Banking and NBFC

NBFCs & Banks In
INDIA
Debraj Das | Debayan Ray
Koushik Dutta | Anindya Mondal
School of Management Sciences
Indian Institute of Engineering Science and Technology,
Shibpur

ADVANTAGE INDIA
©Debraj,Debayan,Koushik&Anindya
2
Robust Demand
• Increase in working population
and growing disposable incomes
will raise demand for banking
and related services
• Housing and personal finance
are expected to remain key
demand drivers
• Rural banking is expected to
witness growth in the future
Innovation in services
• Mobile, Internet banking and
extension of facilities at ATM
stations to improve operational
efficiency
• •Vast un-banked population
highlights scope for innovation
in delivery
Policy support
• Wide policy support in the form
of private sector participation
and liquidity infusion
• Healthy Regulatory oversight
and credible Monetary Policy by
the RBI have leaf strength and
stability to the country’s
banking sector.
Business fundamentals
• Rising fee incomes improving
the revenue mix of banks
• High net interest margins,
along with low NPA levels,
ensure healthy business
fundamentals
FY12
Total
asset
size:
₹90.12
trillion
FY25E
Total
asset
size:
₹1712.28
trillion

Evolution of the Indian banking sector
3
1921
1935
1936 - 1955
1956 - 2000
2000 onwards
• Closed market
• State-owned
Imperial Bank of
India was the only
bank existing
• RBI was
established as
the central
bank of country
• Quasi central
banking role of
Imperial Bank
came to an end
• Imperial Bank
expanded its
network to 480
branches
• In order to increase
penetration in rural
areas, Imperial
Bank was converted
into State Bank of
India
• Nationalisation of
14 large
commercial banks
in 1969 and 6
more banks in
1980
• Entry of private
players such as
ICICI intensifying
the competition
• Gradual
technology
upgradation in
PSU banks
• Number of banks
increased to 27
public sector banks,
22 private sector
banks and 41
foreign banks
• Advent of mobile
and internet
banking
• Growing FDI in the
Indian banking
sector
Source: Indian Bank’s Association, Aranca Research, BMI Notes: RBI - Reserve Bank of India, FDI – Foreign Direct
Investment Note: The data on number of banks belongs to FY11

Growth in deposits
4
489
665
822
763
1030
1182 1170
1274
1453
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Growth in deposits over the past few years
($ bn)
Series 1

Asset Base of Banks
5
100 100 120
250 236
300
940
1000
1090
1290
1336
1510
FY10 FY11 FY12
Asset Base ($bn)
Foreign Banks Private Banks Public Banks Total Linear (Total)

Growth in Money Supply
6

Market Share by Deposits
7
78.2 77.5
17.1 18.2
4.7 4.3
FY05 FY12
Market Share by deposits
Public Banks Private Banks Foreign Banks

Incomes of Banks
8
56.9
63.8
76.3
101
17.7 17.3 20.2 27.96.3 5.5 5.9 7.6
FY09 FY10 FY11 FY12
Incomes from interest ($
bn)
8.9
10.2 10
10.5
3.7
4.3 4.3
5.1
3.1
2.1 2.3 2.3
FY09 FY10 FY11 FY12
Other Income ($ bn)

ROI of Banks
9
91%
100% 97%
128% 126%
79%
103%
96%
143%
175%
89% 88% 88%
153%
176%
SBI & ITS
ASSOCIATE
NATIONALISED
BANKS
PUBLIC BANKS PRIVATE BANKS FOREIGN
BANKS
Return on Asset
FY10 FY11 FY12

ROI of Banks
10
77%
71%
73%
77%
70%
80%
74%
76%
80%
81%
82%
76%
78%
82%
83%
SBI & ITS
ASSOCIATE
NATIONALISED
BANKS
PUBLIC BANKS PRIVATE BANKS FOREIGN
BANKS
Loan-to-Deposit Ratio
FY10 FY11 FY12

11
All About Indian Banks:
RBI
(Apex Bank)
Scheduled
Banks
Co-operative
banks
Urban co-
operative
Banks (52)
State co-
operative
Banks (16)
Commercial
Banks
Public Sector
Banks (27)
Private
Sector Banks
(30)
Foreign
Banks (40)
Regional
Rural Banks
(196)
Unscheduled
Banks
State Banks of Indian and
associates (8 )and other
nationalised bank (19)

Primary Functions
• Accepting Deposits
1. Saving Deposits
2. Fixed Deposits
3. Current Deposits
4. Recurring Deposits
12
• Granting of Loans and Advances
1. Overdraft
2. Cash Credits
3. Loans
4. Discounting of Bill of Exchange
So, Profit of a Bank is = ∑ Loan amount x lending interest rate
−
∑ Publics’ deposit amount x deposit interest rate

Secondary functions
• Agency Functions
The bank acts as an agent of its
customers.
Transfer of Funds
1. Collection of Cheque
2. Periodic Payments
3. Portfolio Management
4. Periodic Collections
5. Other Agency Function
13
• General Utility Functions
Issue of Drafts, Letter of Credits,
etc.
1. Locker Facility
2. Underwriting of Shares
3. Dealing in Foreign Exchange
4. Project Reports
5. Social Welfare Programs
6. Other Utility Functions

14
Indian Banks:
Public Sector Banks Private Sector banks Foreign Bank

• A company registered Company Act -1956
• RBI Act, 1934- 45-IA - Every NBFC should be registered with RBI to
commence or carry on any business of non-banking financial institution.
• NBFCs are financial intermediaries engaged primarily 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
• does not include any institution whose principal business that of
agriculture activity
industrial activity
Sale / purchase / construction of immovable property.
What are NBFC’s
15

Exemption from Registration
• Certain category of NBFCs which are regulated by other regulators are
exempted from the requirement of registration with RBI:
 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 Funds Act, 1982, Sec 2 (b)
 Housing Finance Companies regulated by National Housing Bank.
16

Features of NBFC’s
• All the NBFC are not entitled to accept public deposits.
 Only those NBFCs holding a valid Certificate of Registration (CoR) with authorisation to accept
Public Deposits can accept/hold public deposits.
 The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund and
comply with the Directions issued by the Bank.
• Accept deposit for a period less than 12 months and more than 60 months
• They cannot accept deposits repayable on demand
• NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from
time to time (at present @12.5% © RBI)
• NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
17

Features of NBFC’s
• NBFCs (except certain AFCs) should have minimum investment grade credit rating.
• The deposits with NBFCs are not insured
• The repayment of deposits by NBFCs is not guaranteed by RBI
• There are certain mandatory disclosures about the company in the Application Form
issued by the company soliciting deposits
• If a NBFC defaults in repayment of deposit, the depositor can approach
A. Company Law Board
B. Consumer Forum
C. file a civil suit to recover the deposits.
18

Types of NBFCs
• NBFCs can be classified into two broad categories, viz.,
 NBFCs accepting public deposit (NBFCs-D)
 NBFCs not accepting/holding public deposit (NBFCs-ND)
• Residuary Non-Banking Company
 Residuary Non-Banking Company is a class of NBFC which is a company and
has as its principal business the receiving of deposits, under any scheme or
arrangement or in any other manner and not being Investment, Leasing, Hire-
Purchase, Loan Company.
 These companies are required to maintain investments as per directions of RBI,
in addition to liquid assets.
19

Major NBFCs in India
• Birla Global Finance
• Cholamandalam Investment & Finance Co. Ltd
• First Leasing Company of India
• Sundaram Finance
• Countrywide Finance
• Housing Development Finance Company
• LIC Housing Finance
• CanFin Homes
• Sakura Capital India Ltd
20

Why NBFC’s?
• Only 34% of Indian individuals have access to banks.
• Banks have a lot of constraints in lending.
• Conditions for getting a loan.
• Proximity of financial services.
• Size of loans.
• Higher risk taking ability.
• Innovative business model.
• Expert skills.
• Relationship with customers.
• Single product and dedicated business.
21

Some examples
• In infrastructure financing credit risk evaluation is the main job.
• For collecting the dues they use human resources and pay them
lower than what banks pay. Banks lack here.
• In truck financing majority of the truck drivers don’t have proper
papers to get the loans.
• Many SME’s in India are like truck drivers.
• In home finance, housing finance companies (HFC) flourish with
higher focus and better customer service.
• NBFC’s are the top priority in the above sectors.
22

BANKS Vs. NBFC’s
• NBFC cannot collect deposits in the manner of a bank
• Interest rates for NBFC’s are different compared
• NBFC is not a part of the payment and settlement system and as
such an NBFC cannot issue cheque drawn on itself
• NBFC cannot issue Demand Drafts like banks
• While banks are incorporated under banking companies act, NBFC
is incorporated under company act of 1956.
• Deposit insurance facility of DICGC is not available for NBFC
depositors unlike in case of banks.
• NBFC cannot engage into -
1. agriculture activity,
2. industrial activity,
3. sale/purchase/construction of immovable property
23

Online & ATM usages
24
1988-94
1995-99
2001-2004
2004-2006
2007 onwards
• Deposit of Cash
• Withdrawal of
Cash
• Mini-statement
• Balance
Enquiry
• Coupon dispensing
• Fulfilling request
from customers
• Account Transfer
• Touch screen
menus
• Bill payments
• Mobile
Recharging
• Check Deposit with
scanning
• Customised ATMs
Source: IBA statistics, Aranca Research

Growth in ATMs
25
16750 21509
27088
34789
43651
60153
74743
104500
210000
2005 2006 2007 2008 2009 2010 2011 2012 2014 E
Growth in ATMs – CAGR 29.9%
No of ATMs Expon. (No of ATMs)

ADVANTAGE INDIA
26
0.40%
9.20%
15.20%
24.30%
37.50%
39.90% 40.80%
2007 2008 2009 2010 2011 2012 2013
Rural Teledensity
Rural Teledensity

New Banking Licences as on 04-04-2014
• Bandhan Financial Services
• Infrastructure Development Finance Company (IDFC)
• A committee headed by former RBI governor Bimal Jalan
had
 examined 25 applications for new banking licences,
 L&T Finance
 an arm of engineering-to-IT conglomerate Larsen & Toubro
 Bajaj Finance
 Anil Ambani-controlled Reliance Capital
 Aditya Birla Financial Services.
27

Notable trends in Banking Sector
28
Increasing focus on Women Banking
Wide usability of RGTS & NEFT
Know Your Client (KYC)
Technological Innovations
Diversification of Revenue stream
Improved Risk Management Practices

Thank you all…
29

Banking and NBFC

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