A Comparative Study of NBFC in India
Executive summary:
The study presents a comparative study of NBFC’s in India. There are almost 13000 registeredNBFC’s in India. The study is aimed to provide an holistic view of the NBFC Industry. NBFC fulfills the financial gap by providing loan at a lower rate of interest. The major players of each field1) Housing Finance Industry: LIC Housing Finance.2) Infrastructure Finance Industry: IDFC3) Asset Financing: Shriram Transport Finance4) Composite: Reliance CapitalThe study also compared the Indian Banks v/s NBFC. It was found that at even at the time of theeconomic slowdown NBFC was more profitable. Porters Five forces was also used to analyse theindustry and to find the competitiveness in the industry. The industry is not tightly regulated asthere are many regulatory bodies. Hence, there was an important need to study the NBFC as theindustry plays an important role in the financial Services market of INDIA. It is encouraging that the NBFC sector‘s importance is finally being acknowledged across FS market constituents as well as the regulator. However, the importance attached to the sector isoften transcending into misplaced exuberance. Over simplified and vague drivers for
NBFCvaluations such as strategic fit and customer base, can never substitute dispassionate businessanalytics. A rational assessment of the intrinsic values of NBFCs factoring issues such as pastperformance, structural weaknesses of the sector (for instance funding disadvantages), alongwith an identification of real capabilities are essential to ensure that the equilibrium betweenprice paid and value realized is reached to the extent possible. In the absence of this, India issure to witness the re-opening of the NBFC horror story albeit with a new chapter on theerosion of NBFC investment values affecting investors across categories
Introduction
A
Non-Banking
Financial
Company (NBFC)
is a company
registered
under
the
CompaniesAct, 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 othersecurities of like marketable nature, leasing, hire-purchase, insurance business, chit businessbut 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 deposit sunder any scheme or arrangement or any other manner, or lending in any manner is also anon-banking financial company (Residuary non-banking company).NBFCs are doing functions akin to that of banks; however there are a few differences:(i)an NBFC cannot accept demand deposits;(ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and(iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks. 1.1 TYPES OF NBFC’S
Originally,
NBFCs
registered
with
RBI
were
classified
as:
(i)equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company. However, with effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as (i)
Asset Finance Company (AFC
(ii)
)(ii) Investment Company (IC)
(iii)
(iii) Loan Company (LC)
1.2 REGULATIONS OF NBFC’
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 regulatedby 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 45I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh(raised to Rs 200 lakh w.e.f April 21, 1999).The company is required to submit its application online by accessing RBI‘s secured website https://secweb.rbi.org.in/COSMOS/rbilogin.do (the applicant companies donot 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 thedata and upload the application form. The company may note to indicate the name of the correct Regional Office in the field ―C 8‖ of the ―Annx
Identification Particulars‖ worksheet of the Excel application form. The company would then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the application form (indicating the Company Application Reference Number of its on-line application), along with the supporting documents, to the concerned Regional Office. The company can then check the statusof 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
RESPONSIBILITIES
The NBFCs accepting public deposits should furnish to RBI
Audited balance sheet of each financial year and an audited profit and loss account inrespect of that year as passed in the annual general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors; ii. Statutory Annual Return on deposits - NBS 1;
ii i. Certificate from the Auditors that the company is in a position to repay the deposit as and when the claims arise;
iv. Quarterly Return on liquid assets;
v. Half -yearly Return on prudential norms;
vi. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore andabove or with assets of Rs. 100 crore and above irrespective of the size of deposits ;
vi i .Monthly return on exposure to capital market by companies having public depositsof Rs. 50 crore and above; and
viii. A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms as at (v).
CURRENT SCENARIO
Nearly 11 years after the last of the two banking licences were issued by RBI to private sectorentities, the government has again started the process of allowing the better-managed non-banking finance companies (NBFCs) to graduate to full-fledged banks. FM Pranab Mukherjee‘s Budget proposal on Friday was
the first step towards the same.The second step will be enacted on Tuesday morning. A select group of officials from topNBFCs, under the aegis of the Finance Industry Development Council (FIDC), the trade bodyfor NBFCs in India, are meeting R Gopalan, the banking secretary in the finance ministry, to present a case for select NBFCs to be converted into fullfledged banks, sources said. About12-15 NBFCs and corporate houses having presence in the financial sector are expected to join the race to float a bank. The finance minister is convinced that there is a huge need for low-cost financing at the semiurban and rural areas in India,‘‘ said a industry source. The financial services industry believes the Budget proposal was a reflection of the same. In the finance ministry things are moving in the right direction and the banking secretary‘s meeting proves the same,‘‘ said the source. FIDC office bearers could not be contacted during the extended weekend. RESEARCH DESIGN
Since the research is for industry analysis and it is structured for NBFC‘S. The research uses secondary data for analysis and interpretation. 3.2 OBJECTIVE
The confined objectives of the present study are; To analyse the market of NBFC‘s in India To study the financials of NBFC‘s 3.3 SCOPE OF THE STUDY
The study was limited to the Financial Service market of India which included NBFC‘s mainly from the . The study was completed within the time frame of 60 days(2 months)starting from 1st April, 2010 and ending on 1st June, 2010. The target group of the study were the NBFC‘s. 3.4 DATA COLLECTION
There are two methods of data collection that can be considered when collecting data forresearch purpose. These data collection types include the following: 1.Primary data 2.Secondary data Both the secondary and primary data collection methods were used in the study. 3.4.1 PRIMARY DATA
The primary data required for this study was collected by visiting the financial services and analysing the information provided by them. 3.4.2 SECONDARY DATA
The secondary data for the research was collected from journals, research articles, books and internet websites, annual reports etc. The source of the secondary data was British Library, NBFC‘s and Internet. Secondary data was the main source in formulating the constructs of ― A comparative study of NBFC‘s in India.
3.5 FIELD WORK PLAN
The study was conducted in New Delhi (NCR and Bangalore visiting different institutions and analysing the different NBFC‘s work. LIC HOUSING FINANCE 4.1.1 Housing Finance Industry
India‘s housing finance industry comprises of banks and housing finance companies. They
have contributed to new residential home loans at a compounded annual growth rate (CAGR)of more than 30 percent during the period 2002-2007. This has been due to the combined effect of a booming economy and low interest rates. Further, steady prices and continuation of tax concessions to self-occupied residential home borrowers are contributors to the growth of the industry. The average age of borrowers has declined over the years, while the number of double income households has grown significantly enabling them to borrow higher loan amount due to higher repaying capacity. The scenario of unprecedented growth in housing finance, driven by low interest rates, increasing purchasing power and attraction of the yield in this sector has begun to show signs of change last year. There has been a decrease in demand during the last one year. Earlier to that i.e., during 2006 to 2007 home prices increased at a CAGR of 30 to 40 percent against a 20 percent increment in salaries witnessed in metros and large cities. This had affected the buyer‘s affordability. As the borrowing cost for banks and housing finance companies steadily increased in line with rising interest rates in the economy in the past two years up to Q3 of 2008-09, banks and housing finance companies resorted to hike in interest rates so as to maintain their interest spreads. Interest rates on new home loan originations have increased significantly by 200basis points during April 2008 to September October‘ 2008. As a result a higher proportion of monthly income was being paid out as home loan equated monthly installments (EMI).The combined effect of an increase in property prices and interest rates has meant that home loan buyers, who would have had to borrow less at an interest rate of 8.75 percent a year ago, now have to borrow more to buy the same property due to higher property prices at higher interest rates of 10.5 to 11 percent. This trend has resulted in both lower affordability
i.e., an average home at a higher multiple of annual income, and higher debt burden (meaning that a larger proportion of income gets spent as home loan EMI). Further, the increase in interest rates on fresh loans to 10.5 to 11 percent from 8.75 percent meant increase in debt burden i.e., higher instalment to income ratio. Along with, the economic down turn and consequential apprehensions of job insecurity and income reduction led to slump in the market. However the scenario has taken the reverse turn in the last quarter of the financial year 2008-09, which was evident from the higher booking of flats, and sharp increase in the disbursements. Real estate developers have taken sensible decision in reducing or slashing rates in major centres specially Mumbai, Thane, Navi Mumbai, Delhi NCR and Bangalore to en cash on the existing demand in the real estate market. The good deals might be offered for a few weeks or for the first ten properties or for a killer deal for a time-bound two days or similar schemes but yes, the writing is clear on the wall that the willingness to connect with the ―real pricing has dawned on the developers to sell at reduced prices to encourage more and more sales. The sales teams in the builder/ developer offices are at their all-time creative best with sales tactics. They now understand clearly that with buyers unwilling to relent on unrealistic pricing, there is an even greater need to price competitively, maybe with a lower profit margin, than holding on to the price and project as the interest meter runs. These proactive steps should ensure renewed demands and increased volumes during the current year. The Indian economy, which was on a robust growth path up to 2007-08, averaging at 8.9 percent during the period 2003-04 to 2007-08, witnessed moderation in 2008-09, with the deceleration turning out to be somewhat sharper in the third quarter. Industrial growth experienced a significant downturn and the loss of growth momentum was evident in all categories, viz., the basic, capital, intermediate and consumer goods. However, the fiscal stimulus packages of the Government and the monetary easing of the Reserve Bank will, however, arrest the moderation in growth and revive consumption and investment demand, though with some lag, in the months ahead. Furthermore, prospects of the agricultural sector also remain bright, and this will continue to support the rural demand. Finally, in the wake of expected improvement in agricultural production as well as low international commodity prices, inflationary pressures are also anticipated to remain at a low level through the greater part of the 2009-10. 4.1.2 Indian Housing Finance scenario
India‘s housing finance industry comprises of banks and housing finance companies. They
have contributed to new residential home loans at a compounded annual growth rate (CAGR)of more than 30 percent during the period 2002-2007. The scenario of unprecedented
growth in housing finance, driven by low interest rates and booming economy, has begun to show signs of change last year. There has been a decrease in home prices during the last one year Earlier to that i.e., 2006 to 2008 home prices increased at a CAGR of 30 to 40 percent again to 20 percent increment in salaries witnessed in metros and larger cities. This had affected the buyer‘s affordability. The average home buyer spent around 4 times his net annual income
for purchasing a new residential home in the 3-4 years till March 2005. (source CRISIL report 19th February, 2009) As the borrowing cost for banks and housing finance companies steadily increased in line with rising interest rates in the economy in the past two years upto September‘ 2008, banks and housing finance companies resorted to hike in interest rates so as
to maintain their interest spreads. Interest rates on new home loan originations had increased significantly by 200 basis points during April‗ 2008 to August September‘ 2008. As a result a higher proportion of monthly incomes was paid as home loan equated monthly instalments(EMI). But, the scenario has taken the reverse turn in the last quarter of the financial year2008-09 which was evident from the higher booking of flats and sharp increase in the disbursements. As interest rates are heading southward, public sector banks have set the pace. Housing finance companies would follow the suit. It may be mentioned here that with the decline in interest rates, LIC Housing Finance has passed on 150 basis points rate cut to the customers i.e. 75 basis points each on 1st January, 2009 and 1st April, 2009. Our interest rates are among the lowest in the industry. This has helped our company in retaining customers and maintaining high growth rates even in tough conditions. And interest rate is just one of the factors. Transparency, hassle-free services, property prices and buyer‘s repayment capacity are equally important. The customer would not arrive at a decision solely based on the reduction in interest rates for one year. LIC Housing Finance is one of the best players in the industry in terms of EMI as our company has no hidden costs. 4.1.3 LIC Housing Finance
LIC Housing Finance Ltd. is one of the largest Housing Finance Company in India. Incorporated on 19th June 1989 under the Companies Act, 1956, the company was promoted by LIC of India and went public in the year 1994. The Company launched its maiden GDR issue in 2004. The Authorized Capital of the Company is Rs.1500 Million (Rs.150 Crores) and its paid up Capital is Rs.850 Millions (Rs.85 Crores). The Company is recognized by National Housing Bank and listed on the National Stock Exchange (NSE) & Bombay
Stock Exchange Limited (BSE) and its shares are traded only in Demat format. The GDR's are listed on the Luxembourg Stock Exchange. The main objective of the Company is providing long term finance to individuals for purchase / construction / repair and renovation of new / existing flats / houses. The Company also provides finance on existing property for business / personal needs and gives loans to professionals for purchase / construction of Clinics / Nursing Homes / Diagnostic Centres / Office Space and also for purchase of equipment. The Company possesses one of the industry's most extensive marketing network in India :Registered and Corporate Office at Mumbai, 6 Regional Offices, 13 Back Offices and 158marketing units across India. In addition the company has appointed over 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777 Customer Relationship Associates(CRAs) to extend its marketing reach. Back Offices spread across the country conduct the credit appraisal and administrative functions. The Company has set up a Representative Office in Dubai and Kuwait to cater to the Non-Resident Indians in the GLCC countries covering Bahrain, Dubai, Kuwait, Qatar and Saudi Arabia. Today the Company has a proud group of over 10,00,000 prudent house owners who have enjoyed the Company's financial assistance. Profile & Progress
Provides loans for homes, construction activities, and corporate housing schemes. Around 91% of the loan portfolio derived from the retail segment and the rest fromlarge corporate clients Formed three new wholly owned subsidiaries in 2007-08 to promote marketing of financial products and venture capital fund Rated AAA‘ by CRISIL for the 8th consecutive time in 2008-09; maiden Fixed Deposit program received an FAAA/stable rating by CRISIL. An offshoot of Life Insurance Corporation of India (LIC), incorporate in 1989. Registered & Corporate Office at Mumbai with 6 regional offices, 13 Back Offices and 130 marketing units across the country .1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777Customer Relationship Associates (CRAs) comprise its pan-Indian marketing network. Representative overseas presence in Dubai and Kuwait, Listed on the Bombay Stock Exchange Limited, National Stock Exchange of India Limited and the Luxembourg Stock Exchange. More than 10,00,000 satisfied customers across the country since inception Reported a 23.90 percent increase in disbursals in 2008-09. Improved return on net worth by 267 basis points to 23.80 percent in 2008-09. Reduced net NPA to a record low of 0.21 percent in 2008-09. Enhanced PAT 37.30 percent to Rs. 531.62 crore in 2008-09.
Un-interrupted dividend payment record since 1990.
Recommended 30 percent increase in dividend over previous year i.e from 100 percent to 130 percent. 4.1.4 Financial Performance
debt equity ratio 12
11.5
11
10.5
10
9.5
9
8.5 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
CONTINOUS GROWTH IN LOAN BOOK 300,000
250,000
200,000
150,000
100,000
50,000
0 fy05
fy06
fy07
fy08
fy09
Interest income from housing loans increased 34.90 percent from Rs. 2036.79 crore in 200708 to Rs. 2747.65 crore in 2008-09. The net interest income grew by 31.97 percent from Rs.553.94 crore in 2007-08 to Rs. 731.04 crore in 2008-09. Profit after tax surged 37.30 percent from Rs. 387.19 crore in 2007-08 to Rs. 531.62 crore in 2008-09.
RONW(%) 30
25
20
15
10
5
0 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-06
Jan-07
Jan-08
Jan-09
PBDTM(%) 30
25
20
15
10
5
0 Jan-05
PAT(%) 600
500
400
300
200
100
0 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-07
Jan-08
Jan-09
ROG SALE(%) 40 35 30 25 20 15 10 5 0 Jan-05
Jan-06
Operations: Funds mobilized grew 49.38 percent from Rs. 7489.70 crore in 2007-08 to Rs.11,188.33 crore in 2008-09.
Sanctions (Ind.+Proj.) increased 26.46 percent from Rs. 8617.88 crore in 2007-08 toRs. 10898.47 crore in 2008-09. Disbursements (Ind.+Proj.) grew 23.90 percent from Rs. 7071.48 crore in 2007-08 toRs. 8762.01 crore in 2008-09. Loan portfolio grew 26.18 percent from Rs. 21936.41 crore in 2007-08 to Rs.27679.28 crore in 2008-09
Margins : Net interest margin improved by 10 basis points from 2.85 percent in 2007-08 to 2.95percent in 2008-09. Return on equity grew by 267 basis points from 21.13 percent in 2007-08 to 23.80percent in 2008-09. Net profit margin improved by 49 basis points from 17.82 percent in 2007-08 to 18.31percent in 2008-09. Asset Quality: Gross NPA declined by 63 basis points from 1.70 percent in 2007-08to 1.07 percent in 2008-09.Net NPA levels declined 43 basis points from 0.64 percent in 2007-08 to 0.21 percent in 2008-09.
7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q1 FY07
Q2 FY07
Q3 FY07
Q3 FY07
Q1 FY08
Q2 FY08
Q3 FY08
Q4 FY08
Q1 FY09
Q2 FY09
Q3 FY09
Q4 FY09
The amount of gross Non-Performing Assets (NPA) as on 31st March, 2009 was Rs. 297crores, which is equivalent to 1.07 percent of the housing loan portfolio of the Company,
as against Rs. 372.92 crore i.e., 1.70 percent of the housing loan portfolio as on 31st March,2008. The net NPA as on 31st March, 2009 is reduced to Rs. 57 crore i.e. 0.21 percent of the housing loan portfolio vis-à-vis Rs. 140.90 crore i.e., 0.64 percent of the housing loan portfolio as on 31st March, 2008. The total cumulative provision towards housing loan as on31st March, 2009 is Rs. 240.25 crore. During the year, the Company has written off Rs. 5.40crore of housing loan portfolio as against Rs. 38.99 crore during the previous year. Fund raising The Company raised funds aggregating to Rs. 11,188.33 crore through term loans from banks, Non-Convertible Debenture (NCD), sub-ordinate debts, commercial paper, Public Deposit and others which were used for fresh disbursements as well as repayments/prepayments of past borrowings. The Company‘s NCD issue was rated AAA and Public Deposit was rated as FAAA/STABLE by CRISIL.
RELIANCE CAPITAL: INDIAN ECONOMY: After several quarters of around 9 per cent GDP growth, the rate moderated to 7.6per cent and 5.3 per cent in the last two quarters of 2008, and is expected to average 7 per cent for Financial Year (FY) 2009. The slowdown has been largely caused by a deceleration in industrial growth from about 8.5 per cent in FY 2008 to 2.4 per cent in the third quarter of FY2009. Surprisingly, the agriculture sector slowed down from 4.5 per cent in FY 2008 to-2.2per cent in the third quarter of FY 2009. In contrast, the remarkable service sector success story remained intact as output grew 9.9 per cent in third quarter, down only slightly from10.8 per cent in 2008. The moderation from previous years was due to several factors. The financial crisis and global slowdown affected both export growth in goods, services and hence industrial production as well as corporates‘ access to diverse and low cost funding. Moreover, high inflation during the first half of FY 2009 forced RBI to pursue a tight monetary policy, which further dampened investment and consumption. However, the fact that India‘s growth in the last few years has been fairly broad based (across sectors and regions) and balanced (with consumption, investment, savings and exports all rising) bodes well for the structural transformation of the economy as the business cycle enters a recovery phase, in the second half of FY 2010. RBI cuts rates aggressively: India‘s Wholesale Price Index, which was as high as 12.9 per cent in August 2008 fell to 0.3 per cent by March 2009 resulting in an average inflation of around 8 per cent for FY09. The sharp fall in inflation was caused by a high base, a significant fall in commodity prices and various duty cuts announced by the Government. Inflation is expected to remain low and may even enter the negative territory for a short time before moving up again towards the end of 2009.Falling inflation and slowing growth gave the Central bank enough room and reason to cut rates aggressively. From September ‘08 to March ‘09, the RBI has cut Repo, Reverse Repo and CRR by 400, 250 and 400 bps respectively. This easing in monetary policy is likely to translate, with a lag, into a significant boost for the economy. India‘s Trade Deficit widens, largely due to increasing import growth: Global demand destruction due to the recent crisis led to a mere 3.4 per cent growth in exports in FY 2009 while higher commodity prices(including oil) pegged the imports growth at 14.3 per cent. This resulted in a trade deficit of US$119 billion in FY09 compared to US$88.5 billion in FY 2008. For the first three quarters in FY 2009, the higher trade deficit, coupled with negative capital flows, reduced India‘s Balance of Payments (BoP) surplus to a deficit of US$20.4 billion. After 10 consecutive quarters of surpluses, this is the second time in three quarters that BoP has ended in a deficit. The capital a/c balance too turned negative (-US$ 3.7 billion) in third quarter FY 2009 mainly due to net outflows under portfolio investment, banking capital and short-term trade credit. Outflows under portfolio investment were led by large sales of equities by FIIs and slowdown in net inflows under ADRs/ GDRs. India‘s foreign exchange reserves declined by about US$59 billion in FY 2009, but still remained at an impressive US$250 billion in March 2009. The country‘s current foreign exchange reserves far exceed its total official and private sector external debt making India‘s balance of payments position quite comfortable. Import declines more than export in recent months, thereby improving trade deficit: Since January 2009, Imports have declined more than exports due to both lower oil import bills and slowing domestic
investment and consumption. This has helped in narrowing our trade deficit further. The trade deficit for the month of March narrowed to US$4 billion (4.1 per cent of GDP, annualized) compared to US$14 billion in August 2008. FINANCIAL PERFORMANCE:
DEBT-EQUITY RATIO 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-06
Jan-07
Jan-08
Jan-09
PBDTM(%) 100 90 80 70 60 50 40 30 20 10 0 Jan-05
RONW(%)
20 18 16 14 12 10 8 6 4 2 0 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
ROG-SALE(%) 140 120 100 80 60 40 20 0 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-07
Jan-08
Jan-09
-20 -40
PAT
1200
1000
800
600
400
200
0 Jan-05
Jan-06
The Company‘s gross income for the financial year ended March 31, 2009 increased to Rs.3,017.29 crore, from Rs.2,079.79 crore in the previous year, registering a growth of over45.08 per cent. The operating profit (PBDIT) of the Company increased 46.24 per cent toRs.2,334.99 crore during the year, up from Rs.1 596.69 crore in the previous year. Interest expenses for the year increased by 203.02 per cent to Rs.1,236.75 crore, from Rs.408.15crore, in the previous year. Depreciation was at Rs.21.22 crore as against Rs.17.09 crore in the previous year. The provision for taxation during the year was Rs.109 crore. The net profit for the year decreased by over 5.60 per cent to Rs.968.02 crore from Rs.1,025.45 crore in the previous year. An amount of Rs.193.61 crore was transferred to the Statutory Reserve Fund pursuant to section 45-IC of the Reserve Bank of India Act, 1934, and an amount of Rs.96.81 crore was transferred to the General Reserve during the year under review. The Company‘s Net worth as on March 31, 2009, stood at Rs.6,697.42 crore, as against Rs.5,927.50 Fixed Deposits The Company has neither accepted nor renewed any fixed deposits during the year. Five deposit accounts, aggregating to Rs.26,000, remained unclaimed on the due dates as on March 31, 2009. The Company has intimated the deposit holders individually of their unclaimed amount with a request to return the Fixed Deposit Receipts duly discharged to enable the Company to repay the amount. NBFC VS INDIAN BANKS 2008-09 was a difficult year, especially for the financial segment across the globe. However, India‘s strong macro-economic fundamentals and financial policies have shielded it from the turmoil. The study considered those banks that have announced their results between 15thApril -20th May 2008- 09 posted on the website of Bombay Stock Exchange. The have analysed in total 29 banks (both public & private sector) and 7 NBFCs The) study has examined and compared the profitability of banks with NBFCs during the financial year200809. Simple average and profitability ratio of the two segments have been studied. Methodology - The AFP analysis of the Indian commercial banks & NBFCs profitability is calculated using two broad parameters including net profit and total income. Profitability Ratio is a class of financial metrics that is used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. Profitability is calculated as:(Net Profit/Total income)*100 NBFCs more profitable than commercial banks despite slowdown Even as the world wide financial crisis and slowdown in key sectors of the Indian economy led the Non Banking Financial Companies to face severe cash shortage during the financial year 2008-09, the overall profitability of NBFCs has remained higher than the scheduled commercial banks. During the financial year 2008-09, Non- Banking Financial Companies (NBFCs) average profitability stood higher at 18.90 per cent as compared to the banks with 10.08 per cent. The NBFCs generally operates on the model of lending to riskier projects with interest rates higher than offered by the banking institutions. As the financial markets faced the heat of global crisis during the financial year 2008-09, most of the NBFCs faced problems in fundraising. Among the seven NBFCs, in 2008-09 the highest profitability was reported by Infrastructure Development Finance Company Limited at 20.89 per cent, with total income
stood at Rs.3626.38 crore and net profit at Rs.757.73 crore. It was followed by Housing Development Finance Companies Limited (HDFC) and Power Finance Companies Limited(PFCL) at 20.76 per cent and 20.67 per cent respectively. ―The Reserve Bank of India (RBI) monetary measures by cutting interest rates during 2008-09 has benefited the NBFCs since many of them finance their operations through market borrowings said Mr. Sajjan JindalPresident.
Top five banks and NBFC with high profitability PROFITABILITY
NON
BANKING PROFITABILITY
BANK
INDIAN BANK
RATIO
FINANCIAL
(2008-09) IN %
COMPANIES(NBFC’s) IN %
15.83
INFRASTRUCTURE
RATIO(2008-09)
20.89
DEVELOPMENT FINANCE COMPANY LIMITED BANK OF INDIA
15.50
HOUSING
20.76
DEVELOPMENT FINANCE COMPANIES LIMETED(HDFC) AXIS BANK
13.22
POWER
FINANCE 20.67
COMPANIES LIMETED STATE BNAK OF 12.94
LIC
TRAVANCORE
FINANCE LTD.
UNION BANK OF 12.91
MANAPPURAM
INDIA
GENERAL FINANCE AND
HOUSING 18.46
17.86
LEASING
LIMITED
Among the 17 public sector banks, the highest profitability was reported by Indian Bank and Bank of India at 15.83 per cent and 15.50 per cent respectively. Out of the private sector banks the top positions were occupied by Axis Bank and Yes Bank at 13.22 per cent and12.46 per cent respectively, among others. The 7 NBFCs, aggregate total income grew by hooping 57.3 per cent to Rs.28,208.72 crore in FY‘09 from Rs.17,906.84 crore in the previous fiscal. However, the aggregate total income of 29 banks have increased by 25.3 per cent from Rs 2,69,055 crore in 2007-08 to Rs 3,37,206.9 crore in 2008-09. Year-on-year performance of the 29 banks regarding net profit to total income ratio at the aggregate level showed a marginal decline during FY‘09 with 10.08 per cent as against FY‘08 recorded at 10.52 per cent, while in the case of 7 major NBFCs, the ratio declined during 2008-09 at18.90 per cent as against 21.80 per cent in FY’08.
Banking versus NBFC regulatory arbitrage in India
BANKS
NBFC
FUNCTIONAL RESTRICTIONS Carrying
on
checking Permited
Not permited
accounts,remittance functions and typical retail banking Acceptance
of
term Permited subject to term Permitted
deposite
restrictions(short
subject
to
term limitations,but the term of
deposites are accepted by deposite is atleast 1 year banks) Other
functional Bnaking
limitations
expressly
regulation bar
act For domestic NBFC, no any bar
on
non-financial
business other than that business,except
that
permitted
ceratain
by
the
act crossing
sec6(1)
of
a
on
barrier,(50% of income or assests),the
NBFC
will
lose its character as an NBFC Trusteeship
functions, permitted
no express bar is their
nominee Leasing and hire purchase
Banks are allowed to a No limit limt of 10% of their assets
Operating lease
Treated as a non financial Permitted,though business, not permited
treated
as non-financial business
securitisation
Permitted
subject
to Permitted
subject
to
capital norms and other capital norms and other limitations
limitations
LEASING RESTRICTIONS Need for a licence
Any new bank needs a It is comparatively much licence.licencing
norms eaier to get registration as
are tightly controlled and an NBFC. Besides, there generally,it is perceived to are some 30,000 NBFCs be quite difficult to get a currently registered, many licence for a bank
of which may be available for sale.
Ownership structure/change
in
ownership Indian ownership
Not more than 10% of While prior intimation of capital in a bank may be acquired
without
approval of the RBI
takeover
is
required
in
the case of NBFCs ,there is no
need
for
express
permission for a change in voting control. Ther is no limit as to the percentage holding permitted in case of NBFCs Foreign ownership
Upto
74%
capital
in 100% capital may be held
banking companies may by foreign iowners subject be acquired fior foreign to minimum capitalisation owners.
requirements under FDI norms
Credit control and sectrol asset restrictions
SLR/CRR norms
Substantial part of assests Only 15% of the deposite of banks is blocked due to liabilities of NBFCs is to be statutory
liquidity held in certain permitted
ratio(SLR)
and
cash securities.
reserve ratio(CRR). These are periodically changed to control the expansion of M3 in the economy Sectoral exposure
Periodic regulations place Very
scanty
limits on the extent to have
been
which banks may invest in assests
limitations placed
of
on
NBFCs.
capital market and other Investment in real estate specific segments. There and unquoted equity share are certain segments in are which
banks
need
controlled.
Capital
to market exposure is only
allocate minimum %age of required to be reported. their assests. Capital requirements
adequacy and
provisioning Basel norms
Presents
capital Prudential
regulations
regulations are based on which lay down capital basel
I.
basel
proposed
to
implemented
II
is adequacy
have
been
be substituted in feb 2007,but effective they are based on basel I
2007. Capital requriment and not basel II. Capital generally
9%
of
risk requirements
weighted assests.
10%
of
risk
generally weighted
assests. Provisioning
90 days past due lead to As much as 12 months NPA characterization and overdue is permitted in calss for provisioning as case of lease and hire per international standards
purchase transaction.
