof8.75percentayearago, nowhavetoborrowmoretobuythesamepropertyduetohigherpropertypricesathigher

interestratesof10.5to11percent.Thistrendhasresultedinbothloweraffordabilityi.e.,an averagehomeatahigher multipleofannualincome,andhigherdebtburden(meaningthata largerproportionofincomegetsspentashomeloanEMI).Further,theincreaseininterest rates on fresh loans to 10.5 to 11 percentfrom 8.75 percent meant increasein debt burden i.e., higherinstallmenttoincomeratio.Alongwith,theeconomicdownturnandconsequentialapprehensionso fjobinsecurityandincomereductionledtoslumpinthemarket. However,thescenariohastakenthereverseturninthelastquarterofthefinancialyear2008-09,which wasevidentfromthehigherbookingofflats,andsharpincreaseinthedisbursements.Real estatedevelopershavetakensensibledecisioninreducingorslashingratesinmajorcentres speciallyMumbai,Thane,NaviMumbai,DelhiNCRandBangaloretoencashontheexisting demandintherealestatemarket.Thegooddealsmightbeofferedforafewweeksorforthe firsttenpropertiesorforakillerdealforatime-boundtwodaysorsimilarschemesbutyes, thewritingisclearonthewallthatthewillingnesstoconnectwiththerealpricinghas dawnedonthedeveloperstosellatreducedpricestoencouragemoreandmoresales.The thebuilder/developerofficesareattheirall-timecreativebestwithsales clearlythat withbuyersunwillingto salesteamsin

tactics.Theynowunderstand

relentonunrealistic pricing,thereisanevengreaterneedtoprice

competitively,maybewithalowerprofit margin,thanholdingontothepriceandprojectastheinterestmeterruns.Theseproactive ensure renewed demandsand increased volumes duringthecurrentyear TheIndianeconomy,whichwasonarobustgrowthpathupto2007-08,averagingat8.9per cent duringthe period 2003-04 to 2007-08, witnessed moderation in 2008-09, with the deceleration turning out to be somewhat sharper in the of third quarter. Industrial steps should

growthexperiencedasignificantdownturnandtheloss

growthmomentumwasevidentinall

categories, viz., the basic, capital, intermediateand consumergoods. However,thefiscalstimuluspackagesoftheGovernmentandthemonetaryeasingofthe ReserveBank

will,however,arrestthemoderationingrowthandreviveconsumptionand investmentdemand,thoughwithsomelag,inthemonthsahead.Furthermore,prospectsof theagriculturalsectoralsoremainbright,andthiswillcontinuetosupporttheruraldemand. Finally,inthewakeofexpectedimprovementinagricultural productionaswellaslow level

internationalcommodityprices,inflationarypressuresarealsoanticipatedtoremainatalow through thegreaterpart ofthe 2009-10.

IndianHousing Financescenario

Indiashousingfinanceindustrycomprisesofbanksandhousingfinancecompanies.They havecontributedtonewresidentialhomeloansatacompoundedannualgrowthrate(CAGR) ofmorethan30percentduringtheperiod2002-2007.Thescenarioofunprecedentedgrowth inhousingfinance,drivenbylowinterestratesandboomingeconomy,hasbeguntoshow signsofchangelastyear.Therehasbeenadecreaseinhomepricesduringthelastoneyear.

Earliertothati.e.,2006to2008homepricesincreasedataCAGRof30to40percentagainst a20percentincrementinsalarieewitnessedinmetrosandlargercities.Thishadaffectedthe buyersaffordability.Theaveragehomebuyerspentaround4timeshisnetannualincome forpurchasinganewresidentialhomein the3-4yearstillMarch2005.(sourceCRISIL report

19thFebruary,2009)Astheborrowingcostforbanksandhousingfinancecompanies steadilyincreasedinlinewithrisinginterestratesintheeconomyinthepasttwoyearsuptoSeptember2008 ,banksand housing financecompanies resorted to hikein interest rates so as

tomaintaintheirinterestspreads.Interestratesonnewhomeloanoriginationshadincreased significantly by200basispointsduringApril2008toAugust September2008.Asaresult

ahigherproportionofmonthlyincomeswaspaidashomeloanequatedmonthlyinstalments (EMI).But,thescenariohastakenthereverseturninthelastquarterofthefinancialyear 2008-

09whichwasevidentfromthehigherbookingofflatsand disbursements.Asinterestratesare Housingfinancecompanies heading

sharpincreaseinthe southward,publicsectorbankshavesetthepace.

wouldfollowthesuit.Itmaybementionedherethatwiththe

declineininterestrates,LICHousingFinancehaspassedon150basispointsratecuttothe customersi.e.75 basispointseachon1stJanuary,2009and1stApril,2009.Ourinterest rates areamong the lowest in the industry. This hashelped our company in retaining

customersandmaintaininghighgrowthratesevenintoughconditions.Andinterestrateis just oneof the factors. Transparency, hassle-free services, property prices and buyers

repaymentcapacityareequally

important.Thecustomerwouldnotarriveatadecisionsolely

basedonthereductionininterestratesforoneyear.LICHousingFinanceisoneofthebest players in the industryin terms ofEMIas ourcompanyhas no hiddencosts.

LIC Housing Finance

LIC

HousingFinance

Ltd.

is

oneof

thelargest

Housing

Finance

Company

inIndia.

Incorporatedon19thJune1989undertheCompaniesAct,1956,thecompanywaspromoted byLICofIndiaandwentpublicintheyear1994.TheCompanylauncheditsmaidenGDR issuein2004.TheAuthorizedCapitaloftheCompanyisRs.1500Million(Rs.150Crores) anditspaidupCapital isRs.850Millions(Rs.85Crores).The Companyisrecognizedby

NationalHousingBankandlistedontheNationalStockExchange(NSE)&BombayStock ExchangeLimited(BSE)anditssharesaretradedonlyinDematformat.TheGDR'sare theLuxembourgStock Exchange. listed on

Profile&Progress

Provides loans forhomes, construction activities,and corporate housingschemes. Around91%oftheloanportfolioderivedfromtheretailsegmentandtherestfrom corporateclients large

Formed threenew whollyowned subsidiaries in 2007-08 to promotemarketingof

Financial products and venture capital fund. RatedAAAbyCRISILforthe8thconsecutivetimein2008-09;maidenFixedDeposit. program receivedan FAAA/stable ratingbyCRISIL. An offshoot ofLifeInsuranceCorporation ofIndia(LIC), incorporate in 1989. Registered &CorporateOfficeat Mumbai with 6 regional offices, 13 BackOffices and 130 marketingunits across the country. 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777Customer Relationship Associates (CRAs) comprise its pan-Indian marketingnetwork. Representative overseaspresencein Dubai and Kuwait. Listed on theBombayStock ExchangeLimited, National Stock ExchangeofIndiaLimited and theLuxembourgStock Exchange. Morethan 10,00,000 satisfied customers across the countrysinceinception. Reported a23.90 percentincreasein disbursals in 2008-09. Improved return onnetworthby267 basispoints to 23.80 percent in 2008-09. Reduced net NPA to arecord low of0.21 percent in 2008-09. Enhanced PAT 37.30 percent to Rs. 531.62 crorein 2008-09. Un-interrupted dividendpayment record since1990.

Recommended 30 percent increasein dividend over previousyear i.efrom100 percent to 130 percent.

Figure 1: FinancialPerformance

Interestincomefromhousingloansincreased34.90percentfromRs.2036.79crorein200708toRs.2747.65crorein200809.Thenetinterestincomegrewby31.97percentfromRs.553.94crorein200708toRs.731.04crorein2008-09.Profitaftertaxsurged37.30percent crorein2007-08 to Rs. 531.62 crorein 2008-09. from Rs. 387.19

Figure 2: Debt-equity Ratio

Figure-3: PBDTM & PAT

Figure-4: ROG Sales

Operations:

Funds mobilizedgrew 49.38 percent from Rs. 7489.70 crorein 2007-08 to Rs. 11,188.33crorein 2008-09. Sanctions(Ind.+Proj.)increased26.46percentfromRs.8617.88crorein2007-08to

Rs.10898.47 crorein 2008-09. Disbursements(Ind.+Proj.)grew23.90percentfromRs.7071.48crorein2007-08to

Rs.8762.01 crorein 2008-09. Loan portfoliogrew 26.18 percent from Rs. 21936.41 crorein 2007-08 to Rs.

27679.28crorein 2008-09.

Margins:

Netinterestmarginimproved by 10basispointsfrom2.85percentin2007-08to2.95 percent in 2008-09.

Returnonequitygrewby267basispointsfrom21.13percentin2007-08to23.80 2008-09.

percent

in

Net profitmargin improved by49basispoints from 17.82 percent in2007-08 to 18.31

percentin 2008-09. AssetQuality:GrossNPAdeclinedby63basispointsfrom1.70percentin2007-08 to1.07percentin2008-09.NetNPAlevelsdeclined43basispointsfrom0.64percent in 2007-08 to 0.21 percent in 2008-09.

Onfunds

OntheperformanceoftheCompany:IntheturbulenttimeswhenHousingsectorwas passingthrough roughpatch,LICHousingFinancelargelycouldmanagetheenvironment wellasdomesticeconomicchallengesandwassuccessfulin

well,inspiteofvariousglobalas

producinggood business growth byits inherent strength in meetingdifficult challenges throughunceasinganduntiringefforts.TheCompanyhasnotonlyensuredconsolidationof the gains achieved in the past years, but also ensured further growth and increased levels

profitability.Theyear2008-09hasbeenayearoffurthercontainmentofdefaultsandNPA when compared topreviousyears.

Lending operations

Themainthrustcontinuesonindividualloanswithagrowthof25percentasagainst20 percent in the previousyear. However,project loans were also given dueweightage resultinginamodestgrowthof20percentoverpreviousyear.Duringtheyear,theCompany sanctioned67,886individualloansforRs.8,186.02croreanddisbursed67,237loansforRs. 7,351.09croreduring2008-09.Individual retailloansconstitute75.11percentofthetotal

sanctionsand83.94percentofthetotaldisbursementsfortheyear2008-09comparedtothe lastyearsfigureof75.84percentand83.47percentrespectively.Theretail(individual)loan portfoliogrewbyover22percentfromRs.20,618.78croreason31stMarch,2008toRs. 25,252.87croreason31stMarch,2009.Thecumulativesanctionsanddisbursementssince theincorporation,inrespectofindividualoansare:Amountsanctioned:Rs.45,624.24crore Amountdisbursed :Rs. 42,993.98 crore

Figure-5: Non-Performing Assetsand provisions:

TheamountofgrossNon-PerformingAssets(NPA)ason31stMarch,2009wasRs.297 crores,whichisequivalentto1.07percentofthehousingloanportfoliooftheCompany,as againstRs.372.92crorei.e.,1.70 percentofthehousingloanportfolioason31stMarch, 2008.ThenetNPAason31stMarch,2009isreducedtoRs.57crorei.e.0.21percentofthehousingloan portfolio vis--vis Rs. 140.90 crorei.e., 0.64 percent ofthehousing loan

portfolioason31stMarch,2008.Thetotalcumulativeprovisiontowardshousingloanason31stMarch ,2009isRs.240.25crore.Duringtheyear,theCompany haswrittenoffRs.5.40 croreof housingloan portfolio as againstRs. 38.99 croreduring the previousyear. FundraisingTheCompanyraisedfundsaggregatingtoRs.11,188.33crorethroughterm loansfrombanks,Non-ConvertibleDebenture(NCD),sub-ordinatedebts,commercialpaper, Public Deposit and others which were used for fresh disbursements as well as repayments/prepaymentsofpastborrowings.TheCompanysNCDissuewasratedAAAandPubli cDeposit was rated as FAAA/STABLE byCRISIL.

Macro-Economic AnalysisCompetition TheHousing Finance Industry is one of the most keenly competitive segments of the Economy,withtheBankingsectorhavingasignificantpresence.However,HousingFinance Companieswithadedicatedfocusontheindustryandbetterunderstandingoftheunderlying realestatemarketsstandonabetterfootingwhenitcomestounderstandingtheneedsand requirementofthecustomersasalsoassessingtherisksintheindustry.Itmaybementioned herethatwiththedeclineininterestrates,LICHousingFinancehaspassed pointsratecuttothecustomersduringthecalendaryear2009sofar75basispointseachon 1stJanuary,2009and1stApril,2009.Ourinterestratesare among thelowestintheindustry. on150basis

Thishashelpedourcompanyinretainingcustomersandmaintaininghighgrowthrateseven intoughconditions.Andinterest rateisjustoneofthefactors.Transparency,hassle-free

services,propertypricesandcustomeraffordabilityareequallyimportant.NHBhaslowered itsinterestratesonrefinancetohousingfinancecompanies.Refinanceforruralhousingat concessionalrate of 8 percent perannum for sevenyears has also been provided.Its PLRhas beenreducedto10.75percentperannum.TherefinancefacilityofRs.4,000croreextended byRBItoNHBwillbeon-lentbyNHBtohousingfinancecompanieswithacapofRs.400 housingfinancecompanywith the condition that the refinancewould be croreper availableat

aninterestof8percent,onlyforloansbelowRs.20lakh.HousingFinance,theCompany, throughitscompetitivepricing,transparencyin operations,widedistributionnetworkand

goodcustomerservice,hasnotonlybeenabletoshowagoodgrowthinnewbusiness,but has shown an improved retention rate, which is reflectedin highgrowth ofloan book.

Opportunities

Therearemanyuniquecharacteristicsofhousingdistinguishingitfromothergoods.Itisa necessity.Homeownershipisasocialgoal,bringingsocialstatustothebuyer. Housingisalsoarelativelyexpensiveasset,oftensoakingupalifetimessavings.Housing propertieshaveadownwardslopingdemand effectivelybuywhenpricesarehighandviceversa.Athigh

universal

curve,whichmeansthatlesspeoplewould prices,buyerspostponetheir oftenpurchase

buyingdecisionsandoptforrentedaccommodation.Atlowprices,people

morethanonehouse.Disposableincomesdeterminepurchasingpower.Governmentpolicies relatingtointerestrates,mortgagesubsidies,taxrebateandothertaxeslikestampdutyetc. alsoimpactthehousingpropertymarket.Thehousingsectorismarkedbyavarietyoftaxes andregulations.Thesearemeanttoensurethesafetyofhousesforoccupationandtoconfer rightsofownershiptoenablefurthertransactions.Giventhatbuildingoracquisitionofa houseusually involves several intermediary agents (either statutory like registration of varioustitledocumentsorfacilitatingagentssuchasbrokers,buildersorfinanciers),thefinal costofacquisitionincludesnotjustthepriceofthepropertythatispaidtotheseller(incase thepropertyispurchased)butalsoalltheinterveningtransactioncosts.Asforthehousing propertymarket in India, the residential housing property segment constitutes about 75 activityhas

percentoftherealestatemarketintermsofvalue.Realestatedevelopment

shiftedfrommetrostotheirsuburbsandtier-twocities.Agradualshifttotier-threecitiesand ruralareasistakingplace.Easyavailabilityoffinancefromthehousingfinancecompanies andcommercialbanksatlowerinterestrates,increasedsalariesandavailabilityoffiscaland taxbenefitsarepropellingthedemandforhousingproperties.ThegrowthoftheInformation TechnologyEnabledServices(ITES),industryhasbeenasignificantcontributorofhousing property demandin recent years. ITES firmsare moving from traditional centreslike Mumbai,Delhi,Bangalore,HyderabadandChennaitotheNationalCapitalRegion, Pune,

Chandigarh,Jaipur,etc.inordertobecosteffective.Thisisresultinginnotonlytheboomin residential

propertymarketsbutalsointheinstitutionalpropertymarketsinthesecities. demandfor modern officebuildingsand commercial spaces inIndia.

Thereisgreat

Threats (bottlenecks) Impact of legal charges and documentation fees Therearetaxes/duties/feespayabletothestateattheconstructionstage.Therearetwo thecost namely: i) monetarycost and; aspects of

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 havetobetakenfromdifferentdepartmentsandthattoosequentially.This

delaystheprocessofhousingconstructionandoccupation.Theactualfeesimposedbythe governmentarenotnecessarily highbutthetimetakentoobtainrequisitepermissionsisvery long, procedures cumbersome and sometimes involves extra payments to facilitate the movementoffilesandgettingthetransactionthrough,issignificantvis--visthe fees.Thedelayshighlightthesluggishnessofthemarketbyincreasingthegapbetween changein demand and themarketresponse to it. statutory

FutureOutlook:

Itisestimatedthatthehousingfinanceindustrywillbeabletomaintainahighergrowthin origination ofresidential homeloans overnext threeto

fresh

five yearsmainlydueto

increasedaffordabilityoftheborroweri.e.ratioofaveragepropertypricetoaverageannual income,onaccountofthefallingloaninterest ratesanddecreaseinpropertyprices.The numberofdouble-income quantum increase

averageageofborrowershasdeclinedovertheyears,whilethe

householdshasgrownsignificantlytherebyenablingthemtoborrowhigherloan duetoincreasedaffordabilityandrepaymentcapacity.Thegrowthdriverswillcontinueto demandforself-occupiedresidentialhousing;Revivalofeconomywillcertainly leadtoasteadyincreaseinmonthlyincomesacrosskeysectors.Risingproportionofdouble incomehouseholds,renewedconfidencein securityand availability of varietyof financing

higherincomegeneration,reassuranceofjob options should stimulate growth of the

housingsector.Allthesefactorswillfurtherboosttheimpactofincreased affordability, leading to the sectors steady and comfortable growth. Looking forward, LIC Housing Finance would like to remain focused in end-user segment for growth and increased

profitabilityandwishtomakethecomingyear,ayearoffurtherconsolidationandprogress bycrossing greater milestones.

Reliance Capital:

IndianEconomy: Afterseveralquartersofaround9percentGDPgrowth,theratemoderatedto7.6percent and5.3percentinthelasttwoquartersof2008, FinancialYear(FY)2009.The slowdownhas andisexpectedtoaverage7percentfor beenlargelycausedbyadecelerationin industrial

growthfrom about 8.5 percent in FY 2008 to 2.4 percent in thethird quarter ofFY 2009.Surprisingly,theagriculturesectorsloweddownfrom4.5percentinFY2008to-2.2 percentinthethirdquarterofFY2009.Incontrast,theremarkableservicesectorsuccess storyremainedintactasoutputgrew9.9percentinthirdquarter,downonlyslightlyfrom 10.8percentin2008.Themoderationfrompreviousyearswasduetoseveralfactors.The financialcrisis henceindustrialproductionas andglobalslowdownaffectedbothexportgrowthingoods,servicesand well ascorporatesaccesstodiverseandlowcostfunding. FY2009forcedRBItopursueatight consumption.However,thefact (across sectorsand

Moreover,highinflationduringthefirsthalfof monetarypolicy,whichfurtherdampenedinvestmentand thatIndiasgrowthinthelastfewyearshasbeenfairlybroadbased

regions)andbalanced(withconsumption,investment,savingsandexportsallrising)bodes wellforthestructuraltransformationoftheeconomyasthebusinesscycleentersarecovery phase, in thesecond halfof FY 2010. RBIcutsratesaggressively:IndiasWholesalePriceIndex,whichwasashighas12.9per centinAugust2008fellto0.3percentbyMarch2009resultinginanaverageinflationof around8 cent for FY09. Thesharpfall in inflation was caused byahigh base, per a

significantfallincommoditypricesandvarious

dutycutsannouncedbytheGovernment.

Inflationisexpectedtoremainlowandmayevenenterthenegativeterritoryforashorttime beforemovingup again towards the end of 2009. FallinginflationandslowinggrowthgavetheCentralbankenoughroomandreasontocut

ratesaggressively.FromSeptember08toMarch09,theRBIhascutRepo,ReverseRepo andCRRby400,250and400bpsrespectively.Thiseasinginmonetarypolicyislikelyto translate,withalag,intoasignificantboostfortheeconomy.IndiasTradeDeficitwidens, largelyduetoincreasingimportgrowth:Globaldemanddestructionduetotherecentcrisis ledtoamere3.4percentgrowthinexportsinFY2009whilehigher commodityprices (includingoil)peggedtheimportsgrowthat14.3percent.ThisresultedinatradedeficitofUS$119billi oninFY09comparedtoUS$88.5billioninFY2008.Forthefirstthreequarters inFY2009,the

highertradedeficit,coupledwithnegativecapitalflows,reducedIndias BalanceofPayments(BoP) surplus toadeficitofUS$20.4billion.After10consecutive The

quartersofsurpluses,thisisthesecondtimeinthreequartersthatBoPhasendedinadeficit.

capitala/c balancetoo turned negative (-US$3.7 billion) in third quarter FY 2009 mainly duetonetoutflowsunderportfolioinvestment,bankingcapitalandshort-termtradecredit. Outflows under portfolioinvestment wereled bylargesales of equities byFIIsand slowdown

innetinflowsunderADRs/GDRs.IndiasforeignexchangereservesdeclinedbyaboutUS$59billion inFY2009,butstillremainedatanimpressiveUS$250billionin March2009.The countryscurrent foreignexchangereservesfarexceeditstotalofficialandprivatesector external debt makingIndias balanceof payments position quite

comfortable.Importdeclinesmorethanexportinrecentmonths,therebyimprovingtradedeficit:Sinc e January 2009,Importshavedeclinedmorethanexportsduetobothloweroilimportbillsand

slowingdomesticinvestment and consumption. This has helped in narrowingour tradedeficit further.ThetradedeficitforthemonthofMarchnarrowedtoUS$4billion(4.1percentof annualized) compared to US$14 billion in August 2008. GDP,

RelianceCapital (RCL)isapartoftheRelianceAnilDhirubhaiAmbaniGroupandisoneofIndiasleading andfastestgrowingprivatesectorfinancialservicescompanies,andranksamongthetop3 privatesectorfinancialservicesandbankinggroups,intermsofnetworth.Itisaconstituent

ofS&PCNXNiftyandMSCIIndia. RelianceAnilDhirubhaiAmbaniGroupisamongst Indias top 3 business houses with a market cap of US$ 22 billion, and 150 million

customers.Ithasastrongpresenceacrossawidearrayofhighgrowth businessessuchasTelecom,

consumer-facing

FinancialServices,Energy,Power,InfrastructureandMediaan

EntertainmentRelianceCapitalhasinterestsinassetmanagementandmutualfunds,lifeand generalinsurance,privateequityandproprietaryinvestments,stockbrokinganddepository services,consumerfinance,asset reconstruction,institutionalbrokinganddistributionof financial products. RelianceCapital,aconstituentofS&PCNXNiftyandMSCIIndia,isapartoftheReliance AnilDhirubhaiAmbaniGroup(www.relianceada.com).ItisoneofIndia'sleading,most and fastestgrowingfinancial services companies in theprivate sector. Reliance Capital has interests in asset management and mutual fund; life and general insurance; consumer finance and industrial finance; stock broking; depository services; privateequityand proprietary investments;exchanges,assetreconstruction;distributionof valuable

financial products and other activities in financialservices. RelianceMutualFundisIndia'slargestMutualFundwithoversevenmillioninvestors. RelianceLifeInsuranceisoneofIndia'sfastestgrowinglifeinsurancecompaniesandamong thetopfourprivatesector insurers.RelianceGeneralInsuranceisoneofIndia'sfastest growing

general insurance companies and among the top three private sector insurers. RelianceMoney isoneofIndiasleadingretailbrokeragehousesanddistributorsoffinancial products and services. RelianceCapitalhasanetworthofRs.7,712crore(US$2billion)andtotalassetsofRs. 26,003crore(US$ 6 billion) as on March 31, 2010. RelianceConsumerFinanceoffersawiderangeofproducts,whichincludepersonalloans, vehicleloans(carandcommercial),homeloans,loanagainstproperty,andSMEloans.The focusinthisbusinessisprimarilytheassetqualityandtheprofitabilityofeachloangiven; notmerelygrowthormarketsharegains.IntheSeptembertoDecemberquarteroftheyear, therewasasteepdropinliquidityduetotheglobalfinancialmeltdownthathaditsfallouton

India.Consequentlyweslowedourdisbursals.Thisnaturallyresultedinasmallerloanbook, whichfellfromRs.9,513crorelastyeartoRs.8,576crorethisyearRelianceConsumer FinanceoffersawiderangeofproductswhichincludeHomeloans,Loansagainstproperty, Vehicle

loans(carsandcommercialvehicles),SMEloansandPersonalloans.Thefocusin thisbusiness isnot justonthegrowthofcreditpersebutalsoon thequality ofcredit.Backed bythelong-

standingconservativeapproach,wehavedevelopedstringentin-housecreditrisk managementsystemstoensurethehighestqualityofcredit.Therewasreductionthesizeof ourloanbooktoRs.8,576crore(US$2billion)asonMarch31,2009,asagainstRs.8,902 croreattheendofDecember31,2008.Ourloanbookisspreadacross1,19,759customers and 23

locations. The loan book as on March 31, 2008 was Rs.7,120 crore. Reliance ConsumerFinancegeneratedrevenuesofRs.1,200crore(US$261million)fortheyear endedMarch31, 2009,asagainstRs.395croreforthecorrespondingpreviousperiod an

increaseof204percent.FortheyearendedMarch2009,itachievedaprofitbeforetaxof Rs.91crore(US$20million)asagainstRs.36croreanincreaseof152percent._Reliance Capitalssubsidiariesi.e.RelianceConsumerFinancePvt.Ltd.andRelianceHomeFinance

Table-1: Business mix of Reliance Capital Asset Management Insurance ConsumerFinance&Home Mutual Fund, Portfolio Management, OffshoreFund LifeInsurance, GeneralInsurance Mortgages,LoansagainstProperty,BusinessLoans,Loansfor Commercial Vehicles, Loans for Construction Equipment, Finance Brokingand Distribution AutoLoans,Loans againstshares, BusinessLoans Stocks Commodities and Derivatives, Wealth Management Services,PortfolioManagementServices,InvestmentBanking, Foreign Exchange and Offshore Investment, Third Party

Other Businesses

Products Asset Reconstruction, Institutional Broking, Private Equity, Exchanges, VentureCapital

Figure-6: FinancialPerformance

Figure 7: PBDTM & RONW

Figure 8: ROG Sales & PAT

TheCompanysgrossincomeforthefinancialyearendedMarch31,2009increasedto Rs.3,017.29crore,fromRs.2,079.79croreinthepreviousyear,registeringagrowthofover 45.08percent.Theoperatingprofit(PBDIT)oftheCompanyincreased46.24percentto Rs.2,334.99croreduringtheyear,upfromRs.1596.69croreinthepreviousyear.Interest expensesfortheyearincreasedby 203.02percenttoRs.1,236.75crore,fromRs.408.15

crore,inthepreviousyear.DepreciationwasatRs.21.22croreasagainstRs.17.09crorein thepreviousyear.TheprovisionfortaxationduringtheyearwasRs.109crore.Thenetprofit fortheyeardecreased byover5.60percenttoRs.968.02crorefromRs.1,025.45croreinthe

previousyear.AnamountofRs.193.61crorewastransferredtotheStatutoryReserveFund pursuanttosection45ICoftheReserveBankofIndiaAct,1934,andanamountofRs.96.81crorewastransferredtotheGenera lReserveduringtheyearunderreview.TheCompanys NetworthasonMarch31,2009,stoodatRs.6,697.42crore,asagainstRs.5,927.50Fixed DepositsTheCompanyhasneitheracceptednorrenewedanyfixeddepositsduringtheyear. Fivedepositaccounts,aggregatingtoRs.26,000,remainedunclaimedontheduedatesason 31, 2009. The Company March

has intimated the deposit holders individually of their dischargedto enable

unclaimedamountwitharequesttoreturntheFixedDepositReceiptsduly theCompanyto repaythe amount.

Macro-EconomicAnalysis Opportunities

Lowretail penetration offinancial services / products inIndia Tremendous brand strength andextensivedistribution reach Opportunityto cross sellservices Increasingper-capitaGDP Changingdemographic profileof the countryin favourof theyoung

Threats

Competition from local and multinational players. Execution risk. Regulatorychanges. Attraction and retention of human capital.

FutureOutlook

Indiahassurvivedoneoftheworstglobalcrisesinhistorybetterthanmostothereconomies. Therecent recoveryinmanyoftheleadingmacroindicatorsofeconomicactivityhasled manytobelievethattheworstisoverfortheIndianeconomyandweareonourwaytoa highergrowthtrajectory.Therehasbeen aresurgenceinsalesacrossavarietyofsectors

fromautomobilestocement,steelandelectricity production. Railandporttraffictoohas seenanuptick.ThePurchasingManagersIndex(PMI)hasshownanimprovementfroma lowof49.5forMarchto53.3forApril2009,signifyingarenewedtrendofgrowthin manufacturing.Indiaisthesecondmajoreconomy afterChinawhere thePMIhascrossedthe

baseline50mark,indicatingthestartofanexpansionaryphase.Thegrowthinfirsthalfof FY2010isexpectedtoremainsoft,withtheeconomy turningaroundinthesecondhalf.The

driversofthisturnaroundincludegovernmentsfiscal stimulusmeasures,thecollapsein commodity prices,thecomingonstreamofsignificantdomesticoilandgasoutput,therecent infusionofrecordlevelsofFDI,theimprovementintradedeficitandtheenvironmentfor externalcommercialborrowing(ECB)thefallintherealexchangerate,theRBIsaggressive monetarypolicy actionsandtheexpectedstabilizationoftheglobaleconomy.Indiaremained economyinFY2009afterChina.Inthelightoftheongoing

thesecondfastestgrowing

globalrecession,Indiawill,evenatamodestgrowthof6percentin FY2010,beoneofthe fastest growingin theworld.

Shriram Transport Finance

Economic overview Theglobaleconomicconditionsdeterioratedsharplyduringtheyear2008-09withseveral advanced economiesexperiencingtheirsharpestdeclines.Theassociatedadverseeffects spreadacrossemerging yearandaccentuatedthesynchronized marketeconomies(EMEs)particularlybythethirdquarterofthe globalslowdown.Inflationconditionswitnessed

sharpvolatilityduringtheyearasheadlineinflationinmajoradvancedeconomiesfirmedup considerably uptoJuly 2008, but declined sharply thereafter. The global

f i n a n c i a l environmententeredacrisisphaseinmidSeptember2008,followingthegrowingdistress amonglargeinternationalfinancialinstitutions.IndiathethirdlargesteconomyinAsiais estimatedtohavegrownlessthan7percentin2008-09,aftergrowingatanaveragerateof around9percentormore inthreefiscalyearstoMarch2008.Thiswasonaccountofa global

economicdownturn and a contraction in domesticdemand.

Commercialvehicleindustryoverview

Thefinancialyear2008-09endedwithanetdeclineof22.3percentinnewcommercial vehicle(CV)sales(domesticandexports)ascomparedtothepreviousyear.Theindustry witnessedahealthygrowthduringthefirst-halfof2008-09,postwhichtheCVsalesstarted declining ata high rate. This can be primarily attributed to the weakening of macro- economic indicators, resulting in drop in freight availability, and restricted credit on a

availability.However,inthefourthquarter,theindustrywitnessedaslightrevivalinsales,

month-on-month basis, partly driven by the stimulus packages provided by the government. The key steps taken include reduction in excise duty and provision of accelerated

depreciationtobenefitCVbuyers.Inadditiontothis,thegovernmentalso undertook measures to improveliquidityforNBFCs and provide financial assistanceto State

TransportUndertakingsforpurchasing busesundertheJawaharlalNehruNationalUrban Mission.

Major demand drivers 1.Roadways haveremained adominant transportmode: Overthelastfewdecades,roadwayshavedominantlyimprovedtheirshareduetogreater higherflexibilityofdoor-to-doordeliveryand lowerrisk of coverage,

handlinglosses.

Further,thegovernmentsinvestmentinthedevelopmentofnationalhighwaysoverthelast fewyearshasledtohigherdemandforroadtransport.Withfurtherimprovementinroad infrastructureandhighergrowthexpectedinroadtransport(whichareprimarilytransported throughroadways),roadfreightisexpectedtoaccountfor63.5percentofthetotalfreight movement.

2.Higherreplacementdemand:HigherCVsalesoverthelastfewyearswerealsosupported

by

replacement demand which stemmed from stricter regulations on overloading and emissions. TheSupremeCourt, in November 2005, bannedoverloading ofgoods trucks and trailers in excess of prescribed gross vehicleweight. Toreducepollution, the AutomotiveResearch

OwnershiptrendinCVS

ShriramTransportcaterstosmalltruckoperators(STO

owninglessthanfivetrucks)andfirst-timeusers(FTU),andiscurrentlytheonlyorganised playerfinancingthissegment(othersareprivatefinanciers).STOsandFTUscontrolaround 75percentofthetotaltruckfleet;however,theyhavepoorfreightoriginationskillsandare thereforedependent on brokers for amajorityof theircontracts.

ShriramTransport Finance

Weareapartofthe"SHRIRAM"conglomeratewhichhassignificantpresenceinfinancial servicesviz., commercialvehiclefinancingbusiness,consumerfinance,lifeandgeneral fundsanddistributionoffinancialproductssuchaslifeand

insurance,stockbroking,chit

generalinsuranceproductsandunitsofmutualfunds.Apartfromthesefinancialservices, thegroupisalsopresentinnon-financialservicesbusinesssuchaspropertydevelopment, engineeringprojects andinformation technology. OurCompanywasincorporatedintheyear1979andisregisteredasaDeposittaking NBFCwithReserveBankofIndia underSection45IAoftheReserveBankofIndiaAct, 1934. STFCdecidedtofinancethemuchneglectedSmallTruckOwner.Shriramunderstoodthe of 'Aspiration' much before marketing based on 'Aspiration' power became

Fashionable.ShriramstartedlendingtotheSmallTruckOwnertobuynewtrucks.Butwe foundamismatchbetweentheAspirationandAbility.TheTruckOperatorwashonestbut theEquityathiscommandwasnotsufficienttosupportthecreditlevelsrequiredtobuya new truck. FromDrivertoOwner,evenifonlyofaPre-ownedTruckandfromPre-ownedTrucktothe New

Truck, wehavebeen with himin his journeyof Prosperityas hehas been ourpartner in ourroad to success and leadership.

Figure-9: Financial Performance

Figure 10-PBDTM & RONW

Figure 11: Debt- Equity Ratio & ROG- Sales

Figure 12: ROG - PAT

Public issue of NCDS

Toexplore and develop additional source of financing and with a view to meet The Companys BoardofIndia(Issueand businessoperations,TheCompany,pursuanttotheSecuritiesandExchange ListingofDebtSecurities)Regulations,2008andsubjecttothe

necessaryapprovals,consentsandpermissions,issuedandallottedSecuredNon-Convertible Debentures, through apublicissue and raisedasum of Rs. 99,999.96 lacs. Consideringthepotentialinraisingfundsbyissueofnon- convertibledebentures(NCDs), TheBoard,atitsmeetingheldonJanuary18,2010,hasdecidedtoofferandallot,subjectto aforementioned Regulations the

and such approvals as may be necessary, secured / oneormoretranchesthroughanother

unsecured,NCDsnotexceedingRs.50,000lacsin

publicissuewhich is expected to open for publicsubscriptions in May2010.

SWOT AnalysisStrengths
Thepioneer in thepre-owned CVs financingsector Knowledge-driven (products as well as local customers) and relationship-based businessmodel. Significantexpertiseandexperienceinvaluationofpre-ownedCVsaswellasin recovery/collection ofmonthlypayments fromcustomers Pan-India presencewith 484 branch officesallover the country. Awell-definedandscalableorganisationstructure,capableofsupportingsurging delinquencyasassetsarebackedwithadequatecoverandareeasyto immediateliquidity Strong financialtrackrecorddrivenbyfastgrowthinAUMwithlowNonPerforming Assets (NPAs). ExperiencedandstablemanagementteamStrongrelationshipswithpublic,privateas foreign banks, institutions and investors wellas growthLow with

repossess

Weaknesses

TheCompanysbusinessanditsgrowtharedirectlylinkedtotheGDPgrowthofthe

country. Anyslowdown in GDP growthmayhaveanegativeimpact on thebusiness.

Opportunities

GrowthintheCVmarketdrivenbytheeconomicgrowthandtheinfrastructure development in the country

Strongdemandforconstruction equipment Strong demandforpassenger CVs demand forpre-owned tractorsLoans forworking capital requirements ofCV users

Strong

PartnershipswithprivatefinancierswillenabletheCompanytoenhanceitsreach withoutsignificant investments in buildinginfrastructure

Threats

Maintaining relationships with customers who are mobile and have no proper documentation

Maintainingasset quality. Regulatory changes in the Non-Banking Financial Company (NBFC) and transportation sectors.

Outlookand opportunities

Theglobalfinancialslumpdrastically inthecountrys

squeezedexportdemandforourproductsandservices

mainUSandEuropeanmarkets.TheGDPgrowthfor2008-09isnow

projectedtobeintherangeof6.5to6.7percent.TheGovernmentofIndiaaswellasthe Reserve Bank of India did a splendid task in somewhat insulating the country financialmarketsfromtheeffectsoftheworldwidecrisis.Theyrespondedtothechallenge and magnificently, thus minimisingthe impact of the crisis on and its quickly

India while

maintainingcomfortabledomesticandforeignexchangeliquidity.TheGovernmentofIndia providedthreestimuluspackageswhich,amongstothermeasures,cutexcisedutyby centacrossthe fourper

boardandincreasedplannedexpenditurebyRs.20,000crores.Easingof

monetarycurbs andregulatoryactions of theReserveBank ensured that ourfinancial markets functionednormallyinspiteofthedisturbances acrosstheworld.Thesemeasures,onone hand

stimulated consumption and on the other hand provided enoughliquidityin thefinancial markets.Theseinitiatives,coupledwithlowercommodityprices,areexpectedtosoftenthe downswingbystabilisingdomesticeconomicactivity.Severalfactors,suchasincreased movement of freightat theleadingports, pick-upin project investments, increased hiring, and encouragingdatafromanumberofkeymanufacturingsegmentscouldbeanindicatorthat thedowntrendhasbottomedout andthatoureconomyispoisedtoregainitslostvigour shortly. It is reported that auto, cement, steel and capital goods sectors have started

performingstronglywhichindicatesapossiblestrongturnaroundin

theeconomy.Despite

severalchallengeslyingahead,theIndianeconomyremainsresilientandiswidelyexpected togrowataround6percentinFY2009-10.ThecumulativeproductiondatafortheAuto industryfor200809recordedagrowthof2.96percentover200708.During2008-09the salesofCommercialVehiclesdeclinedby21.69percentwhencomparedtothatoflastyear. SalesofMedium&HeavyCommercialVehicles(M&HCV)fellby33.16percentandLight

CommercialVehicles(LCV)recordeda economicslowdowninthecountry,YourCompanywas

negativegrowthof7.10percent.Inspiteofthe abletoonceagainpoststerling

growthintheFY2008-09aswell.YourCompanywas,toalargeextent,insulatedfromthe downswingasitoperatesmainlyinthepreownedcommercialvehiclesegment,andisthe onlyorganised player in this segment.

IDFC Global FinancialandEconomic Crisis

The year2008-09sawtheworstglobalfinancialandeconomiccrisisin60years. The crisis had asevereknock-on effect on thedevelopingandemergingeconomies, andcausedIndiatolosemuchsheenfromthestellareconomicperformanceofthe Itexacerbatedthe pastyears.

beginningofacyclicaldownturninIndiaseconomyandIndiasGDP

growth,whichwas9%during 2007-08,slowedto5.3%inthethirdquarterof2008-09. Although FinancialInstitutions(FIs)inIndiahaveverylimitedexposuretothetoxicordistressedassets,dir ectlyorthroughderivatives,andtothefailedandstressedglobalFIs, strongimpactthroughtrade,financialmarketsandmoderationincapital flows.Theimpacthasalsobeen feltbytheinfrastructuresectorinthecountry,largely Indiahasfelta

throughweakeningofdemand,whichwaspronouncedinthetransportationsector(seeTable 1),andreducedavailability offinances,asexternalcapitaldriedupandtheequity marketOn

theotherhand,theglobaleconomicslowdownledtosofteningofcommoditypricessuchas crudeoil,aluminum,ironore,copperandsteelafterJuly2008,therebyreducingthecostof projectsalbeitwithsometimelag. Interest ratesalsostarteddecliningin linewith the

monetarypolicymeasuresadoptedbytheReserveBankofIndia.Nevertheless,thesepositive effectswereoffsetbytheweakening rupee, slackeningdemandandproblems facedby

developersin respectof fund raising.Poorinfrastructurecontinues to hamper theprospects of Economic growth and business in the country.

Table 2 : Weakening Demand For Transportation Services

To

meetthegrowingdemandforinfrastructureservices-regulatoryframeworkandprivate

sectorparticipation.Notwithstandingsuchefforts,theprogressincapacityexpansioninthe differentsectorswasverylimited(seeTable2).Theglobalcrisisisonlypartlytoblameas therearecontinuing deficienciesinpolicyandregulatory frameworks,anddelaysindecision

making.Thedelaysinallocationof3Gspectrum

andallegationsoffavouredtreatmentto

someoperatorsfor2Gspectrumhavedonelittletostrengthentheinvestmentclimateinnot onlythetelecomsector,butininfrastructureperse.Similarly,litigationrelating tonormslaid new The

downinthemodelbiddocumentsfortheroadssectordelayedthemuchneededimpetusfor projects underthe National Highways Development Programme(NHDP).

concessionagreements

finalizedfortheawardofnewterminalsatmajorportsin2007-08

alsounderwentseveralrevisionsduring2008-09.Theawardandexecutionofprojectsalso facedseveralproblems.Theseincludethelargenumberofclearancesrequiredfromvarious governmentagencies,delaysinlandacquisition.changesinscopeof projectsduringthe

biddingprocess,inadequatesupplyofequipment,delaysinawardofcivilworks,andweak project

execution capacity. WhilefinancialmarketsintheUSandEuropewerefeelingthepressureinthesecondhalfof 200708,othercapitalmarkets,especiallyinemergingeconomies,didnotseemtothinkthat primeproblemwouldplayoutintoafullblowncrisisoffinancialconfidence.That changedbythefirsthalfof 2008-09,wheneveryonebegantoseeaclearerpictureofthe thesub-

extentofwrite-downsundertakenbythemajorinternationalfinancialhousesonaccountof theirnon-performing assets.

InfrastructureDevelopment Finance

CompanyLimited(IDFCortheCompany)wassetupin1997toactasafinancierand catalystforthedevelopmentofprivatesectorsponsoredinfrastructureprojectsinIndia.Over thelast12years,andmoresosincetheInitialPublicOffering(IPO)inJuly2005,IDFChas pursuedafocusedgrowthstrategytoevolverapidlyintoaone-stop-shopforinfrastructure financeinIndia,capableofmeetingtheincreasingly complexandambitiousrequirementsof an expanding client base. Infrastructure typically involves projects with long gestation periods, with each project going through different phases of implementation. Broadly speaking,itbeginswithconceptualizingaproject.Thenthefullprojectplanisdeveloped, followed byfinancial closure. Next comesthe execution phase, where the underlying physicalinfrastructureisactuallycreated.Finally,theprojectmovestorevenuegeneration, whentheunderlyingassetstartsgettingutilisedandgeneratesactualincomestreams.Eachof thephaseshasdifferentriskreturnprofiles.IDFCsexpertiseliesinadeepunderstandingof therisksandopportunitiesassociatedwiththedifferentphasesofaprojectslifecycle,and appropriatelypackagingdifferentiatedfinancialsolutionsthatbestmeettherequirementsof investorsandclientsatthedifferentstagesbyprogressivelyexpandingtherangeofitsskills, productsandservicesbeyondthetraditionalprojectlendingtoinvestmentbankingaswellas

differenttypesofassetmanagement.Thisdiversifiedrangeofproductandservicecapability hasstrengthened IDFCscorebusinessmodelandhaspropelledtheCompanyintooneof

Indiaspremierfinancialservicesplatformleveragingknowledgeandtalenttospantheareas ofinfrastructureprojectfinance,assetmanagementandinvestmentbanking.MuchofIDFCs businessisaboutmobilizinginternationalaswellasdomesticcapital.Naturally,likeother businesses,ithastodealwithdemandandsupplysideissues.Whilethedemandsideissues aredomesticinnatureandrelatelargelytotheappetiteforprivateinvestmentespeciallyin Infrastructuresector,thesupplysideissuesaremoreglobal.Theseincludefactorslike costofcapital, liquidityandinvestorconfidencethatareintrinsictointernationalcapital flows. Onbothfrontsthereweresignificantdevelopmentsinthemacro-economicenvironmentand overallmarketconditions,whichplayedakeyroleindefiningtheCompanysstrategyand progressduring2008-09.Inthiscontext,itisimportanttofirstanalysethestructuralchanges thattookplaceinthemacroeconomic environmenttoappreciatethechallengesthatIDFC had to face and overcomeduring 2008-09. the

Thebusinessenvironment and IDFC AswasreportedinlastyearsAnnualReport,thefallinhousing pricesintheUShadsparked

offthesubprimelendingcrisisinthemiddleof2007.Creditdowngradingbyratingagencies andincreaseddefaultriskof various housingbackedpaper,particularlycollateraliseddebt

obligations(CDOs)thatweresliced,dicedandfarremovedfromtheoriginalassets,rapidly spreadthroughouttheUS,andthentotheEuropeanandAsianfinancialsystems.Inamatter ofmonths,whathadstartedasaUShousingproblembecameamajorcrisisthataffectedthe entireglobalfinancialsystem.Severallargeinternationalfinancialinstitutionswereleftto grapplewiththeconsequencesoflargeassetwrite-downs.Soonthisledtoanunprecedented contractionofcreditinthesystemespeciallyinthelastthreeandahalfmonthsof2008, afterthecollapseofLehmanBrotherson14thSeptember.Thankstomassivefinancial,

monetaryand

fiscalinterventionsbytheUSaswellasmajorEuropeannations,theacute

financialcrisispassedbyJanuary2009.Butitscarredtherealeconomyeverywhereinthe world.StartingwiththeUSinthethirdquarterof2008,every majordevelopedcountrywent

intoarecessionwhichcontinuestilltoday.Atthe timeofwritingthisManagement Discussion and Analysis, the global situation remains grim. Indeed, thisis the worst

economicdownturn thatthe world has seen sincethe Great Depression ofthe 1930s. TheUShasalreadysufferedfromthreesuccessivequartersofnegativeGDPgrowth, withpossiblymoretofollow.AlthoughitisbelievedbysomethattheUSeconomy willbottomoutby theendofthethirdquarterof2009,theestimatedGDPgrowthfor2009willbe2.9%.InApril2009,unemploymentwasat8.9%,andrisingtheworst early1980s. TheEuroareaisalsoinadeeprecession,andstructurallymuchworseoffthanthe growthfor2009 is estimated at-3.7%. Japanisheadingforyetanotherperiodoflongtermde-growth.Industrialoutputhas beenfallingby morethan30%everymonthcomparedtoayearearlier;andGDP growth US.GDP sincethe

for2009 is being estimated at 6.4%. Withanestimated11%to12%fallintherealvalueofworldtradein2009,Chinas expected to reduceto high single digits. Indiasgrowthisdownfromthe9%plusrangeofthelastthreeyearsto6.7%in the chances of it beingsimilar in 2009-10. Figure 13: Debt- Equity Ratio & PBDTM 2008-09, with growth is

Figures-14:RONW

Figure 15:IDFC consolidated net profit at Rs. 750 crore for FY 2009 Funding:

IDFCconsolidated net profit atRs. 750 crorefor FY2009

HighlightsofFY2009

ProfitAfterTaxof Rs.750 croreforFY 2009 compared to Rs.742 croreinFY 2008 Balancesheet size as on March 31, 2009: Rs. 29,809 crore:an increaseof7% Net NPAs at 0.21% ofoutstandingloans Capital AdequacyRatioat 23.75% (TierI 20.04%; TierII 3.71%) NetInterest income (NII)of Rs.922 crore:an increaseof 33% NonInterestIncome ofRs. 613 croreinFY 2009 Assets under management USD 4.7 bn Closureof USD 1.0 bnIndiaInfrastructureFundand USD 0.70 bnIDFC Private

EquityFundIII At its 72nd Board Meeting held on April 28, 2009, the Board of Directors ofInfrastructure DevelopmentFinanceCompanyLimited(IDFC)approvedfinancial

resultsfortheperiodApril1,2008toMarch31,2009andrecommendedDividendat therate of Rs. 1.20 per equityshare forFY 2009.

Figure16: ROG sales

Income

NetInterestIncome (NII) increased by33%fromRs. 694 crorein FY 2008to Rs. 922 crorein FY 2009. NetInterestIncome (NII) from infrastructureloans increased by34%from Rs. 565 crorein FY 2008toRs. 758 crorein FY 2009. NetInterestIncome fromtreasuryoperations increased by27%from Rs. 129 croreinFY 2008 to Rs. 164 croreinFY 2009 Non-InterestIncomeforFY2009decreasedby 1%fromRs.618croreinFY2008to Rs.613crorein FY 2009.

FeesfromIDFCs assetmanagement business wereRs. 203 crorein FY 2009. IncomefromInvestmentbankingandbrokingactivityofIDFCwasRs.115crorein

FY 2009. Income from principal investments was Rs. 184 crorein FY 2009. Other fees wasRs.111 crore in FY 2009.

Figure 17: PAT

Profits:

Profitbeforetax(PBT)increased by4% from Rs. 1,000 croreinFY 2008 to Rs. 1,036 croreinFY 2009.

EPS(diluted) at Rs. 5.78 per share

AfteraccountingforRs.278 crorefortax, profitin associate companyandminority interest, theprofitafter tax(PAT) for FY 2009 increased by1%to Rs. 750 crorefrom Rs. 742 crorein FY 2008.

Macro EconomicAnalysis TheinfrastructureNBFCstatus,,willallowIDFCtoimprovefundmobilizationandease funding pressure on the firm. the statuswill give it higher overall single-

party/groupexposures,andborrowingfrombankscouldincreaseto20%ofnetworth.Noninfrastructure NBFCs can currentlyraise up to 15% ofnet worth.

Additionally,thefirmsplantoraiseRs3,500croreoverthenext12monthsisapre- emptive bid to raise capital and stay relevant with the SBIs of the world, Limaye told

Mintinaninterviewlastweek. Thestate-ownedStateBankofIndiaisIndiaslargest lender. Inthenextthreeyears,theopportunityintheinfrastructurelandscapelooksquiteattractive sowethinkitis agoodtimetocapitalizeontheopportunity,hesaid,estimatingthat

infrastructurelenderscouldstandtolendclosetoRs3trillionoverthenextthree-fouryears, especiallyin power, roads andgas distribution.

Indian Banks VS NBFC

2008-09wasadifficultyear,especiallyforthefinancialsegmentacrosstheglobe.However, Indiasstrongmacro-economicfundamentalsandfinancialpolicieshaveshieldeditfromthe turmoil..Thestudyconsideredthosebanksthathaveannouncedtheirresultsbetween15th 20thMay2008-09postedonthe analyzedintotal29banks(bothpublic&privatesector) April-

websiteofBombayStockExchange.Thehave and7NBFCsThe)studyhas

examinedandcomparedtheprofitabilityofbankswithNBFCsduringthe financialyear 2008-09.Simpleaverageandprofitabilityratio ofthetwosegmentshavebeenstudied.

Methodology-TheAFPanalysisoftheIndiancommercialbanks&NBFCsprofitabilityis calculatedusingtwobroad Ratioisaclassoffinancialmetricsthatis earningsascomparedtoitsexpensesandotherrelevant oftime. parametersincludingnetprofitandtotalincome.Profitability usedtoassessabusiness'sabilitytogenerate costs incurredduringaspecific period

Profitabilityis

calculatedas:

(Net Profit/Total income)*100

NBFCsmoreprofitablethancommercialbanksdespiteslowdownEvenastheworldwide financialcrisis slowdowninkeysectorsoftheIndianeconomyledtheNonBankingFinancialCompaniestoface severecashshortageduringthefinancialyear2008-09,the overallprofitabilityofNBFCshasremained higherthanthescheduledcommercialbanks. Companies(NBFCs)average and

Duringthefinancialyear2008-09,Non-BankingFinancial profitability

stoodhigherat18.90percentascomparedtothebankswith10.08percent.The

NBFCsgenerallyoperatesonthemodeloflendingtoriskierprojectswithinterestrates

higherthanofferedbythebankinginstitutions.Asthefinancialmarketsfacedtheheatof globalcrisisduringthefinancialyear2008-09,mostoftheNBFCsfacedproblemsinfund Amongtheseven NBFCs, in 2008-09 thehighest profitabilitywas raising. by

reported

InfrastructureDevelopmentFinanceCompanyLimitedat20.89percent,withtotalincome stoodatRs.3626.38croreandnetprofitat Rs.757.73crore.ItwasfollowedbyHousing

DevelopmentFinanceCompaniesLimited(HDFC)andPowerFinanceCompaniesLimited (PFCL)at20.76percentand20.67percentrespectively.TheReserveBankofIndia(RBI) monetarymeasuresbycuttinginterestratesduring2008-09hasbenefitedtheNBFCssince ofthemfinancetheiroperationsthroughmarketborrowings saidMr.SajjanJindal President. Aggregatenetprofittototalincomeratioof17publicsectorbanksand12privatesector banks reported to be 10.08 per cent during2008-09. many

Table 3: Top5 Banks andNBFCs with highest profitability:

Amongthe17publicsectorbanks,thehighestprofitability BankofIndiaat

wasreportedbyIndianBankand

15.83percentand15.50percentrespectively.Outoftheprivatesector

banksthetoppositionswere occupiedbyAxisBankandYesBankat13.22percentand 12.46percentrespectively,amongothers.The7NBFCs,aggregatetotalincomegrewbya whooping57.3 percenttoRs.28,208.72croreinFY09fromRs.17,906.84croreinthe

previousfiscal.However,theaggregatetotalincomeof29bankshaveincreasedby25.3per centfromRs2,69,055crorein2007-08toRs3,37,206.9crorein2008-09.Year-on-year performanceofthe29banksregardingnetprofittototalincomeratioattheaggregatelevel showedamarginaldeclineduringFY09with10.08percentasagainstFY08recordedat 10.52percent,whileinthecaseof7majorNBFCs,theratiodeclinedduring2008-09at 18.90per centas against21.80 percent inFY08.

Table 4: Banking versus NBFCregulatory arbitrageinIndia

Porters fiveforces
Porters five forces modelofcompetition

Thenatureofcompetitionintheindustryinlargepartdeterminesthecontentof strategy,especiallybusinesslevelstrategy.baseditisonthefundamentaleconomicsofthe industry,theveryprofit potentialofanindustryisdeterminebycompetitioninteraction.

Wheretheseinteractionsareintense, profittendstobewhittledawaybytheactivitiesof competing. Porters model is based on the insight that a corporate strategyshouldmeetthe opportunities andthreatsintheorganizationsexternalenvironment.Especially,competitive strategyshouldbaseonand understandingofindustrystructuresandthewaytheychange. thatshapeeveryindustryandeverymarket. These

Porterhasidentifiedfivecompetitiveforces

forces determine the intensity of competition and

hence the profitability and

attractivenessofanindustry.Theobjectiveofcorporatestrategyshouldbetomodifythese competitiveforcesinawaythatimprovethepositionoftheorganization.Portersmodel supportsanalysisofthedrivingforcesinanindustry.Basedontheinformationderivedfrom theFiveForcesAnalysis,managementcandecidehowtoinfluenceortoexploitparticular characteristics oftheirindustry.

Barriers toentry

Productdifferentiationisverydifficult:AsmostoftheNBFCsoffersimilartypesof loanswhich themarket. caterstosamemarket.Innovationofaproductplaysaveryimportant rolein

Licensingrequirement:Therearealready13000registeredNBFC.So,thelicensing requirement is also low.The regulations arenot that stringentas that of aBank.

Threatofsubstitute:

Banks:Banksareimportantsubstitutes.Asthey

areleadersinthemarkets.They

have

aquitestrongbrand presenceand agood creditappraisal method also. MoneyLenders:SmallNBFCscaterto theruralareaswherethereisalreadyavery

strongpresence. Theydominatethemarketintheruralareasanditsmostlythe unorganised market theytap in.

Bargaining Power ofsuppliers

Manyalternatives:ThesuppliersinthiscasearethedepositorsortheNBFCsfunds. Suppliershavelotsofalternativestoputtheirmoney.Withtherisktheycaninvest theirmoney.E.g.Low Risks:Banks, Bondsetc. High Risk: Stocks,Investment.

RBIrulesandregulations:RBIrulesandregulationsarenotasstringentasofBanks. NBFCs aregoverned bymanybodies. E.g. RBI,FIDC, NHBetc

Bargaining powerofconsumervery high

Largeno. ofalternatives Low switching costs Undifferentiated services Fullinformation aboutthe market Threat ofcompetitors

Largeno ofNBFCs High marketgrowthrate Low switching costs Undifferentiated services High fixed cost High exitbarriers

Rivalryamong competitors isvery fierceinIndianNon BankingFinancialIndustry.

TheservicesNBFCsofferismoreofhomogeneouswhichmakestheCompanytoofferthe sameserviceatalowerrateandeattheircompetitormarketsshare.MarketPlayersuseall sortsofaggressivesellingstrategiesandactivitiesfromintensiveadvertisementcampaignsto promotionalstuff.Evenconsumerswitchfromonebanktoanother,ifthereisawidespread intheinterest.Hencetheintensityofrivalryisvery high.Thenooffactorshascontributedto increaserivalrythoseare.

AlargenoofNBFCserving

similarloanproducts:ThereissomanyNBFCsandnon

financial

institution fightingfor samepie,which hasintensified competition. Highmarketgrowthrate:Indiaisseenasoneofthebiggestmarketplaceandgrowth rate inIndian financial industryis also veryhigh.This has ignited the competition. Homogeneous product and services: The services banks offer is more of homogeneouswhichmakesthecompanytoofferthesameserviceatalowerrateand eat their competitor markets share. Undifferentiatedservices:AlmosteveryNBFCprovidessimilarservices.Everybank tries to copyeach otherservicesand technologywhich increaselevel ofcompetition. High exit barriers: High exit barriers humiliate banks to earn profit and retain

customersbyprovidingworld class services.

CHAPTER 3 SUMMARY AND CONCLUSION

Results of the Study Top-ratedNBFCshavenotonlybeensuccessfulinmanagingtheirmarketsharebutalsoin protectingtheir profitability.Acombinationofthefactorscitedearlierhadhelpedthese

NBFCsearnbetterreturnsontheirdeployment.Infact,almostallthetop-ratedNBFCsenjoy areturnontotalassetsthatishigherthanHDFC Bank's,oneofthebetter-runbanks.The

higherreturnonassetswasdespitetheiroperatingcostratiobeingsimilartothatofHDFC Bank.Forexample,operatingexpensesasaproportionofnetmarginworkedoutto68per centforHDFCBank.Onanaverage,thiswasnotsignificantlyhigherthantheratioformost NBFCs.Ifreturnonassetswerestillsuperior,thenitwasbecauseofthehigher returnontheirfunds.FortopNBFCs,theinterestincomeworkedoutto17-21percentof theirtotalassetsfortheyearendedFY.Theliquidity inthebankingsystemalsohelpedthese top-rated

financecompanies.SpreadsovergovernmentsecuritiesforAAAratedcorporatesectordebt instrumentarenowonly50basispoints.Inotherwords,ifthecostof fundsforbanking

companieshasdeclinedsharply,thentop-ratedNBFCshavealsobenefitedfromsucha declineininterestrates.Someofthesecompaniesarenowraisingfundsat7-8percent. Also,thesecompanieshavedisplayedtheabilitytomanagetheirportfoliowithoutlarge incidenceofnon-performingassets.Forinstance,LICHousingFinance,IDFCandShriram TransportFinanceboastofnetnon-performingassetstonetadvancesratiooflessthan1per cent.Thisagainhashelpedthemlowertheoverallcostofoperationsand,thereby,protect their

profitability. Higher profitability and innovative financing options, such as securitization, havealso helpedin boosting the capital adequacyratio ofthese NBFCs. amongothers,LICHousingFinance,IDFCandShriramTransportFinance,RelianceCapital, boastofcapitaladequacyratiosupwardsof15percent.Inotherwords,theirbalancesheets continueto

be strongto accommodate furthergrowth in disbursements.

Disbursements-Sharp fallduring the crisis

DisbursementswereclearlyhitduringthecrisisasisvisiblefromPrimaryreasonforthis initialfallwaslackofsupplyoffundsafterthemarketliquiditydriedup.Impacthowever differeddependingonthecapitalstructureofthecompany,withNBFCshavinglargerALM mismatches and those which had more dependence on mutual funds for funding were affectedmoreseverelyasmutualfundsthemselvesfacedredemptionpressureontheirshort termschemes.Tosupportthesector,RBIundertookseveralmeasurestoimproveliquidity flowtotheNBFCsector.Thiswasasignificantdevelopmentastheregulatorhighlightedthe systemicimportanceof thesector.

RBImeasures to improveliquidity ofNBFCs The systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI) werepermitted to raise short-term foreign currencyborrowings. Allowed banks to availliquiditysupport under theLAF for thepurpose ofmeetingthe fundingrequirementsofNBFCsthroughrelaxationinthemaintenanceofSLRupto 1.5per cent of their NDTL. Risk weights on banks exposures to claims on NBFCs-NDSIwere reduced to 100 per cent from 150 per cent. Settingupofaspecialpurposevehicle(SPV)foraddressingthetemporaryliquidity constraints ofsystemically important non-deposit taking non-banking financial companies (NBFCsND-SI). Deferringthehigher CAR norms forNBFCs-ND-SIby1year.

WhileliquidityconditionsstartedimprovingfromQ4FY09,disbursementsgrowthremained subdued for the sector till the first half of FY10. On ay-o-y basis the cumulative disbursementsshowedafallduringQ1FY10andH1FY10.Thisperiodsawdeteriorationin assetqualityofmostNBFCs,whichwasespeciallyhighintheirunsecuredloanportfolios. Lowerdisbursementsweremainlybecauseofthepullbackof NBFCsoutofunsecured

lendingsegments.Onacumulativebasis9MEFY10disbursementsincreasedbymorethan 19%.EvenifweconsiderthelowbaseeffectofQ3FY09disbursements,thereisclear pick up in disbursements and a positive outlook for the indication sector. of

With

improvementinoveralleconomic activity andhigherthrustoninfrastructure financing by the government, thescenariois expected to improve furtherin FY11.

CostofFunding-Shotupduringthecrisisduetoshorttenureborrowings, &expectedtobelessvolatileduetolargerproportionoflongterm funding

stabilizednow

ManyNBFCstookadvantageofthelowerinterestrateregimeattheshorterendoftheyield borrowingshorttermfunds(3months1year)atlowerratesandlendingfor maturitiesrangingfrom3-4yearsathigherrates.Howeverthelevelofmismatchesdiffered betweenNBFCsandthosewithhighermismatchfacednotonlyliquiditypressure,buttheir costoffundingalsoincreasedduringthisperiodduetoinversingoftheyieldcurveanda generalriseininterestrates.Averageborrowingscosts1(onanaggregate

curveby

basisforCARE

ratedNBFCs)increasedfromaround9.5-10.0%inFY08to11.5-12.0%inFY09.Thisshows theseverity oftheimpactasfinancialcrisisaffectedfundingcostsinthe secondhalf ofFY09

andledtoa200bpsincreasefortheentireyear.TheresponsebyNBFCswastogradually replaceshorttermfundingwithlongtermsources.Thisisasignificantstructuralchangein theborrowingprofilesthatwillbringmorestabilityinprofitabilityofthesector.However spreadswillalsobelowercomparedtohistoricallevelsduetothischange.Duringthe9ME FY10costofborrowingreducedfromtheaverageof11.5-12.0%ofFY09to10.210.5%for the9monthperiodandisexpectedtoremainaroundtheselevelsforFY10.Thishoweveris stillhigher than theFY08 levels due to thestructural movetowards longer term borrowings.

AssetQualityDeterioratedmoreduetounsecuredloanswhichisnowvirtually

stoppedby

mostplayers,provisioninghasimproved&assetqualityexpectednotto worsenfurther.

Assetqualityforthesectordeterioratedsignificantlyduringthecrisis.AggregateGrossNPAratio trended from around 1.1% for FY08 to around 2.1% in FY09. While therewas deteriorationin allassetclasses,unsecuredassetclasses(PersonalLoans,UnsecuredSME loans)showedthemaximum deteriorationandwerethekeydriversforoverallincreasein

NPAs.Apartfromtheasset-typefinanced,anotherdifferentiatorbetweenassetqualitieswas theorigination&collectionmodelfollowed.NBFCs whichoriginatedmajorityoftheir

portfoliothroughbranches&ownemployeesshowedbetterassetqualityperformancethan thosewhichusedtheDSAmodel.AggregateGrossNPAratiohasfurtherworsenedto3.0% attheendof9MFY10,howeveritisclosetopeakingout.De-growthinunsecuredportfolio segmenthasalsoloweredtheportfoliooutstandinggrowththerebyleadingtoabaseeffectontheGr ossNPAratioandaddingtotheriseinreportednumbers.Provisioncoveragehasincreasedfromaroun d50%forFY09toaround60%attheendof9MFY10asplayershave becomemore

conservative.UnsecuredlendinghasvirtuallystoppedformanyNBFCsand underwriting norms have also been tightened in general for other asset classes. Thesedevelopments indicate positive structural changes.

Conclusion
ItisencouragingthattheNBFCsectorsimportanceisfinallybeingacknowledgedacrossFS marketconstituents as wellas theregulator.However,the importanceattached tothe sector is oftentranscendingintomisplacedexuberance.OversimplifiedandvaguedriversforNBFC valuationssuchasstrategicfitandcustomerbase,canneversubstitutedispassionatebusiness analytics.ArationalassessmentoftheintrinsicvaluesofNBFCsfactoringissuessuchaspast performance,structuralweaknessesofthesector(forinstancefundingdisadvantages),along withanidentificationofrealcapabilitiesareessentialtoensurethattheequilibriumbetween pricepaidandvaluerealizedisreachedtotheextentpossible.Intheabsenceofthis,Indiais suretowitnessthere-openingoftheNBFChorrorstoryalbeitwithanewchapteronthe ofNBFC investment values affectinginvestors acrosscategories. Ratings of the NBFCs whoseprofitabilityandasset qualitywas affected dueto the crisis weresupportedbytheirstrongparentage.Basedontheparentalstrengthsomeplayershave raisedfurtherequityandalsomanagedtore-aligntheirbusinessmodelswhilemaintaining theirsolvency. onrelatively overallpositiveoutlookonthesectorduetothebetterALMposition,focus saferassetclassesandthedemonstratedacceptanceofthesectorassystemically erosion

importantbytheregulator.Thecrisishasimposedanoverallsenseofcautionevenforthenewerentran tsinthemarket.Alsogoingforwardhighercapitaladequacynormswillputafairlyconservativecapon theleverageofthesectortherebyimprovingthecreditprofileofmanyentities (NBFC-NDSI).

Recommendations

DomesticFinancialmarketscanbeintegratedbymakingNBFCsChannelpartnersto Banks.Itwillhelpinbetterallocationandfundsavailability.Itwillalsohelpinbetter management ofFinancial services sector inIndia.

Enhancingthecreditdeliverymechanisms:Thecreditdeliverymechanismneedsto bemore transparentandhasslefree.Thereshouldbemorestringentnormsforthe defaulters.

StrengtheningtheprofessionalismofNBFCsectorthrougheducationandtraining: NBFCs areorganized players. Regulatory bodyneeds to educate people about NBFC.

To reducein interest costand hencebenefit theultimate consumer.

Limitations Of the Study

There were several time constraints. Due to continuous change in environment, what is relevant today may be irrelevant tomorrow.

The data available through secondary sources was brief.

BIBLIOGRAPHY

Books: NBFCs and mutual funds. Non-Banking Financial Companies in India, AkhanJafor, New Century Publications Investigation into NBFCs, by P Sarath Kumar.

Websites: http://www.rediff.com/money/2011/march/07rbi.htm (March,2011) http://www.financialexpress.com/news/Column---Why-NBFCs-may-not-want-to-bebanks/614492/ (March,2011) http://www.stockwatch.in/nbfcs-offering-high-dividends-yet-again-25964 (March,2011) http://www.livemint.com/2011/04/30204917/IDFC-seeks-infrastructure-NBFC.html (April,2011) http://www.encyclopedia.com/doc/1G1-143176307.html (April,2011) http://mba-bba-dissertations.blogspot.com/2011/04/capital-structure-of-indiabullsnbfc.html (April,2011) http://www.nbfc.rbi.org.in (April,2011) http://www.rediff.com/money/2007/jul/20nbfc.htm (April,2011) http://www.thehindubusinessline.com/2011/04/14/stories/2009111451870100.htm (April,2011) http://indiabudget.nic.in/es98-99/chap35.pdf (April,2011) http://www.banknetindia.com/finance/fbanking.htm (April,2011) http://www.coolavenues.com/know/fin/svs_nbfc_1.php3 (April,2011) http://www.thehindubusinessline.com/.../2005022800330800.htm (April,2011)