Studies Shaheed Sukhdev College of Business.: Bachelor of Financial and Investment Analysis

NBFCs and their ROLE in the EMERGING GLOBAL FINANCIAL MARKETS
STUDIES SHAHEED SUKHDEV COLLEGE OF BUSINESS.
PROJECT
OF
“FINANCIAL SERVICES”
BY
RICHA SHARMA (15901)

ROHITASHWA AGGARWAL (159**)
ARJUN JUNEJA (15929)
RAGHAV SRIVASTAVA (159**)
VEDANT AHIR (159**)
BACHELOR OF FINANCIAL AND INVESTMENT

ANALYSIS
YEAR: 2008-09
UNDER THE SUPERVISION OF
MR.KUMAR BIJOY
(FACULTY, FINANCIAL SERVICES)
CONTENTS
S.NO. TOPIC PAGE NO.
1.
OUR SAY 1
2. INTRODUCTION TO NBFCs
OUR SAY…
Our topic, “NBFCs AND THEIR ROLE IN THE EMERGING GLOBAL
FINANCIAL MARKETS” has to do with the NON BANKING FINANCIAL
COMPANIES and the role and scope they are expected to play in the future in the
global financial markets…
But to discuss the topic we are first required to discuss on-

1. What primarily are NBFCs?
2. When and why had they been introduced in the financial markets?
3. How has their performance been since the time they have been started and
what all major functions have they performed?
4. What significance do they have in the global context?
5. What has been the impact on the role-status of this sector? ;and most
importantly,
6. What roles are they expected to play in the future and especially in the
global market?
The last question again holds some doubts…like “if the role of the NBFCs will
diversify in the future or will it remain the same or will it be reduced as
compared to the present scenario?”
Another major question that arose in our mind was that “if the status and role of
the NBFCs would be widened or narrowed in future as per the global market
conditions?”
And lastly the question we have tried to address is that would the EXPECTED
MERGERS OF BANKS AND NBFCs AND THE ACQUISITIONS OF NBFCs
BY BANKS enlarge the NBFC sector or would it lead to a merger of the NBFCs
into banks and reduce the NBFCs to a mere sub-sector of the banking sector and
if it would be required to play only a petty role of supporter to the banks?
Our whole team of five people has tried to find answers to these questions which are
very crucial for the study of our project and hence, we will focus on all the above
mentioned sections one by one in our project.
INTRODUCTION TO NON-BANKING
FINANCIAL COMPANIES
(NBFCs)
As per books,
“A non-banking financial company (NBFC) is a company registered under the

Companies Act, 1956 and is engaged in the business of loans and advances,
acquisition of shares/stock/bonds/debentures/securities issued by government or
local authority or other securities of like marketable nature, leasing, hire-purchase,
insurance business, chit business, but does not include any institution whose
principal business is that of agriculture activity, industrial activity,
sale/purchase/construction of immovable property.”
A non-banking institution which is a company and which has its principal business of
receiving deposits under any scheme or arrangement or any other manner, or lending in
any manner is also a non-banking financial company (residuary non-banking company).
‘NBFC’ itself is defined under sec. 45-I(f) of the RBI Act,
"Non-banking financial company" means-
(i) a financial institution which is a company;

(ii) a non banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the rbi
bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.
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So in simpler and easily understandable terms we can say that the NBFCs as described by
RBI in points are-
• equipment leasing company;

• hire-purchase company;
• loan company;
• investment company.
But the NBFCs have been classified into EIGHT (8) major categories-
The above listed 8 kinds of NBFCs are as discussed below-
LOAN COMPANY- Loan company means a company which is a financial

institution carrying on as it’s principal business the providing of finance whether by
making loans or advances or otherwise for any activity other than its own but does
not include an equipment leasing company or a hire-purchase finance company.
HIRE-PURCHASE COMPANY- Hire purchase (frequently abbreviated to HP) is

the legal term for a contract developed in the United Kingdom.
In cases where a buyer cannot afford to pay the asked price for an item of property
as a lump sum but, can afford to pay a percentage as a deposit. A hire-purchase
contract allows the buyer to hire the goods for a monthly rent.
When sum equal to the original full price plus interest has been paid in equal
installments the buyer may then exercise an option to buy the goods at a
predetermined price (usually a nominal sum) or return the goods to the owner.
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INVESTMENT COMPANY- Investment Company is a company which is a
financial institution carrying on as its principal business the acquisition of
securities. Its main business is holding securities of other companies purely for
investment purposes.
The investment company invests money on behalf of its shareholders who in turn
share in the profits and losses.
MUTUAL FUNDS COMPANY- Mutual Benefit Financial Company means a

company which is a financial institution notified by The Central Government under
The Companies Act 1956.
A mutual fund is a professionally managed type of collective investment scheme in

which money is pooled from many investors and invests it in many kinds of
securities by a fund manager. Currently, the worldwide value of all mutual funds
totals more than $26 trillion.
Mutual funds can invest in many kinds of securities. The most common securities in
which the mutual funds invest the money of the investors are-Cash instruments,
Stock, Bonds, etc., but there are hundreds of sub-categories.
CHIT FUNDS COMPANY (Miscellaneous Non-Banking Financial Companies)-

CHIT means a transaction whether called chit, chit fund, chitty, kury or by any
other name or under which a person enters into an agreement with a specified
number of persons that every one of them shall subscribe a certain sum of money by
way of periodical installments over a definite period and that each such subscriber
shall, in his turn, as determined by lot or by auction or by tender or in such other
manner as may be specified in the chit agreement, be entitled to the prize amount.
The merits of these chit funds are that they act as good source of finance for all
sections of society, be it rich business class or even small traders or working class as
well. Moreover it is also a good means of savings for any contingency; and hence
serves all persons-whether the desire is for savings or for contingency or for some
expense.
RESIDUARY FINANCE COMPANY- Residuary Non-Banking Company is a class

of NBFC whose principal business is receipt of deposits, under any scheme or
arrangement or in any other manner and not being investment, asset financing,
Loan Company.
Investments as per directions of RBI, in addition to liquid assets. The functioning of

these companies is different from those of NBFCs in terms of method of
mobilization of deposits and requirement of deployment of depositors' funds.
Although it is true-no ceiling on raising of deposits by RNBCs. But every RNBC has
to ensure that the amounts deposited and investments made by the company are not
less that the aggregate amount of liabilities to the depositors.
HOUSING FINANCE COMPANY- Indian Real Estate-on its way to donning the
image of an organized industry-global standards-as fragmentation, disorganization,
poor governance and inefficient infrastructure; take a backseat. Much of the
positive zing lies in the significant rise in investment, not only from within India but
from offshore as well. Most financial institutions- home loans to both Indian and
NRI customers- floating and fixed rate of interest or blended ones- customized
packages- purposes of constructing/ buying a new house, vacant plot or extension
and even home improvement.
Housing Finance has accumulated expert experience spanning over 40 years in

construction/project finance with emphasis in multiple housing developments.
Products and services offered include- (A) Short-term construction loan of 4 to 6

months for construction of single dwelling units, (B) Short-term multiple
development construction loans and bridging loan facilities for a period of up to 24
months, (C) Long-term financing of a wide spectrum of commercial and residential
properties for rental, (D) Evaluation of construction projects proposals for project
concept, commercial, technical and financial viability, (E) Marketing support
through availing developer’s access to website link, display of properties in ultra
modern property point for wide reach.
EQUIPMENT LEASING- it means a company which is a financial institution

carrying on as its principal business, the activity of leasing of equipment.
Equipment Lease - An agreement that specifies the rights and obligations between a
lessor (who owns equipment) and a lessee (to whom the lease gives certain rights to
possess and use the equipment).
This avoids the need to invest capital in equipment. Ownership rests in the hands of
the financial institution or leasing company, while the business has the actual use of
it.
Example- obtaining the use of machinery, vehicles or other equipment on a rental

basis.
The most RECENT CATEGORISATION of the NBFCs by the RBI is as under-
NBFCs
AFC IC LC
AFC- ASSET FINANCING COMPANIES- Asset Financing Company is defined as an

entity whose principal business is financing of physical assets supporting productive
activities.
Principal business for this purpose is defined as aggregate of financing real or physical
assets supporting economic activity and income arising therefrom is not less than 60% of
its total assets and total income respectively.
IC- INVESTMENT COMPANIES- An investment company is a company whose main

business is holding securities of other companies purely for investment purposes.
The investment company invests money on behalf of its shareholders who in turn share in
the profits and losses. An investment company invests the money it receives from
investors on a collective basis, and each investor shares in the profits and losses in
proportion to the investor’s interest in the investment company.
The performance of the investment company will be based on (but it won’t be identical
to) the performance of the securities and other assets that the investment company owns.
LC- LOAN COMPANIES- Loan Companies (LC) means any company which is a
financial institution carrying on as its principal business the providing of finance whether
by making loans or advances or otherwise for any activity other than its own but does not
include an equipment leasing company or a hire-purchase finance company.
An industrial loan company (ILC) or industrial bank is a financial institution in the

United States that lends money, and may be owned by non-financial institutions.
PERFORMANCE OF NBFCs…
…then and now…!!!
Non-banking finance companies (NBFCs) have played an important role in the Indian
Financial system. Traditionally they have been the vehicle for financing individuals and
corporate who had some difficulty in obtaining bank funding. Earlier, Commercial banks
tended to stay away from retail and small-to-medium sized Corporate and the NBFCs
saw opportunity in this void and built dominant positions in automobile financing,
commercial vehicle financing, IPO funding and corporate leasing. Consequently, many
NBFCs set up large countrywide distribution networks-often as large as those of
consumer companies.
But to be specific, we can say that the JOURNEY OF NBFCs HAS BEEN FULL OF
UPS AND DOWNS.
INITIALLY- Easy access of funds from (i) capital market IPO and (ii) deposits from the
public resulted in the mushrooming of many NBFCs in the late eighties, early-to-mid
nineties.
• In 1981, there were 7,063 NBFCs.
• This number shot up to 24,009 in 1990, and
• By 1995, there were as many as 55,995 such companies.
From Apr-1991 to Mar-1997, the deposit base of the NBFCs grew at an average rate of
88.57% p.a. Prominent NBFCs at that time included Tata Finance, Sundaram Finance,
Ashok Leyland Finance, Gujarat Lease Finance etc.
BUT Reserve Bank of India (RBI) was to frame STRINGENT GUIDELINES in

1997-98; these literally choked the lifeline of most NBFCs i.e. their ability to raise
deposits.
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• Until as recently as 1997, non-banking finance companies (NBFCs) were
booming with over 42,000 registered firms managing public deposits of
Rs. 15,000 crore. However, stringent regulatory norms put in place by the Reserve
Bank of India (RBI) saw large-scale closure of these institutions since 1998.
The deposit base of NBFCs grew

rapidly in early-mid nineties
3000
DEPOSIT BASE
2500
YEAR YEAR
2000 DEPOSIT NO.
1500 BASE(Rs. In
1000 billions) 1 1988
500
2 1989
0 3 1990
1 2 3 4 5 6 7 8 4 1991
YEAR 5 1992
6 1993
7 1994
8 1995
• RBI's first attempts to rein in deposit taking NBFCs by asking them, in early1998,
to have their public deposit schemes rated by independent rating agencies such as
CRISIL and ICRA. It should be noted that during the 36-month period from
April'97 to March'00, Crisil downgraded 149 NBFCs due to their deteriorating
business and financial risk profiles and credit fundamentals.
• Shakeout in the NBFC sector appeared in the wake of the stipulation regarding
rating of their deposit schemes. Other regulatory stipulations, such as the one on
minimum net owned funds, also played a part. Inevitably the shakeout caused a
sharp fall in the number of NBFCs accepting public deposits.
• The number of registered NBFCs dropped from 1536 in Mar-99 to 996 in
Mar-00. As of March 2000, there were 996 NBFCs (excluding Residuary NBFCs
i.e. RNBCs) registered with the RBI with a collective asset base of
Rs. 400 billion. This was on account of a sharp fall in companies with an asset
base < Rs. 5 million where the number dropped from 1055 to just 177.
• The 996 NBFCs accepting public deposits came down to 577 by September
2004. Deposits of NBFCs declined from Rs. 6,500 crores in 2000-01 to Rs. 3,400
crores in 2003-04.
• Today, there are around 900 companies in the organised sector, including 10 big
players. Public deposits managed by the industry has shrunk to around Rs 3,000
crore, of which nearly 80% is in the hands of the big players and the balance with
small and medium companies.
• But the secular decline in interest rates witnessed in 2000-01 has benefited the
NBFCs. The increase in interest spreads was the key driver of the NBFCs'
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enhanced core profitability. Overall the interest spread increased by 118 basis
points for the 21 NBFCs between 2000-01 and 2002-03.
• The core profitability measured by the net profitability margin (NPM), more than
doubled to 1.90 per cent in 2002-03 from 0.77 per cent in 2000-01.
Banks have started looking at NBFCs as competitors and it is difficult to compete with
banks as they are flush with funds. They lend directly to customers for purchase of
trucks, cars, consumer durables, housing loans etc., at cheaper rate of interest.
Over the past two years, however, things have stabilised in the industry. Public
confidence is back. But the public is not willing to park its funds with NBFCs due to the
low rate of interest offered by them for deposits. Moreover, not many companies are
inviting deposits in a big way. They have opted for alternative sources to raise money at a
relatively low rate.
However, competition from banks will not affect big NBFCs which are currently... not
looking at converting themselves into banks. It will not affect the very small players
either as they have their captive customers.
 In 1996, the NBFI

sector accounted for
approximately $200
billion in transactions in
the United States.
 According to the World
Bank, approximately
30% of total assets
South Korea's financial
system was held in
NBFIs as of 1997.
PURPOSE OF CREATION…
…initial role planned for NBFCs.
A robust banking and financial sector is critical for activating the economy and
facilitating higher economic growth. And the role of NBFCs in the growth and
development of this sector has been historically acknowledged by several committees set
up by the Government and RBI, over the years. NBFCs, as an entity, play a very useful
role in channelising funds towards acquisition of commercial vehicles and consequently,
aid in the development of the road transport industry.
BANKS were the financial institutions that reached the major section of every country of
the world. Still there were some rural, under-privileged and under-served sections in each
of the nations and they needed some financial institutions who could cater to their needs.
Banks had a METRO-FOCUSSED approach and hence the UNDER-SERVED sections

needed special financial assistance.
For this purpose, NON-BANKING FINANCIAL SERVICES came into picture.
• The NBFCs or the Non-Banking Financial Companies constitute the financing

sector that could reach the areas and the niches which the banking sector could
not touch or the parts of the economy which were away from the reach of the
banks.
• Financial intermediaries especially NBFCs have a definite and very important role
in the financial sector, particularly in a developing economy like ours the role of
non-banking sector in both manufacturing and services sector is significant and
they play the role of an intermediary by facilitating the flow of credit to end
consumers particularly in transportation, SMEs and other unorganized sectors.
• Non-banking finance companies (NBFC) were created to operate mostly in
unorganized and under-serviced segments of the economy, thereby creating a
niche for themselves.
• In contrast to the banks, the NBFC business model is characterised by very close
customer interaction and relationship, a deep understanding of customer needs,
wider and specialized branch network, and low-cost infrastructure. So another
major reason for the creation of NBFCs is to maintain a close personal bond
between the companies and the customers, so that better provision of financial
services could be enabled.
• NBFCs due to their inherent strengths in the areas of fast and easy access to
market information for credit appraisal, a well-trained collection machinery, close
monitoring of individual borrowers & personalized attention to each client as well
as minimum overhead costs, are in a better position to cater to the smaller
segments. NBFCs serving segments of the population that are ignored by banks
are best adapted to withstand the growing competition that banks pose. Because
of their niche strengths, local knowledge, and presence in remote topographies,
these NBFCs are able to appraise and service non-bankable customer profiles and
ticket sizes. They are thus able to service segments of the population whose only
other source of funding would be moneylenders, often charging usurious rates of
interest.
• The role of NBFCs in creation of productive national assets can hardly be
undermined. This is more than evident from the fact that most of the developed
economies in the world have relied heavily on lease finance route in their
developmental process, e.g., lease penetration for asset creation in the US is as
high as 30% as against 3-4% in India.
NBFCs not only supplement the banks' role in disintermediation, they also further the
cause of financial inclusion. Therefore, unhesitatingly it’s correct to say that in India,
where even today, there are several credit starved and under-serviced segments in the
economy, the NBFCs have a definite long-term role.
So the purpose of creation of NBFCs can be summed up as-
• UNTOUCHED AREAS
• IMPORTANT ROLE TO BE PLAYED
• NEED OF BETTER FINANCIAL SERVICES
• UNDER-SERVICED SEGMENTS
WHY NBFCs? WHY NOT BANKS?
This section is to deal with the Question-

“IF BANKS WERE ALREADY EXISTING AND FLOURISHIRING IN THE
WORLD ECONOMY, THEN WHY WERE THE NBFCs CREATED BY RBI?”
This particular sub-head concentrates on what all special roles are the NBFCs playing
over BANKS, which can help the NBFCs to create a special zone for themselves and help
them in the diversification of their role if future. It can also be studied as the points of
difference between the two on certain basis.
To begin with, we can say that the Non-bank financial companies (NBFCs) are financial
institutions that provide banking services without meeting the legal definition of a bank,
i.e. one that does not hold a banking license.
These special reasons and the special roles assumed by the NBFCs are as discussed
below-
• Banks are the financial institutions that serve the basic purpose of accepting
deposits and giving loans. But in the present context, they are assuming more and
more roles and responsibilities… still there are some sections or niches which
haven’t been touched by the banks even after their commendably wide network
now. These sections had to be covered by some of the financial institution and
this role was taken up by the NBFCs or Non-Banking Financial Companies. They
performed the functions of serving the untouched and comparatively smaller
sections.
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• While banks (mostly private sector and foreign) have adopted a metro-focused
model in building their retail portfolios, NBFCs follow a multi-pronged strategy
aimed at widening reach in non-metro locations. Their focus is on financing
commercial vehicles and two-wheelers in such regions and their strong
relationships with customers and manufacturers have helped them garner strong
business volumes.
• Banks and NBFCs compete in providing certain financial services while NBFCs
specialise in certain products and services that receive little or much reduced
emphasis from the mainline banking system. These include hire purchase and
leasing, IPO funding, small ticket loans and venture capital. Unlike banks they do
not provide working capital by way of cash credits and cannot mobilise demand
deposits such as savings bank and current accounts.
• A sharp focus on financing commercial vehicles and two-wheelers, segments that
private and foreign banks are not too active in, has worked to the advantage of
these companies. There has been 30 per cent growth in these segments over the
last couple of years.
• High-yielding segments such as consumer durables, two-wheelers and pre-owned
CVs, where NBFCs have registered strong growth, still offer potential to grow.
Rural and semi-urban areas, which are largely under-banked, also offer substantial
scope for NBFCs to improve their business volumes.
• The difference between a bank and an NBFC has narrowed. Other than deposit
taking activity, the assets are largely similar. The NBFCs have an advantage in
management of risks and reach, I would say. Apart from this there is always the
adaptability to change, where the NBFCs are fast. Newer banks are also quite like
that.
• They have greater cost efficiency than banks. The world over, NBFCs (or
merchant banks/other non-banks) enjoy greater leeway on both the assets and
liabilities sides of their balance sheets than the tightly regulated banks. That gives
them greater flexibility in product selection and in pricing their services.
• Indian NBFCs have played a meaningful role during the last decade in making
high quality customer service available to a wide spectrum of retail customers.
NBFCs have a major role to play in delivering quality financial services to the
small enterprise segment and semi-urban India.
This clearly points to the fact that there was a strict need of the NBFCs even after the
existence of BANKS because all the sections could not be well entertained by them. And
hence NBFCs acted as a major server for that section.
Now to sum up this section, we would like to brief the points of NBFCs over BANKS as
under-
• HIGH QUALITY CUSTOMER SERVICE
• UNDER- SERVED AREAS
• NON-METRO FOCUSED MODEL
• COST EFFICIENCY WORLD-OVER
• HIGHER GROWTH PROSPECTS
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• AREAS UNTOUCHED BY BANKS
ROLES PLAYED BY NBFCs…...

…….in detail.
Talking of NBFCs and it’s future, we are first required to discuss in detail what are the
present roles that it is playing in the present financial market. This will help us to
understand what scope it do have in future and whether it would play a bigger role in the
future or would it be reduced to pettier role in the upcoming time.
So here we have tried to enlist all the roles of the NBFCs we came across and could
gather information about.
• To give an idea of the following points, we can say in a single sentence that the
role of NBFCs has become increasingly important from both the macro economic
perspective and the structure of the Indian financial system.
• Basically it would be very appropriate to say that the task of NBFCs starts and is
much more vital in the areas untouched by the BANKING SECTOR. The banks
don’t reach the under-developed sector due to their network constraint but in these
sectors NBFCs have found their strength.
• Other than this sector, there are some other sectors also where either the BANKS
are not very strong or do not exist at all. For example, NBFCs help in the direct
leasing of heavy vehicles like trucks,etc and this saves the companies from the
cumbersome project of acquiring loans from the banks and then go in for the
lease.
• Indian NBFCs have played a meaningful role during the last decade in making
high quality customer service available to a wide spectrum of retail customers.
NBFCs have a major role to play in delivering quality financial services to the
small enterprise segment and semi-urban India.
• A sharp focus on financing commercial vehicles and two-wheelers, segments that
private and foreign banks are not too active in, has worked to the advantage of
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these companies. There has been 30 per cent growth in these segments over the
last couple of years.
But to be very specific and clear, below mentioned is the list of some of the roles
provided or in other words services rendered by the NBFCs in the present context. This
list of activities done broadly includes all the roles been played by the NBFCs as of now.
Services Provided:
Non-bank institutions frequently acts as-
• Suppliers of loans and credit facilities,

• Supporting investments in property,
• Trading money market instruments
• Funding private education,
• Wealth management such as Managing portfolios of stocks and shares and
• Underwrite stock and shares, TFCs and other obligations
• Retirement planning
• Advise companies in merger and acquisition
• Prepare feasibility, market or industry studies for companies
• Discounting services e.g, discounting of instruments
Note that the list of activities provided above may include some roles even beyond
the spectrum of activities mentioned initially in the project but these roles have been
seen to be performed by the NBFCs at some point of time till the present day.
So the list of the roles performed by the NBFCs till date give us a brief idea about
what all sectors have been touched upon by them and would provide us a base to
study if the role of these NBFCs would diversify and increase in future or would it
decline to a petty status.
GLOBAL FINANCIAL MARKETS

ITS
PAST, PRESENT & FUTURE.
GLOBAL FINANCIAL MARKETS-

NBFCs IN THE GLOBAL CONTEXT
PRESENT CONTEXT: in the present day world and according to the needs of the
entire global markets, all the companies need to bring innovation in their activities
and make it a part of their business. Secondly, lower cost and better efficiency points
to the growth of trend of mergers globally.
EFFECT OF CRISIS: Notwithstanding the sub-prime mortgage crisis in the US

causing a temporary blip in the domestic financial sector in India, the domestic
banking sector is all set to achieve a growth rate of 25 to 30 per cent a year.
But considering the extraordinary resilience of Indian economy, it is quite sure our
financial sector will bounce back soon and achieve a growth rate of 25 per cent to 30
per cent per annum.
RETAIL’S EFFECT: In the emerging scene, the market for retail customers is
where all action is. Each kind of intermediary brings to the market a unique
advantage. The boom in retail financing over the last few years — largely a result of
consumer credit remaining an under-served area — has fuelled the rapid growth of
financial services companies. This clearly implies a growth prospect for the NBFCs
alike the other institutions of the financial sector.
POLICIES IN INDIA: With declining interest of the NBFCs in the public deposits ,
the Reserve Bank should look at the possibility of allowing only banks to take public
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deposits. “A time has perhaps come when we can now think of only allowing banks
to acquire public deposits.”
CONDITIONS FOR DEVELOPING WORLD: For a developing nation where

infrastructure creation has been presently accorded highest priority, leasing has
immense potential. More particularly in the case of small and medium enterprise
(SME) sector which accounts for the lion’s share of the entire economic activities in
our country, leasing offers tremendous advantages and hence needs to be promoted in
a big way.
NEED OF THE HOUR: The market for financial loans, howeveris not determined
solely by the cost of finance. Service -- which may be loosely described as the
convenience offered to the customer in terms of speed, and product features -- plays a
critical role in volume growth.
These aspects also do decide how and what all functions would the NBFCs would be
performing in the upcoming scenario.
NBFCs IN THE EMERGING SCENARIO

The present world signifies GLOBAL INTEGRATION. The performance of the
Companies in a single nation do affect the other nations as well.
So, in this emerging global scenario, it is very essential for us to have a look at the
NBFCs and its expected future.
To have an idea of this part of our project, we have divided the entire scope of our
idea into some parts:
• STATUS of NBFCs in the future.

• ROLES expected to be assumed by NBFCs in future.
The status again has to be studied in 2 parts-
• NBFCs in the NEAR FUTURE.

• NBFCs in the LONG RUN.
Prediction of the future of the NBFCs is based on three aspects-
• STUDY OF PAST.
• STUDY OF PRESENT.
• PREDICTION ABOUT FUTURE.
FUTURE SCOPE AND ROLE OF THE

NBFCs IN THE EMERGING FINANCIAL
MARKETS…
…A Detailed Study.
On studying the facts and figures about the trend of the performance and the roles
adopted by the NBFCs as well as on clearly having an idea of the predictions of the
future market conditions, we have come to the conclusion that although some can see
a bright future and a large number of new avenues for the NBFCs to grow and
flourish, still there are some others who believe the end or atleast the decline in the
role of this part of the financial services altogether.
So after studying all the aspects, we have come to a conclusion that if the NBFCs
would enlarge their role in the future, then there can be two possibilities-
1. Either the NBFCs would takeover the BANKING sector and would lead the
other financial institutions as well by assuming more and more roles.
2. Otherwise there could be another possibility that the NBFCs would merge
with or get converted into large BANKS and this could mean the reduction of
the NBFCs in the world and an automatic enlargement of the banking sector
globally.
The bottom line is that “the coming years will be testing ground for the NBFCs
and only those who will face the challenge and prove themselves will survive in
the long run.”
All banks are not ready to innovate and create products and services for the new
demand. This creates space for the NBFCs to flourish.
It is well known fact that NBFCs meet a significant share of credit demand from the
SME segment through products like factoring, equipment leasing, etc in most
developed economies.
Moreover, certain product segments are out of bounds for banks (e.g. operating
leases) and such regulatory arbitrages could be leveraged by NBFCs to create a
profitable franchise.
We are going to present this section of our project under the following sub-heads:
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1. Study on the basis of past.
2. Present scenario and predictions about NBFCs’ future.
3. Banks losing identity: gap between banks and NBFCs narrowing.
NBFCs IN THE PAST

STUDY AS PER THE PAST- the study on the basis of the past performance
and the roles assumed by the NBFCs helped us to have an accurate idea of how much
popular and efficient the NBFCs had been till now and past definitely sets the base
for the present and future and hence has enabled us to define its future in a more
confident and better way.
We have made the use of a tool to study the performance of the NBFCs called the
TOTAL SHAREHOLDER RETURN(TSR).
For 3 different periods the statistics for the TSR for the NBFCs and BANKS has been
shown below which clearly indicates the growth prospects of the NBFCs in future:
• TSR for 2003-08(%)-
1. PSU BANKS-42
2. PRIVATE SECTOR BANKS-45.5(average)
3. NBFCs-85
• TSR for 2005-08(%)-
1. PSU BANKS-21
3. NBFCs-83
• TSR for 2007-2008(%)-
1. PSU BANKS-47
3. NBFCs-83
TSR depicts the growth and profitability of the concern and here as clearly visible,
the NBFC sector has delivered much more growth than the other institutions of the
financial sector.
GENERAL COMMENTS- Studying the last few years in the RETAIL

FINANCING there has been a boom which is largely because consumer credit has
been an under-served area and this has led to the NBFCs greatly benefiting from it.
Moreover it has also withstood the strong competition from the banks in their chosen
niche areas.
1
OTHER SIDE OF COIN- However, studying other tools like AGGREGATE
INCOME , NET PROFITS, PAT TO TOTAL INCOME RATIO, we get a totally
opposite picture.
• The return on the total income of 383 NBFCs decreased during the period
between APRIL and JUNE 2008.
• Moreover, the combined net profits of the 383 NBFCs have increased only
11.2% to Rs.2533 crore, resulting a decrease in return to total income from
22.35% in APRIL-JUNE2007 to 20.36% in APRIL-JUNE2008.
THIS part do give us a negative indication and is a clear pointer to the fact that in the
times of depression recently, the performance and the popularity of the NBFCs has
fallen visibly. The last couple of years have seen significant developments in the
financial sector that have raised competition across-the-board. Non-banking finance
companies (NBFCs) have perhaps felt the pressure most.
NBFCs are now struggling hard to find reasons for continued existence,
strategies for such existence and business areas for growth and earnings.
Consequently, top-rung NBFCs are changing tack, and initiating moves to become
financial supermarkets. They are seeking to provide as many services as possible, and
their fate will be decided by how successful they are.
Given such a situation,
• NBFCs must realize the plain fact that a certain amount of market share and
size or a "critical mass" is vital for sheer survival.
• The NBFCs, in the next couple of years, will be faced with the relentless logic
of Darwinism. A process of elimination is certain.
• But a financial intermediary cannot be closed down like a cement plant or a
soap factory as they have a set of financial claims both inward and outward
with differing maturities and risks. So the most practical method would be
consolidation by mergers.
• World over, troubled banks and non- banks have been bailed out by the
mergers and acquisition route.
But before discussing what can be the effects of these mergers of NBFCs with banks,
we would first like to bring to light the views of different renowned business
personalities and the organizations regarding the future of NBFCs.
NBFCs IN THE NEAR FUTURE

The near future of the NBFCs has been discussed under this section with the help
of the predictions of the experts in this field:
• A.C. SHAH-
“A shakeout in the non-banking finance sector is likely in the near future.”

The public is not willing to park its funds with NBFCs due to the low rate of
interest offered by them for deposits.
He said NBFCs played a complementary role to the banking sector by filling

up gaps in the demand for credit and mobilizing the savings of the
community. ``After the CRB scam the NBFCs are at cross roads. The most
critical problem confronting the industry was liquidity. Deposits have
disappeared, rate of renewal has fallen drastically and premature withdrawals
have been heavy. Over the past two years, however, things have stabilized in
the industry.
• Credit Rating and Information Services of India Ltd (CRISIL)-
“Concern over the weak financial fundamentals of non-banking finance

companies (NBFCs).”
• ROOPA KUDVA, managing director and chief executive officer,

Crisil-
“The decline in business volume will mean a further marginalisation of the

sector, a trend that has been accelerating over the past few years as banks have
taken over the traditional NBFC stronghold of retail lending.”
However, the decline in business volume would mean a further

marginalization of the sector, a trend that has been accelerating over the past
few years as banks had taken over the traditional NBFC stronghold of retail
lending, she said.
• RBI-
“The NBFCs have been declared to be the weakest link in the entire financial
services sector.”
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This report has been presented by the RBI and says so because the banks have
been flourishing and are very strong in the aspect of the funds.
• HEMANT KANORIA, CMD, SREI Infrastructure Finance Ltd-
“Over the last 3-4 months, it had become extremely difficult for NBFCs to
raise money in the domestic market. We have been awaiting the government’s
and the RBI’s approval for access to the ECB market. The move will boost the
confidence of NBFCs as raising money in international markets will be easier
and long-term capital requirements will now be taken care of.”
• R RAVI, executive director of the Mumbai-based Alpic Finance-
“The future belongs to strong financial service factories.” Being a major

player in the Indian NBFC sector, his views on NBFCs and their business
plans are refreshing at best. NBFCs have certain disadvantages vis-à-vis banks
when it comes to sourcing and deploying of funds.
NBFCs do not have access to the short-term settlement mechanism and the
liquidity management system.
• R. VAIDYANATH-
“NBFCs — creditable but unrecognized role.” In a large country like India

with substantial service sector activity, it is important that the role played by
NBFCs in credit provision is recognised. They have an extensive network and
credibility among their constituents, both borrowers and lenders. In fact, for
the unorganised sector they are the source of finance. But they are being given
the short-shrift.
SOME other general facts about the recent performance of the NBFCs are as
under-
• Banks have started looking at NBFCs as competitors. However,

competition from banks will not affect big NBFCs which are currently...
not looking at converting themselves into banks.
• Pre-owned (second-hand) vehicle financing, where banks have been
largely inactive, also offers huge potential.Retail finance, which has seen a
significant spurt over the last three-four years, is expected to grow, albeit
at a moderate pace. High-yielding segments such as consumer durables,
1
two-wheelers and pre-owned CVs, where NBFCs have registered strong
growth, still offer potential to grow.
• Banks and NBFCs compete in providing certain financial services while
NBFCs specialise in certain products and services that receive little or
much reduced emphasis from the mainline banking system.
• In 2003, the public deposits with the NBFCs totalled Rs 20,000 crore (less
than 2 per cent of that with scheduled Commercial banks). Of this, 75 per
cent or Rs 15, 000 crore was with five Residuary Non-Banking Financial
Companies (RNBCs) such as Sahara (RBI's Trend and Progress of
Banking 2003-2004). This creates a problem of the residuary finance
companies occupying major proportion of the NBFCs leaving lesser scope
for other kinds of NBFCs.
Now after the recent future, we are required to give an eye to what would be
the future of the NBFCs in the long run.
NBFCs IN THE LONG RUN

In the long run it is being speculated that there is happening a merger between
BANKS and NBFCs on the overall global front. So the mergers already
occurred set a base for the fact that the NBFCs, if declining in status, do
consider the idea of merging with a strong BANK and even if they become
bigger in status, they still do consider the idea of getting converting into
BANKS.
Hence the LONG TERM FUTURE OF THE NBFCs can be expressed in the
following way-
 A merger between BANKS and NBFCs on the overall global front.

 NBFCs would convert into BANKS.
1
This brings us to the next part of our project, i.e.
1. IF THE MERGERS AND CONVERSION OF NBFCs INTO BANKS

WOULD LEAD TO ENLARGEMENT OF THE NON-BANKING
FINANCIAL COMPANIES?
2. OR, WOULD IT CAUSE THE NBFCs TO BECOME JUST A
SMALL SECTOR TO THE BANKING INDUSTRY?
It is very clear that the gap between the banks and NBFCs has been narrowing
nearly. . Other than deposit taking activity, the assets are largely similar. The
NBFCs have an advantage in management of risks and reach, I would say.
Apart from this there is always the adaptability to change, where the NBFCs
are fast. Newer banks are also quite like that.
In the long-term, the gap between banks and NBFCs will narrow. In which
case a different breed of NBFCs will emerge.
For instance, a much focused entity catering to a small area.
Some NBFCs have converted themselves into banks, while others have
merged into banks. Given this scenario, does CRISIL foresee NBFCs as
having a role to play in the Indian financial system over the medium to
long term? Will there be any NBFCs left in the country in a few years?
These would also help us to know what all roles would be conferred upon the
NBFCs in the future as per their status in the emerging financial sector. The
present state of affairs is as discussed below in brief-
• The market shares of non-banking finance companies (NBFCs) have been

shrinking steadily in a number of the businesses they are engaged in; banks
have been growing steadily in these segments. Some NBFCs have converted
themselves into banks, while others have merged into banks.
• Partnerships with banks can take a variety of forms. Some NBFCs will
become originating agents working for a fee, like DSAs, but others are likely
to have more substantial partnerships with banks. Such a partnership could,
for instance, involve the NBFC performing credit appraisals, and sharing
credit risk on assets that it has originated and sold to its partner bank. The
success of this business model will depend critically on the NBFCs ability to
assess the risks involved in the exposures it originates.
Some leading NBFCs have also metamorphosed into banks: Ashok Leyland
Finance Ltd, for instance, merged into IndusInd Bank Ltd, and Kotak
Mahindra Finance Ltd converted into Kotak Mahindra Bank Ltd.
1
Now the question before us is whether the NBFCs, which have traditionally
dominated the market of retail finance (like bill discounting, ICDs
financing and the car finance business), can meet the challenges of the
future?
If yes, then how?
And the answer to this question would be that “In the changed scenario, cost
of funds and ability to capitalize at regular intervals are key factors for
NBFCs to sustain good asset quality, maintain reasonable return and
defend market position.”
ANALYSIS OF FUTURE ROLES.

Under this section, we have tried to answer the most crucial question of our
project, i.e., WHAT WOULD BE THE ROLE OF NBFCs IN THE
EMERGING FINANCIAL MARKETS?
Traditionally, the NBFCs have dominated the market for retail finance. Their
forte has been credit delivery to areas not covered by banks and FIs. Thus,
NBFCs are perhaps better acquainted and more sensitive to the latent needs of
the retail customer. With such new areas as insurance being opened up, top-
rung NBFCs are presented with an opportunity to grow.
Moreover, as traditional boundaries between different categories of financial

intermediaries are disappearing, NBFCs have to face stiff competition in retail
financing specially from banks and FIs. And in the future it can also mean that
NBFCs should move into the forte of financial intermediaries (i.e. working
capital loans and term lending) which might even reduce their present role.
There have been occurring mergers between the NBFCs and BANKS but
apart from mergers, other options waiting for NBFCs are to change the tracks
and explore new areas. They have to extend their product portfolio to include
asset management companies, housing finance firms and to venture into
newly opened insurance sector for private participation.
• There are some examples for this-
1. Firstly, the Launch of associate company of Sundaram Finance to disburse

housing loans, which has been the domain of HDFC and LIC Housing
Finance.
2. And the other major examples are entry of Kotak Mahindra Finance
Limited, Sundaram Finance and Lakshmi General Finance into the
insurance business.
3. In the medium term most NBFCs are looking at developing niche areas and
concentrating on fee based income to offset the loss in fund based
activities.
4. The move of Ashok Leyland Finance to launch a finance portal that would
be used to sell products of other financial intermediaries and to use
its skill in collection to derive a pure service income.
• Another new area which can be explored by NBFCs is the Internet. Recently
the Morgan Stanley Dean Witter Internet research emphasized that Web is more
important for retail financial services than for many other industries. Web based
services involve use of Internet for delivery of financial products & services. The
Internet has leveled the playing field and afforded open access to customers in the
global marketplace. Internet financing could be a cost-effective delivery
channel for NBFCs.
• Retail finance, which has seen a significant spurt over the last three-four years,
is expected to grow, albeit at a moderate pace. While cyclical factors may play
out, the structural drivers of the retail boom are expected to remain intact, lending
a favourable outlook to the mortgage market.
• High-yielding segments such as consumer durables, two-wheelers and pre-

owned CVs, where NBFCs have registered strong growth, still offer potential to
grow.
For example- The opportunity for pre-owned truck financing is estimated at Rs

40,000 crore over the next 10 years; this can also be understood as an indication
1
of the growth of NBFCs in the future and can even serve to be the strength of the
NBFCs.
• Rural and semi-urban areas, which are largely under-banked, also offer
substantial scope for NBFCs to improve their business volumes. NBFCs, with a
wider reach in locations where banks with a more `heavy cost' structure have left
a gap, are well placed to service this largely under-penetrated market. Their
operating costs (barring funding costs) and staff costs are more competitive than
other organized intermediaries.
• For NBFCs, areas such as personal loans and credit cards hold a lot of
promise owing to their limited exposure so far. With the consumption story fast
gathering pace, volumes in these sectors can only be expected to rise.
• One noticeable role that the NBFCs can assume in the future and has started
taking shape is that the NBFCs that are subsidiaries of banks are permitted to
offer discretionary portfolio management services on a case-by-case basis.
This means that even those NBFCs which do not have a big status are also
gaining more roles and higher status even after being under the BANKS.
With their unique strengths, the stronger NBFCs will complement banks, as
innovators and partners.
• As innovators, these NBFCs will identify new businesses, or new ways of doing
traditional businesses; they will build business models that will gradually attain
stability, and create markets before the banks step in.
• As partners, they will combine their origination strengths with the banks' funding
strengths, so that the delivery and penetration of financial services is enhanced
considerably across the country.
After discussing the general expected roles that the NBFCs can assume in the
upcoming financial markets, we would also like to throw light on what the different
NBFCs are planning about their future prospects and most importantly future roles.
FUTURE
PROSPECTS OF
SOME
COMPANIES…
…in the words of the company
representatives.
FUTURE PROSPECTS…
We have tried to obtain a glimpse of the future prospects of several different well-
known financial services’ companies because these future plans of the below listed
companies would enable us to have an idea of what can be the future roles that can be
assumed by all the NBFCs in general.
The future prospects of some of those companies are discussed in brief, as under-
COMPANY 1.
FUTURE CAPITAL
Future Capital is the financial arm of Future Group. It is a financial service provider
of the country.
In the future it has planned to start rolling out Money Bazaars across the country.
This would be a ONE-STOP-FINANCIAL-SHOPS for a providing a variety of

financial products and services like-
• Housing loans
• Personal loans
• Insurance
• MFs, &
• Credit cards.
Hence, it has tried to enter other segments of the financial services, rather than only
the regular financial products.
COMPANY 2.
ASHOK LEYLAND FINANCE

Traditionally, ALF has depended on commercial vehicle financing for a significant
proportion of its revenue.
However, recently the company initiated steps to broadbase its revenue stream by
entering new areas of finance.
• The other segment they are concentrating on is passenger cars.

• The other segment they have is multi-utility vehicles (MUVs). It is
more or less on the pattern of commercial vehicles vis-à-vis risk. There we
certainly have considerable scope.
• The other segment is construction equipment as it will take time for
others to get in.
• They are also at an advanced stage of developing a loan portal by which
they will have the capability to distribute loan products of other
intermediaries. The move of Ashok Leyland Finance to launch a finance
portal that would be used to sell products of other financial intermediaries
and to use its skill in collection to derive a pure service income.
1
COMPANY 3.
RELIANCE CAPITAL
Reliance Capital is an arm of the Anil Dhirubhai Ambani Group.
It has got the future plans as under-
• It will set up a separate housing financial subsidiary and non-banking

financial company (NBFC) for the consumer finance sector.
Ambani said his company is also planning to selectively expand its-
• asset management
• life insurance, &
• broking operations.
It has planned to proceed on with these above mentioned activities in the

following countries-
• Asia
• Africa &
• the Middle East.
OTHERS-
Another is the case of ABN AMRO BANK.
As per the country executive of ABN AMRO, India, Ms. Meera Sanyal-
“ABN Amro Bank will use its NBFC to complement its retail
distribution business.”
This implies that the bank has given a completely new role to its NBFC of
providing a support to its retail distribution business.
After studying all these examples, we got an idea of what all roles can the NBFCs be
presumed to take in the future and how much can they diversify from their old traditional
roles in the future.
FINAL WORDS…
The future of the Non-Banking Financial Companies would
depend largely on their performance in the present slowdown. It
will be a deciding factor for their future scope and role in the
emerging global financial markets.
In the PRESENT SCENARIO, it is very essential for them to

come up with best of customer services round-the-world because
this is the basic strength of this sector.
They need to explore all possible opportunities but also need to

strengthen their BASICS too!!!
GLOSSARY

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NBFCs and their ROLE in the EMERGING GLOBAL FINANCIAL MARKETS

STUDIES SHAHEED SUKHDEV COLLEGE OF BUSINESS.

RICHA SHARMA (15901)

BACHELOR OF FINANCIAL AND INVESTMENT

UNDER THE SUPERVISION OF

S.NO. TOPIC PAGE NO.

But to discuss the topic we are first required to discuss on-

“A non-banking financial company (NBFC) is a company registered under the

‘NBFC’ itself is defined under sec. 45-I(f) of the RBI Act,

"Non-banking financial company" means-

(i) a financial institution which is a company;

• equipment leasing company;

The above listed 8 kinds of NBFCs are as discussed below-

LOAN COMPANY- Loan company means a company which is a financial

HIRE-PURCHASE COMPANY- Hire purchase (frequently abbreviated to HP) is

MUTUAL FUNDS COMPANY- Mutual Benefit Financial Company means a

A mutual fund is a professionally managed type of collective investment scheme in

CHIT FUNDS COMPANY (Miscellaneous Non-Banking Financial Companies)-

RESIDUARY FINANCE COMPANY- Residuary Non-Banking Company is a class

Investments as per directions of RBI, in addition to liquid assets. The functioning of

Housing Finance has accumulated expert experience spanning over 40 years in

Products and services offered include- (A) Short-term construction loan of 4 to 6

EQUIPMENT LEASING- it means a company which is a financial institution

Example- obtaining the use of machinery, vehicles or other equipment on a rental

The most RECENT CATEGORISATION of the NBFCs by the RBI is as under-

AFC- ASSET FINANCING COMPANIES- Asset Financing Company is defined as an

IC- INVESTMENT COMPANIES- An investment company is a company whose main

An industrial loan company (ILC) or industrial bank is a financial institution in the

BUT Reserve Bank of India (RBI) was to frame STRINGENT GUIDELINES in

The deposit base of NBFCs grew

 In 1996, the NBFI

Banks had a METRO-FOCUSSED approach and hence the UNDER-SERVED sections

For this purpose, NON-BANKING FINANCIAL SERVICES came into picture.

• The NBFCs or the Non-Banking Financial Companies constitute the financing

So the purpose of creation of NBFCs can be summed up as-

WHY NBFCs? WHY NOT BANKS?

This section is to deal with the Question-

ROLES PLAYED BY NBFCs…...

Non-bank institutions frequently acts as-

• Suppliers of loans and credit facilities,

GLOBAL FINANCIAL MARKETS

PAST, PRESENT & FUTURE.

GLOBAL FINANCIAL MARKETS-

NBFCs IN THE GLOBAL CONTEXT

EFFECT OF CRISIS: Notwithstanding the sub-prime mortgage crisis in the US

CONDITIONS FOR DEVELOPING WORLD: For a developing nation where

NBFCs IN THE EMERGING SCENARIO

• STATUS of NBFCs in the future.

The status again has to be studied in 2 parts-

• NBFCs in the NEAR FUTURE.

Prediction of the future of the NBFCs is based on three aspects-

FUTURE SCOPE AND ROLE OF THE

NBFCs IN THE PAST

• TSR for 2003-08(%)-

• TSR for 2005-08(%)-

• TSR for 2007-2008(%)-

GENERAL COMMENTS- Studying the last few years in the RETAIL

Given such a situation,

NBFCs IN THE NEAR FUTURE

“A shakeout in the non-banking finance sector is likely in the near future.”

He said NBFCs played a complementary role to the banking sector by filling

• Credit Rating and Information Services of India Ltd (CRISIL)-

“Concern over the weak financial fundamentals of non-banking finance