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April 2014 Edition of BEACON, A Monthly Newsletter by SIMCON.
Inside this issue:
INDUSTRY ANALYSIS : Non Banking Financial Company
Concept of the Month
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  1. 1. B E A C O N A Newsletter by SIMCON– SIMSREE Consulting Club Volume : 2 Issue : 6 April 2014
  2. 2. INDUSTRY ANALYSIS : Non Banking Financial Company Introduction NBFCs have been playing a complementary role to the other financial institutions including banks in meeting the funding needs of the economy. They help fill the gaps in the availability of financial services that otherwise occur in the unbanked & the underserved areas. NBFCs account for 12.3% assets of the total financial system. The NBFC segment has witnessed considerable growth in the last few years and is now being recognised as complementary to the banking sector due to implementation of innovative marketing strategies, introduction of tailor-made products, customer-oriented services, attractive rates of return on deposits and simplified procedures, etc. NBFCs have been at the forefront of catering to the financial needs and creating livelihood sources of the so-called unbankable masses in the rural and semi-urban areas. Through strong linkage at the grassroots level, they have created a medium of reach and communication and are very effectively serving this segment. Thus, NBFCs have all the key characteristics to enable the government and regulator to achieve the mission of financial inclusion in the given time. Types of NBFCs NBFCs have been classified on the basis of the kind of liabilities they access, the type of activities they pursue, and of their perceived systemic importance. I. Liabilities based classification NBFCs are classified on the basis of liabilities into two categories, viz, Category ‘A’ companies, (NBFCs having public deposits or NBFCs-D), and Category ‘B’ companies, (NBFCs not having public deposits or NBFCs-ND). II. Activity Based Classification NBFCs are classified in terms of activities into five categories, viz., Loan Companies (LCs), Investment Companies (ICs), Asset Finance Companies (AFCs), Infrastructure Finance Companies (IFCs) and Systemically Important Core Investment Companies (CICs-ND-SI). III. Size Based Classification Non-deposit taking NBFCs with assets of Rs. 100 crore and above were labelled as Systemically Important Non-Deposit taking NBFCs (NBFCs-ND-SI), and prudential regulations such as capital adequacy requirements, exposure norms along with, reporting requirements were made applicable to them. Market share / key players As per the RBI, 12,159 NBFCs were registered with India as on 31st January 2014. Out of these, 244 are registered NBFCs permitted to accept Public Deposits. As of April 2013, the NBFCs had an asset base greater than INR 6500 billion. The NBFCs have around 12.3% assets of the total financial system. Porter’s 5 forces model Barriers to entry: Low Licensing requirement: The licensing requirements of RBI for NBFCs are not that stringent as compared to the banks. There are already 12159 registered NBFCs while there are only around 180 banks in India. Bargaining power of consumers: High - Many alternatives: The consumers have got many alternatives for availing credit. - Large number of NBFCs: The consumers have a large spectrum to choose from. Threat of substitutes: Moderate - Banks: NBFCs were actually created by the government of India as it felt the need to provide banking facilities to the poor and underprivileged who could not get access to banks. Thus banks are a perfect substitute for NBFCs. - Unorganized money lenders: The unorganized money lenders have a strong presence in the rural markets. They pose a big threat to the NBFCs in the rural areas. Bargaining power of suppliers: High - Many alternatives: The suppliers in this case are the depositors or the NBFC’s funds. The suppliers have many alternatives at their disposal to invest their money depending on their risk appetite. Eg: High risk: stocks, low risk: banks marketing strategies by the companies to gain the market share. Volume : 2 Issue : 6 BEACON : Page 1 April 2014 For detailed report and all industry analysis from previous Beacons together, please visit our blog : Overview of Loans Some of the key NBFC players are as follows: Ref: CRISIL estimates (FICCI)
  3. 3. Intensity of rivalry: High - Undifferentiated services: The service offerings by NBFCs are almost the same. There is a low level of service differentiation. - Marketing strategies: Due to the increased rivalry among the NBFCs, there has been use of aggressive selling & intensive Key growth drivers: Rural wage growth is increasing, which will rural growth. Also, good monsoons last years and the current general elections will increase spending in rural areas. This in turn may lead to growth in vehicle and gold loans from NBFCs. Growing consumer credit market Consumer credit market is promoted to increase by 67% from 2013 to 2020. Product innovation NBFCs are building organised pre-owned CV (commercial vehicle) segment, which is largely untouched by banks. NBFCs also finance more than 80 % of equipment leasing and hire purchase activities in India. They currently have 70% market share in CV finance. Another example of product innovation was creation of an Islamic banking NBFC firm in Kerala last August. Product customization NBFCs structure monthly instalments while accounting for the seasonality of cash flows in construction equipment loans. Use for fostering financial inclusion Focus of NBFCs is on rural segment, Small and middle enterprises (SMEs) and Microfinance NBFCs constitute almost 76% of the Rs. 120 billion microfinance industry in India. NBFCs have a large rural network. The sector has been recog- nised as complementary of banking system by introducing diversification in the financial sector, simplified sanction procedures, flexibility and timeliness in meeting the credit needs. Segment share of NBFCs and banks in retail finance Impact analysis: Nachiket Mor Panel RBI report While looking for some key differences between Banks and NBFCs, the Nachiket Mor Committee in its report (primarily based on Financial Inclusion) batted for convergence between the two. Many of the recommendations are similar to Usha Thorat committee (2012) like 2-category simplification of NBFC categorization. However, unlike the Thorat report which recommended SLR for NBFCs, the Mor report recommends that the SLR requirement to be done away with. It suggests allowing them to raise funds from abroad as external commer- cial borrowings and permitting them to seize the assets of defaulters under the Sarfaesi Act, just as banks do. However, two key demands of NBFCs – which would have granted NBFCs more fund to lend - were rejected. Banks need to invest 9% of their own money for funds they lend and borrow the rest 91% from the market; while NBFCs have to contribute 15%. The Mor Committee recommends a status quo. The committee has also rejected the call to bring ‘risk weights’ of the loans given by NBFCs on a par with those by banks. A lower ‘risk weight’ means lesser amount of own funds relative to the quantum of the loan. Conclusion NBFCs have emerged as an integral part of the Indian financial system by catering to the credit needs in under-served areas and unbanked customers. Though NBFCs have the rural network of branches and established rural customer base, their raison d'etre may be threatened by new banks entering the rural areas. References HSBC Global Research: India NBFCs - October 2013 Financial Services – IBEF Report FICCI: Financial Foresights: Role of NBFC’s in promoting inclusive growth – April 2013 Fitch: India Ratings & Research Report - January 2013 News reports from Times of India, Financial Express, Eco- nomic Times, The Hindu sector.html For detailed report and all industry analysis from previous Beacons together, please visit our blog : Volume : 2 Issue : 6 BEACON : Page 2 April 2014 INDUSTRY ANALYSIS : Non Banking Financial Company Growing per capita income Ref: Credit Suisse
  4. 4. COMPANY ANALYSIS : Shriram Transport Finance Corporation Ltd. Volume : 2 Issue : 6 For detailed report and all company analysis from previous Beacons together, please visit our blog: BEACON : Page 3 April. 2014 starting from simple three wheelers, taxis, MUV’s, vans to high cost and state of the art Volvo / Mercedes buses travelling across the length and breadth of the country. STFC also provides loans for personal cars. Farm Equipment Shriram Transport has a granular footprint of more than 300 rural / semi urban branches which cater to the requirement of finance from buyers of tractors, harvesters and various other farm equipment which are deployed both for agricultural and commercial purposes. Construction Vehicle & Equipment With increased demand for construction equipment post the investment announcement for infrastructure in the 12th 5 year plan, STFC started separate subsidiary to fund the capital requirements of contractors engaged in infrastructure projects (Shriram Equipment Finance Co Ltd., aka, SEFC). STFC also funds the retail portion of this vast business with easy solutions for buyers of tippers, dumpers, backhoe loaders and cranes and as also for the purchase of pre-owned construction equipment. Other services Freight bill discounting : Purchasing the bill from customers at a discount and crediting the money to the truckers within time so that they can get an instant payment for the work they have performed without actually waiting for 35-40 days. Tyre Finance : Financing the tyre purchase for the trucker. Engine replacement Finance : Financing the engine replacement for the truckers. Competitor Analysis Shriram Transport finance has lot many competitors in this field. Mah & Mah Finl. Serv, Reliance Capital, Bajaj Finance, Muthoot Finance, PNB Gilts these are some of the competitors. Of these, PNB Gilts is having almost double sales of that of STFC. Shareholding Pattern The most recent development in the shareholding is a stake pur- chase by Ajay Piramal of the Piramal enterprises worth INR 1600 Crores. The most recent development in the shareholding is a stake purchase by Ajay Piramal of the Piramal enterprises worth INR 1600 Crores. Introduction Shriram Transport Finance Company, Ltd. is an India-based company that provides vehicle financing services. It works under Shriram Group of Businesses based in Chennai. NBFC wing of this group (STFC) was incorporated in 1979 and is reg- istered as a Deposit taking NBFC with Reserve Bank of India under section 45IA of the Reserve Bank of India Act,1934. It was promoted by R. Thyagarajan, A.V.S Raja & T. Jayaraman. Its products include Commercial Vehicle Finance, Passenger Commercial Vehicle Finance, Multi Utility Vehicle Finance, Three wheeler Finance, Tractor Finance and Construction Equipment Finance. The Company has a network of 620 branches and 515 rural centers. The Company has confined its operation to financing transport sector as the sector had been registering consistent growth and also as trucks are assets generating revenue on a continuous basis with almost zero gestation period. Besides financing commercial vehicles (both new and pre-owned) STFC also extends finance for tyres, en- gine replacement and working capital. It also provides ancillary services such as freight bill discounting besides offering co-branded credit cards. It works with two of its subsidiaries - Shriram Equipment Finance Company Ltd (SEFC) and Shriram Automall India Ltd (SAMIL). The Company's operation are predominantly based in S. India. Today, Shriram Transport Finance Company has approximately 20-25% market share in pre-owned and approximately 7-8% market share in new truck financing with more than 8.5 lakh customers. Business STFC offers financing on a diverse portfolio of commercial vehicles. They are currently offering loans to the following seg- ments: Heavy Duty Truck (HDT) STFC provides loans to such vehicles which weight 16.2 tons and above and are an integral part of the commercial activity of any country as these vehicles are usually deployed in the long haul distance and in transportation of materials at the ports. Shriram Transport offers financing options for the purchase of both new and used vehicles to this segment which has some of the bigger fleet owners on one end of the spectrum and the small fleet / single vehicle owner on the other. Medium, Intermediate And Light Duty Truck (LDT) STFC is into financing of commercial vehicles ranging from 5-16.2 tons , amounting to approximately 5 million in numbers in India. Pick Up Truck And Mini Truck ( P&MT) Financing of vehicles weighing less than 5 tons, which are approximately 3 mn on roads, with 0.3-0.5 mn vehicles being 3 wheelers and the rest being 4 wheelers Passenger Vehicle STFC is into financing of a wide range of passenger vehicles
  5. 5. COMPANY ANALYSIS : Shriram Transport Finance Corporation Ltd. Volume : 2 Issue : 6 For detailed report and all company analysis from previous Beacons together, please visit our blog: BEACON : Page 4 April. 2014 SWOT Analysis Strengths - The pioneer in the pre-owned commercial vehicles financing sector - Knowledge-driven and relationship-based business model - Pan-India presence with 539 branch offices - A well-defined and scalable organization structure based on product, territory and process knowledge - Strong financial track record driven by fast growth in AUM with low Non-Performing Assets (NPAs) - Experienced and stable management team - Strong relationships with public, private as well as foreign banks, institutions and investors. - More than 8.5 lakh customers across India Weaknesses - The Company’s business and its growth are directly linked to the GDP growth of the country. Slowdown in the country’s economy may have an adverse impact on the top line. - No access to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act or Debt recovery tribunal (DRT) for recovery of bad loans and no access to refinance. - Largely restricted to the south India market Opportunities - Growth in the CV market - Strong demand for construction equipment - Strong demand for passenger CVs - Strong demand for pre-owned tractors - Loans for working capital requirements of CV users - Partnerships with private financiers will enable the Company to enhance its reach without significant investments in building infrastructure. Threats - Regulatory changes in the NBFC and ancillary sectors - High cost of funds - Asset quality deterioration may not only wipe out profits but also net-worth Commercial Vehicle Business Model The following are the key aspects to the business of STFC: Valuation 65-70% of loan to value ratio in case of old commercial vehi- cles. 75-85% of loan to value ratio in case of new commercial vehicles. Collection/ Recovery habits Consistent monitoring of due payments, which is necessary owing to the underdeveloped banking habits of the customers. Recovery is based on the knowledge of and relationship with the customers. Prudent Credit norms Credit norms are decided on the basis of the financial discipline of the customer along with the understanding of the business Model. Future Strategy Core business - Leverage the large pan-India network to enhance reach in North & East India, particularly in large CV hubs - To increase market share in pre-owned CV market Expanding the pre-owned market segment - Introduce top-up products such as finance for tyres, working capital and engine replacement Leveraging Private Financers - Build partnership with private financiers in the unorganized market to leverage their local knowledge - Partnered with more than 500 private financiers Axis bank co-branded credit cards - Tied up with Axis Bank to distribute credit cards to small truck owners - Distributed over 3,00,000 credit cards as of March 31, 2013 Financials References company-ltd/2967.html Pre-owned vehicles New vehicles Lending yields 18-24% (for 5-12 yrs) 15-16% (for 2-5 yrs) 14-16% Target market Small truck owners (less than 2-3 trucks) with less developed banking habits Existing customers willing to expand business Market share Market leadership with 25- 27% 5-7% market share Performance Asset under management of INR 398 Crores at the end of FY13 Asset under management of INR 95 Crores at the end of FY13 Key Statistics
  6. 6. Concept of the Month Ansoff’s Matrix Igor Ansoff was a Russian/American mathematician who applied his work to the world of business. His most famous work is the Ansoff Matrix. The purpose of this matrix is to help managers consider how to grow their business through existing or new products or in existing or new markets. In this way he was helping managers to assess the differing degrees of risk associated with moving their organisation forward. Marketing strategies: Ansoff’s matrix suggests four alternative marketing strategies which hinge on whether products are new or existing. They also focus on whether a market is new or existing. Within each strategy there is a differing level of risk. The four strategies are: Market penetration – This involves increasing market share within existing market segments. This can be achieved by selling more products/services to established customers or by finding new customers within existing markets. Product development – This involves developing new products for existing markets. Product development involves thinking about how new products can meet customer needs more closely and outperform the products of competitors. Market development – This strategy entails finding new markets for existing products. Market research and further segmentation of markets helps to identify new groups of customers. Diversification – This involves moving new products into new markets at the same time. It is the most risky strategy. The more an organisation moves away from what it has done in the past the more uncertainties are created. However, if existing activities are threatened, diversification helps to spread risk. References : matrix.html#ixzz31lz3nRRd Volume : 2 Issue : 6 BEACON : Page 5 April. 2014
  7. 7.  The first management consultancy to serve both industry and government clients was Booz Allen Hamilton  PwC Russia was a Partner and the Official Professional Services Provider of the XXII Olympic Winter Games and XI Paralympic Winter Games held in the city of Sochi in Feb 2014  More than $500 billion worth of M&A deals were announced just in the first two months of 2014 QUIZ OF APRIL Answers of last beacon March 2014 Quiz : 1. Accenture 2. Ahmad Jauhari, Group CEO of Malaysia Airlines 3. X: Booz & Co., Y: PwC 4. Golden Parachute 5. X: Apollo Tyres, Y: Cooper Tire & Rubber Quiz 1. In the wake of observations made by forensic auditor X, the chief regulator of forwards and futures markets in India has directed the India’s first listed exchange to drop Y as its statutory auditor. Name X and Y. 2. Name the groups the two individuals in the image head. 3.Developed by Y, Xis India’s first ever payment network. Name X and Y 4. An online tool X allows shoppers to compare Y’s prices on food and household products to those of its competitors. Name X and Y. 5. Mondelez International’s JV with Amsterdam's D.E. Master Blendershas created a new global player in the burgeoning coffee market. Name this new player. ANSWERS : MARCH ISSUE Answer To: with Subject= simcon_quiz_april_2014 Winner will be recognized. All Correct Answers will be published in next month’s Edition. Contributions invited: To make this feature a successful effort, we seek continued involvement and contribution from our readers, that is YOU. We invite articles and trivia on themes related to consulting. Be it industry news, consulting trends, a joke, a cartoon or feedback, we are eager to hear from you. So go ahead, do your research, pen down your thoughts and mail your entries to Best Regards, Our FB page : SIMCON –SIMSREE CONSULTING CLUB Mail To: Volume : 2 Issue : 6 BEACON : Page 6 April. 2014 Winner :- Aruna Rathod GIM HCM, Goa