NBFCs AND THEIR ROLE IN THEEMERGING GLOBAL FINANCIAL MARKETS
THE AREAS OF FOCUS IN OUR PROJECT ARE- What primarily are NBFCs? When and why had they been introduced in the financialmarkets? How has their performance been till date? What are the major functions performed by them? What significance do they have in the global context? What has been the impact of the inflation on the role of thissector? What role are they expected to play in the future in thecontext of the financial markets?
"Non-banking financial company" means-(i) a financial institution which is a company;(ii) a non banking institution 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 bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.NBFCs as described by RBI in points are- EQUIPMENT-LEASING COMPANY; HIRE-PURCHASE COMPANY; LOAN COMPANY; INVESTMENT COMPANY
They are also categorized in a different format among 8 categories- LOAN COMPANY HIRE PURCHASE COMPANY INVESTMENT COMPANY MUTUAL BENEFIT COMPANY MISCELLANEOUS NON-BANKING FINANCIAL COMPANY-CHIT FUNDS RESIDUARY FINANCE COMPANY HOUSING FINANCE COMPANY EQUIPMENT LEASING COMPANYAnother and recent way of categorizing NBFCs is as under- ASSET FINANCING COMPANY(AFC) INVESTMENT COMPANY(IC) LOAN COMPANY(LC)(This is with effect from december,2006)
Loan company means a company which is a financial institutioncarrying on as it’s principal business the providing of financewhether by making loans or advances or otherwise for any activityother than its own but does not include an equipment leasingcompany or a hire-purchase finance company.
Hire purchase (frequently abbreviated to HP) is the legalterm for a contract developed in the United Kingdom.In cases where abuyer cannot afford to pay the asked price for anitem of property as a lump sumBut,can afford to pay a percentage as a deposit,a hire-purchase contract allows the buyer to hire thegoods for a monthly rent.•When sum equal to the original full price plus interesthas been paid in equal installments•the buyer may then exercise an option to buy thegoods at a predetermined price (usually a nominalsum) or return the goods to the owner.
Investment Company is a company which is a financial institutioncarrying on as it’s principal business the acquisition of securities. 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.
Mutual Benefit Financial Companymeans a company which is a financial institutionnotified by The Central Government under TheCompanies Act 1956.•A mutual fund is a professionally managedtype of collective investment scheme in whichmoney is pooled from many investors and investsit in many kinds of securities by a fund manager.•Currently, the worldwide value of all mutualfunds totals more than $26 trillion.•Mutual funds can invest in many kinds ofsecurities.
The most common securities in which the mutual funds invest themoney of the investors are- Cash instruments Stock Bondsbut there are hundreds of sub-categories.For example-Stock funds can invest primarily in the shares of a particular industry,such as technology or utilities.
CHIT means a transaction whether called chit, chit fund, chitty, kuryor by any other name or under which a person enters into anagreement with a specified number of persons that every one of themshall subscribe a certain sum of money by way of periodicalinstallments over a definite period and that each such subscribershall, in his turn, as determined by lot or by auction or by tender orin such other manner as may be specified in the chit agreement, beentitled to the prize amount. Good source of finance-for allsections of society Good means of savings for anycontingency Serves all persons-whether thedesire is for savings or forcontingency or for some H D N U C T F S I H D N U C T F S Iexpense
Residuary Non-Banking Company-class of NBFC-principal business the receiving of deposits,under any scheme or arrangement or in anyother manner and not being investment, assetfinancing, loan company.Investments as per directions of RBI, in additionto liquid assets.The functioning of these companies isdifferent from those of NBFCs in terms of methodof mobilization of deposits and requirement ofdeployment of depositors funds.
NO CEILING ON THE AMOUNT OF DEPOSITS WITH RNBC-A BIT RISKY.If the RNBCs are safe or not?Although it is true-no ceiling on raising of deposits by RNBCsBut every RNBC has to ensure that the amounts deposited andinvestments made by the company are not less that the aggregateamount of liabilities to the depositors.To secure the interest of depositor, such companies are required toinvest in a portfolio comprising of highly liquid and secured instrumentsviz. Central/State Government securities, fixed deposit of scheduledcommercial banks (SCB), Certificate of deposits of SCB/FIs, units of MutualFunds, etc.
Indian Real Estate-on its way to donning the image ofan organized industry-global standards-asfragmentation, disorganization, poor governance andinefficient infrastructure; take a backseat. Most financial institutions- home loans toboth Indian and NRI customers- floating andfixed rate of interest or blended ones-customized packages- purposes ofconstructing/ buying a new house, vacantplot or extension and even homeimprovement.BRIEF BACKGROUNDHousing Finance has accumulated expert experience spanning over 40 years inconstruction/project finance with emphasis in multiple housing developments.
Products and services offered include Short-term construction loan of 4 to 6 months forconstruction of single dwelling units. Short-term multiple development construction loansand bridging loan facilities for a period of up to 24 months. Long-term financing of a wide spectrum of commercialand residential properties for rental. Evaluation of construction projects proposals forproject concept, commercial, technical and financial viability. Marketing support through availing developer’s access towebsite link, display of properties in ultra modern propertypoint for wide reach.
Means a company which is a financial institution carrying on as it’s principalbusiness, the activity of leasing of equipment. EQUIPMENT LEASE - Anagreement that specifies the rights and obligations between a lessor(who owns equipment) and a lessee (to whom the lease gives certainrights to possess and use the equipment). Obtaining the use ofmachinery, vehicles or other equipment on a rental basis. This avoids theneed to invest capital in equipment. Ownership rests in the hands of thefinancial institution or leasing company, while the business has theactual use of it.
The deposit base of NBFCs grew rapidly in early-mid nineties YEAR YEAR NO. 3000 1 1988DEPOSIT BASE 2500 2 1989 2000 DEPOSIT 3 1990 1500 BASE(Rs. In billions) 4 1991 1000 5 1992 500 0 6 1993 1 2 3 4 5 6 7 8 7 1994 YEAR 8 1995 ...then and now.
Initial years of NBFCs- not a good response in terms of performance-seen in terms of their deposit base and share in the financial servicessector.Banks-very popular at that time-enjoyed a much more larger share ascompared to the NBFCs.Later-improvement in performance- In 1981, number of NBFCs => 7063 In 1990, number shot upto => 24009 In 1995, number of NBFCs was => 55995In terms of deposit base, it could be traced as From April 1991 to March 1997, the deposit base grew at an averagerate of 88.57%. The public deposits managed in 1997 were of value ofabout Rs.15000 crores. Since 1998, due to stringent government regulations, the deosits withthe NBFCs have gone down. Today the deposits managed by the sector has shrunk to aboutRs.3000crores.
Also the performance of the NBFCs-studied in terms of the asset basethey hold.• As of 2000, the collective asset base of all the NBFCs was aboutRs.400 billion.• This was a huge fall in the figures as there was a sharp fall in thecompanies with an asset base of <Rs.5 million.Generally speaking-core profitability of the NBFCs-rose in 2002-03since the last two years the status of the NBFCs has increased,although since the depression in the world economy-the growth andperformance of the NBFCs-gone down-compared to just previousperformance.
BANKS-financial institutions-reached the major section of every country ofthe worldstill there were some rural, under-privileged and under-served sectionsin each of the nationsRequirement of the services of somefinancial institution which could cater totheir needs.Lead to the creation of the NON-BANKING FINANCIAL COMPANIES orsimply NBFCs. UNTOUCHED AREAS IMPORTANT ROLE TO BE PLAYED NEED OF BETTER FINANCIAL SERVICES UNDER-SERVICED SEGMENTS
It makes a study of what special is there in NBFCs that provide theman edge over the Banking sector.If the NBFCs can prosper and flourish in the future or would it be subsideddue to the Banking sector? Banks-covered major section of the nation-but still some under-servedsections exist -need for financial institutions for them-NBFCs CAME INTOPICTURE. BANKS-focus on the METRO-BASED MODEL-but NBFCs’ concernNON-METRO-FOCUSSED MODEL.
NBFCs –concentrate their activities on areas NOT ENTERTAINED by theBANKING sector -like-1. HIRE-PURCHASE2. LEASING3. EQUIPMENT-LEASING4. LOANS5. CHIT FUNDING,etc.Cost efficiency -NBFCs are better than Banks-greater LEEWAY on thebalance sheet-WORLD OVER.NBFCs-important role in the provision of QUALITY CUSTOMERSERVICES -much better than banks can ever do.
So to sum up we can define this section “BANKS OVER NBFCs” in thefollowing points-
IMPORTANT ROLE IN MACROECONOMICS PERSPECTIVE REACH THE UNDER-DEVELOPED SECTOR AREAS UNTOUCHED BYBANKS-LEASING, LOANS, ETC. HIGH QUALITY CUSTOMERSERVICE TO RETAILCUSTOMERS. FINANCING COMMERCIALVEHICLES AND EVEN SMALLBUSINESSES.
Non-bank institutions frequently actsas:- Suppliers of loans and credit.Supporting investments in property Trading money market instruments Funding private education, Wealth management. Underwrite stock and shares. Retirement planning Advisory functions. Discounting services.
GLOBAL FINANCIAL MARKET is an institution or arrangementthat facilitates the exchange of financial instruments, includingdeposits and loans, corporate stocks and bonds and otherinstruments across the world in a quick and easy manner………
POINTS TO DISCUSSPRESENT CONTEXTIn the present day world -innovation in their activities-lower cost andbetter efficiency-points to the growth of trend of mergers globally.EFFECT OF CRISISSub-prime mortgage crisis in the US -temporary blip in the domesticfinancial sector and its impact on NBFC’s.RETAIL’S EFFECTIn the emerging scene, the market for retail customers is where allaction is. Consumer credit remaining an under-served area — fuelledthe rapid growth of financial services companies-implies a growthprospect for the NBFCs.POLICIES IN INDIA:Declining interest of the NBFCs in the public deposits-RBI should lookat the possibility of allowing only banks to take public deposits.
CONDITIONS FOR DEVELOPING WORLDFor a developing nation where infrastructure creation has been presentlyaccorded highest priority -leasing-immense potential.NEED OF THE HOURThe market for financial loans-not determined solely by the cost of finance.Service -- loosely described as the convenience offered to the customer interms of speed & product features -- critical role in volume growth. So theservice sector has to be improved. And NBFCs-specially focused oncustomer services-higher potential to grow.
TODAY it’s the world of GLOBAL INTEGRATION. And the performance ofeach and every economy depends and reciprocally affects the other nation aswell.Hence the overview of the future of NON-BANKING FINANCIAL COMPANIESin the emerging global markets is very essential for us to have a look at.To have an idea of this part of our project, we have divided the entire scope ofour 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 can be done on the basis of- STUDY OF PAST STUDY OF PRESENT PREDICTION ABOUT FUTURE
For 3 different periods the statistics for the TSR for the NBFCs and BANKS has beenshown below- TSR for 2003-08(%)-• PSU BANKS-42• PRIVATE SECTOR BANKS-45.5(average)• NBFCs-85 TSR for 2005-08(%)-• PSU BANKS-21• PRIVATE SECTOR BANKS-30.5(average)• NBFCs-83 TSR for 2007-2008(%)-• PSU BANKS-47• PRIVATE SECTOR BANKS-18.5(average)• NBFCs-83
Seeing the other side of the coin i.e., we get a totally opposite picture! The return on the total income of 383 NBFCs decreased during theperiod between APRIL and JUNE 2008. The combined net profits of the 383 NBFCs have increased only11.2% to Rs.2533 crore, resulting a decrease in return to total incomefrom 22.35% in APRIL-JUNE2007 to 20.36% in APRIL-JUNE2008.This does give a negative implication and is also depicting that in case ofdepression, NBFCs have been badly affected.THE LAST couple of years have seen significant developments in thefinancial sector that have raised competition across-the-board. Non-bankingfinance companies (NBFCs) have perhaps felt the pressure most.
• Banks have started looking at NBFCs as competitors.• High-yielding segments such as consumer durables, two-wheelers and pre-owned CVs, where NBFCs have registered strong growth, still offer potentialto grow.The views of the market players about the FUTURE of NBFCs are-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 ofinterest offered by them for deposits.Credit Rating and Information Services of India Ltd (CRISIL)-“Concern over the weak financial fundamentals of non-banking financecompanies (NBFCs).”
RBI-“The NBFCs have been declared to be the weakest link in the entire financialservices sector.”ROOPA KUDVA, managing director and chief executive officer, Crisil-"The decline in business volume will mean a further marginalisation of thesector, a trend that has been accelerating over the past few years as bankshave taken over the traditional NBFC stronghold of retail lending.“HEMANT KANORIA, CMD, SREI Infrastructure Finance Ltd-“Over the last 3-4 months, it had become extremely difficult for NBFCs toraise money in the domestic market. We have been awaiting thegovernment’s and the RBI’s approval for access to the ECB market.”R RAVI, executive director of the Mumbai-based Alpic Finance-"The future belongs to strong financial service factories.“R. VAIDYANATH-“NBFCs — creditable but unrecognized role.”
The future of the NON-BANKING SECTOR cannot be easily predicted for the longrun because it has seen through many ups and downs in it’s entire journey.A merger between BANKS and NBFCs on the overall global front. NBFC’s would convert into BANKS.Here we would be faced with two of the VERY IMPORTANT QUESTIONS andthose are-WILL THE MERGERS AND CONVERSION OF NBFCs INTO BANKS WOULDLEAD TO ENLARGEMENT OF THE NON-BANKING FINANCIAL COMPANIES?OR,WILL IT CAUSE THE NBFCs TO BECOME JUST A SMALL SECTOR TO THEBANKING INDUSTRY?
A BRIEF SAY ON MERGERS AND ACQUSITIONS…It is very clear that the gap between the banks and NBFCs has beennarrowing lately. …. Other than deposit taking activity, their activities arelargely similar. The NBFCs have an advantage in management of risks andreach.NBFC’s are fast to adapt to the changes.In the long-term, the gap between banks and NBFCs will narrow. In whichcase a different breed of NBFCs will emerge. For instance, a very focusedentity catering to a small area.Some NBFCs have converted themselves into banks, while others havemerged into banks.Given this scenario, does CRISIL foresee NBFCs as having a role to playin the Indian financial system over the medium to long term? Will therebe any NBFCs left in the country in a few years?
ROLES FOR FUTURE...Traditionally, the NBFCs have dominated the market for retail finance.With such new areas as insurance being opened up, top-rung NBFCsare presented with an opportunity to grow.There have been occurring mergers between the NBFCs and BANKSbut apart from mergers, other options waiting for NBFCs are to changethe tracks and explore new areas.They have to extend their product portfolio to include assetmanagement companies, housing finance firms and to venture intonewly opened insurance sector for private participation.There are some areas where the NBFCs can expand themselves due toeither the need of healthy customer service, or as they need to beexplored or even due to the expertise of the NBFCs in those areas.
ENTRY INTO Retail finance Housing loans Insurance business Web-based services High yielding segments Personal loans & Credit cards Portfolio-management services Sale of products of other financial intermediariesThese are the areas that either haven’t been touched at all or still offerhuge potential to grow.
Future CapitalAshok Leyland FinanceReliance CapitalABN Amro Bank
Future Capital, the financial arm of Future Group, will soon start rolling out Money Bazaarsacross the country. This one stop-shop would be providing numerousservices like-• Housing loans• Personal loans• Insurance• MFs• Credit cards
Traditionally, ALF has depended on commercial vehicle financing for a significantproportion of its revenue. However, recently the company initiated steps tobroadbase 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 moreor less on the pattern of commercial vehicles vis-à-vis risk. There wecertainly have considerable scope.• The other segment is construction equipment...will take time for othersto get in.• They are also at an advanced stage of developing a loan portal by whichthey will have the capability to distribute loan products of otherintermediaries.• The move of Ashok Leyland Finance to launch a finance portal that wouldbe used to sell products of other financial intermediaries and to use itsskill in collection to derive a pure service income.
Reliance Capital, an arm of the Anil Dhirubhai Ambani Group, willset up a separate housing financial subsidiary and non-bankingfinancial company (NBFC) for the consumer finance sector.Ambani said his company is also planning to selectively expandits• asset management• life insurance, and• broking operationsin emerging markets across Asia, Africa andthe Middle East.
ABN Amro BankMs Meera Sanyal, Country Executive-ABN Amro Bank, India.“ABN Amro Bank will use its NBFC tocomplement its retail distribution business.”
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 upwith 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!!!