A Comparative Study Of NBFC in India 2010

Table of Contents
EXECUTIVE SUMMARY .................................................................................................................. 3
CHAPTER-1 INTRODUCTION ......................................................................................................... 4
1.1 Types Of NBFC‘s ......................................................................................................................... 5
1.2 Regulations of NBFC‘s ................................................................................................................. 6
1.3 Guidelines for new deposits .......................................................................................................... 8
1.4 Responsibilities ........................................................................................................................... 11
1.5 Current Scenario ......................................................................................................................... 12
CHAPTER-2 Literature review ......................................................................................................... 14
2.1 Importance Of NBFC‘s ............................................................................................................... 15
2.2 Role of NBFC‘s .......................................................................................................................... 16
2.3 On Global Crisis ......................................................................................................................... 17
CHAPTER-3RESEARCH METHODOLOGY ............................................................................... 18
3.1 RESEARCH DESIGN ................................................................................................................ 19
3.2 Objective ..................................................................................................................................... 19
3.3 SCOPE OF THE STUDY ........................................................................................................... 19
3.4 data collection ............................................................................................................................. 19
3.4.1 PRIMARY DATA ............................................................................................................... 19
3.4.2 SECONDARY DATA ......................................................................................................... 19
3.5 Field Work Plan .......................................................................................................................... 20
CHAPTER-4MAJOR PLAYERS AND SELECTED COMPANY FOR STUDY ........................ 21
4.1 LIC HOUSING FINANCe.......................................................................................................... 24
4.1.1 Housing Finance Industry .................................................................................................... 24
4.1.2 Indian Housing Finance scenario ......................................................................................... 25
4.1.3 LIC Housing Finance ........................................................................................................... 26
4.1.4 Financial Performance ......................................................................................................... 28
4.1.5 Macro Economic Analysis ................................................................................................... 33
4.2 Reliance Capital: ......................................................................................................................... 38
4.2.1 Indian Economy: .................................................................................................................. 38
4.2.2 Reliance Capital ................................................................................................................... 39
4.2.3 Financial Performance ......................................................................................................... 41
4.2.4 Macro Economic Analysis ................................................................................................... 44
4.3 Shriram transport finance ............................................................................................................ 47

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4.3.1 ECONOMIC OVERVIEW .................................................................................................. 47
4.3.2 COMMERCIAL VEHICLE INDUSTRY OVERVIEW ..................................................... 47
4.3.3 Shriram Transport Finance................................................................................................... 48
4.3.5 Financial Performance ......................................................................................................... 49
4.3.4 SWOTANALYSIS............................................................................................................... 52
4.4idfc ............................................................................................................................................... 56
4.4.1 Global Financial and Economic Crisis................................................................................. 56
4.4.2 Infrastructure Development Finance .................................................................................... 57
4.4.3 Financial Performance ......................................................................................................... 59
4.4.5 Macro Economic Analysis ................................................................................................... 63
CHAPTER-5 INDIAN BANKS V/S NBFC’S ................................................................................... 65
5.1 Top 5 Banks and NBFCs with highest profitability ................................................................ 67
5.3 Banking versus NBFC regulatory arbitrage in India............................................................... 68
CHAPTER-6 Porter’s five forces ...................................................................................................... 70
CHAPTER-7 FINDINGS & MANAGERIAL IMPLICATIONS................................................... 74
7.1 findings ....................................................................................................................................... 75
7.1.1 Disbursements - Sharp fall during the crisis ........................................................................ 75
7.1.2 Cost of Funding.................................................................................................................... 77
7.1.3 Asset Quality ........................................................................................................................ 77
CHAPTER-8 RECOMMENDATIONS AND CONCUSION ......................................................... 79
8.1 Recommendation: ................................................................................................................... 80
8.2 Conclusion .............................................................................................................................. 80
REFERENCES .................................................................................................................................... 82

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EXECUTIVE SUMMARY

The study presents a comparative study of NBFC’s in India. There are almost 13000 registered
NBFC’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 field

1) Housing Finance Industry: LIC Housing Finance.

2) Infrastructure Finance Industry: IDFC

3) Asset Financing: Shriram Transport Finance

4) Composite: Reliance Capital

The study also compared the Indian Banks v/s NBFC. It was found that at even at the time of the
economic slowdown NBFC was more profitable. Porters Five forces was also used to analyse the
industry and to find the competitiveness in the industry. The industry is not tightly regulated as
there are many regulatory bodies. Hence, there was an important need to study the NBFC as the
industry 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 is
often transcending into misplaced exuberance. Over simplified and vague drivers for NBFC
valuations such as strategic fit and customer base, can never substitute dispassionate business
analytics. A rational assessment of the intrinsic values of NBFCs factoring issues such as past
performance, structural weaknesses of the sector (for instance funding disadvantages), along
with an identification of real capabilities are essential to ensure that the equilibrium between
price paid and value realized is reached to the extent possible. In the absence of this, India is
sure to witness the re-opening of the NBFC horror story albeit with a new chapter on the
erosion of NBFC investment values affecting investors across categories

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CHAPTER-1

INTRODUCTION

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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).

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) Investment Company (IC)
(iii) Loan Company (LC)

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1.2 REGULATIONS OF NBFC’S

 In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC
should be 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 regulated
by 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 45
I(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 do
not 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 the
data 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 status
of 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.
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 All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a
valid Certificate of Registration with authorisation to accept Public Deposits can
accept/hold public deposits. NBFCs authorised to accept/hold public deposits besides
having minimum stipulated Net Owned Fund (NOF) should also comply with the
Directions such as investing part of the funds in liquid assets, maintain reserves,
rating etc. issued by the Bank.

Yes, there is a ceiling on acceptance of Public Deposits. An NBFC maintaining required

NOF/Capital to Risk Assets Ratio (CRAR) and complying with the prudential norms can
accept public deposits as follows:

Category of NBFC having minimum Ceiling on public

NOF of Rs 200 lakhs deposit
AFC* maintaining CRAR of 15% without credit rating 1.5 times of NOF or Rs 10
crore whichever is less

AFC with CRAR of 12% and having minimum investment grade

4 times of NOF
credit rating
LC/IC** with CRAR of 15% and having minimum investment 1.5 times of NOF
grade credit rating

*AFC=Asset Finance Company

** LC/IC = Loan company/Investment Company

As has been notified on June 17, 2008 the ceiling on level of public deposits for NBFCs
accepting deposits but not having minimum Net Owned Fund of Rs 200 lakh is revised as
under:

Category of NBFC having NOF more Revised Ceiling on public

than Rs 25 lakh but less than Rs 200 lakh deposits
AFCs maintaining CRAR of 15% without credit rating and Equal to NOF
AFCs with CRAR of 12% and having minimum investment 1.5 times of NOF
grade credit rating

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LCs/ICs with CRAR of 15% and having minimum investment Equal to NOF
grade credit rating

 Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest
may be paid or compounded at rests not shorter than monthly rests.

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months. They cannot accept deposits repayable on
demand.
 The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 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. The present ceiling is 12.5 per cent per annum. The interest may be paid
or compounded at rests not shorter than monthly rests.
 NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
 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.
 Certain mandatory disclosures are to be made about the company in the Application
Form issued by the company soliciting deposits.
 Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except
deposits by debit to NRO account of NRI provided such amount does not represent
inward remittance or transfer from NRE/FCNR (B) account. However, the existing
NRI deposits can be renewed.

1.3 GUIDELINES FOR NEW DEPOSITS

 Customer identification: 'Know The Customer' (KYC) should be the key guiding
principle for identification of an individual / corporate customer (depositor or
borrower).

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 Accordingly, the KYC framework should have two-fold objective, (i) to ensure
customer identification and verifying his identity and residential address; and (ii) to
monitor transactions of a suspicious nature.
 NBFCs should ensure that the identity of the customer, including beneficial owner is
done based on disclosures by customers themselves.
 Typically easy means of establishing identity would be documents such as Permanent
Account Number (PAN), ration card, driving licence, Election Commission's identity
card, passport, et cetera in case of individuals and registration certificate, partnership
deed/agreement, et cetera and other reliable documents in respect of companies, firms
and other bodies.
 Verification through such documents should be in addition to the introduction by a
person known to the NBFC.

Procedures for existing customers

 In respect of existing customers, NBFCs should ensure that gaps and missing
information in compliance of KYC guidelines on customer identification procedure is
filled up and completed before June 30, 2004.

Ceiling and monitoring of cash transactions

 NBFCs would normally not have large cash withdrawals and deposits.
 However, wherever transactions of Rs 10 lakh (Rs 1 million) and above are
undertaken, they should keep record of these transactions in a separate register
maintained at branch, as well as at Registered Office.
 Such information should be made available to regulatory and investigating authorities,
when demanded.

Guidelines and monitoring procedures

 The board of directors of NBFCs should formulate policies and procedures to

operationalise the guidelines and put in place an effective monitoring system to ensure
compliance by their branches.
 Early computerisation of branch/office reporting will facilitate prompt generation of
such reports and monitoring.
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Internal control systems

 Duties and responsibilities should be explicitly allocated among the staff for ensuring
that policies and procedures are managed effectively and that there is full commitment
and compliance to an effective KYC programme in respect of both existing and
prospective customers/clients.

Internal audit/inspection

 Internal auditors must specifically scrutinise and comment on the effectiveness of the
measures taken by branches / offices of NBFC in adoption of KYC norms and steps
towards prevention of money laundering.
 Specific cases of violation should be immediately brought to the notice of head /
controlling / registered office.

Record keeping

 NBFCs should prepare and maintain proper documentation on their customer

relationships and cash transactions of Rs 10 lakh and above.
 The records of all such transactions should be retained for at least ten years after the
transaction has taken place and should be available for perusal and scrutiny by audit
functionaries as well as regulators and law enforcement authorities; as and when
required, at the branch as well as at registered office.

Training of staff and management

 It is important that all the operating and management staff is made fully aware of the
implications and understand the need for strict adherence to KYC norms.
 NBFCs may take suitable steps to impart training to their operational staff on anti-
money laundering measures.

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1.4 RESPONSIBILITIES

The NBFCs accepting public deposits should furnish to RBI

i. Audited balance sheet of each financial year and an audited profit and loss account in
respect 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;
iii. Certificate from the Auditors that the company is in a position to repay the deposits
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 and
above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;
vii. Monthly return on exposure to capital market by companies having public deposits
of 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) above.

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1.5 CURRENT SCENARIO

Nearly 11 years after the last of the two banking licences were issued by RBI to private sector
entities, 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 top
NBFCs, under the aegis of the Finance Industry Development Council (FIDC), the trade body
for 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 full-fledged banks, sources said. About
12-15 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
semi-urban 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.

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n the last Union Budget, the FM had announced that RBI is considering giving additional
banking licences to private sector players, including NBFCs. This was ostensibly to further
financial inclusion and also to improve the size and sophistication of the Indian banking
system. The announcement set the financial markets on fire with a lot of conjecturing as to
who would be the lucky few. The access to low-cost current account and savings accounts
and the ability to offer all financial products under one roof were cited as major attractions
for NBFCs to rush to seek banking licences. It was also expected that RBI would give new
licences to private players very soon. But, an analysis reveals a different picture. Neither is
RBI in a hurry to issue fresh licences nor are many NBFCs keen to get into commercial
banking.

The reasons for this are manifold. RBI rules are stringent for commercial banks as they are
the visible face of the Indian financial system and commercial banks are primarily the
custodians of public money. RBI places restrictions on commercial banks in their lending
operations. Out of Rs 100 taken in as deposits, approximately Rs 30 has to be set apart as
statutory requirements towards CRR and SLR. This leaves the banks with Rs 70 to lend. Out
of this, 40% has to be statutorily lent towards the priority sector as defined by RBI. This
leaves banks with approximately Rs 42 to lend at their own discretion. Many NBFCs would
definitely find this as restrictive to say the least.

As per the guidelines of 2001, NBFCs seeking a banking licence should have a minimum
paid-up capital of Rs 200 crore, which must be increased to Rs 300 crore within 3 years of
conversion into a bank. Further, banks have to invest large funds in fixed assets and
information technology primarily to facilitate financial inclusion, risk management, anti
money laundering, etc. These huge capital expenditures increase the payback period for the
investments made. Also, banking-as-a-business model is far more people-, process- and
product-driven than a simple NBFC model. For example, in order to adopt universal banking,
the staff needs to be multi-skilled in banking functions. So, the operating expenses will be
substantially higher, which, in turn, would reduce the profitability of operations. Also, there
are restrictions on ownership and voting rights. Current stipulations cap voting rights at 10%;
higher rights require the specific approval of...

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Chapter-2

Literature
review

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2.1 IMPORTANCE OF NBFC’S

According to RBI Non Banking Finance Companies (NBFCs) is a constituent of the
institutional structure of the organized financial system in India. NBFCs perform a significant
and important role in our financial system. They facilitate the process of channelising of
public savings and provide better return to the depositors. We are aware that due to
liberalization and globalisation, banking industry and financial sector has gone through many
reforms. In the present economic environment it is very difficult to cater need of society by
Banks alone so role of Non Banking Finance Companies and Micro Finance Companies
become indispensable. The activities of non-banking financial companies
(NBFCs) in India have undergone qualitative changes over the years through functional
specialisation. The role of NBFCs as effective financial intermediaries has been well
recognised as they have inherent ability to take quicker decisions, assume greater risks, and
customise their services and charges more according to the needs of the clients. While these
features, as compared to the banks, have contributed to the proliferation of NBFCs, their
flexible structures allow them to unbundle services provided by banks and market the
components on a competitive basis. The distinction between banks and non-banks has been
gradually getting blurred since both the segments of the financial system engage themselves
in many similar types of activities. At present, NBFCs in India have become prominent in a
wide range of activities like hire-purchase finance, equipment lease finance, loans,
investments, etc. By employing innovative marketing strategies and devising tailor-made
products, NBFCs have also been able to build up a clientele base among the depositors, mop
up public savings and command large resources as reflected in the growth of their deposits
from public, shareholders, directors and their companies, and borrowings by issue of non-
convertible debentures, etc.

According to KPMG survery The Indian Non Banking Finance Company (NBFC) sector has
often been relegated to the shadows, in most discussions on the Indian Financial Services
(FS) industry. Banks, insurance companies and capital market players take centre stage and
invariably, NBFCs attract public attention only during times of crisis. Little attention has
been paid to the silent but effective manner in which NBFCs have spread their operations
across the country. NBFCs have provided financial solutions to sections of society who
hitherto were at the mercy of unorganized players for credit and savings products, which

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were delivered on economically and socially usurious terms. ronically, in recent times,
NBFCs are once again in the spotlight for their perceived strengths and capabilities rather
than their problems. While this re-rating ought to bring cheer to a much maligned sector, a
degree of caution needs to be instilled within potential investors in NBFCs, who need to
clearly understand the true drivers of value for finance companies. This understanding is
imperative to enable a better judgment of the intrinsic worth of NBFCs. This article proceeds
to illustrate the key factors responsible for the strong re-rating of the NBFC sector, as well as
discuss the validity of each of these factors, as actual drivers of value. Today, the NBFC
sector is as financially sound as it has ever been.To an extent, this can be attributed to the
very problems affecting the sector which have resulted in the purging of several players,
leaving the fittest few to dominate the landscape. Taking the Reserve Bank of India‘s (RBI)
definition of ‗reporting NBFCs‘ as a proxy for non-dormant players, a mere 24 NBFCs held
92.7 percent of the total assets of all NBFCs in 2005-2006. The balance assets, amounting to
less than 8 percent of the total, were fragmented across 439 NBFCs. In addition to this
consolidation, at present, NBFCs in general are well-capitalized with strong parent support. A
majority of active NBFCs reported capital adequacy ratios exceeding 12 percent

2.2 ROLE OF NBFC’S

According to EPW Research Foundation (EPWRFThe Indian economy is going through a
period of rapid `financial liberalisation'. Today, the `intermediation' is being conducted by a
wide range of financial institution through a plethora of customer friendly financial products.
The segment consisting of Non-Banking Financial Companies (NBFCs), such as equipment
leasing/hire purchase finance, loan and investment companies, etc. have made great strides in
recent years and are meeting the diverse financial needs of the economy. In this process, they
have influenced the direction of savings and investment. The resultant capital formation is
important for our economic growth and development. Thus, from both the macroeconomic
perspective and the structure of the Indian financial system, the role of NBFCs has become
increasingly important. The crucial role of Non Banking Finance Institutions (NBFIs) in
broadening access to financial services, and enhancing competition and diversification of the
financial sector has been well recognized. The main advantages of these companies lie in
their ability to lower transactions costs of their operations, their quick decision-making
ability, customer orientation and prompt provision of services. While NBFIs are sometimes
seen as akin to banks in terms of the products and services offered, this is strictly not

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accurate, as more often, NBFIs play a range of roles that complement banks. Further, Status
Note on NBFCs
NBFIs can add to economic strength to the extent they enhance the resilience of the financial
system to economic shocks. A well developed and properly regulated NBFI sector is thus an
important component of broad, balanced, efficient financial system that spreads risks and
provides a sound base for economic growth and prosperity.

2.3 ON GLOBAL CRISIS

According to CARE: NBFC sector faced significant stresses on asset quality, liquidity and
funding costs due to the global economic slowdown & its impact on the domestic economy.
While all the NBFCs were affected, the impact varied according to the structural features of
each NBFC. Asset-liability maturity (ALM) profiles, type of assets financed and origination /
collection models followed were the primary differentiators within NBFCs. The support
provided by the Reserve Bank of India (RBI) highlighted the explicit acceptance of the
systemic importance of the sector. FY10 was marked by re-aligning of the liability profiles,
tightening of lending norms coupled with closing down of many of the unsecured loan
segments. On a structural basis, the sector is now more robust due to the lessons learned by
NBFCs from this crisis. Profitability is expected to be lower than historical levels due to
conservative ALM management, higher provisioning and avoidance of high yielding
unsecured loan segments. However profits are at the same time expected to be much more
stable & less susceptible.

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CHAPTER-3

RESEARCH
METHODOLOGY

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3.1 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 analyze 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 for
research 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 whose details and references has been given in Chapter-
2 and in ―References‖. The source of the secondary data was British Library, NBFC‘s and
Internet.

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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 analyzing the different NBFC‘s work.

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CHAPTER-4

MAJOR PLAYERS AND

SELECTED COMPANY FOR
STUDY

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LIC HOUSING FINANCE

RELIANCE CAPITAL

SHRIRAM TRANSPORT
FINANCE

IDFC

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4.1 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 200
basis 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 installment 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,

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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 encash 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 per
cent 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.

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Earlier to that i.e., 2006 to 2008 home prices increased at a CAGR of 30 to 40 percent against
a 20 percent increment in salariee 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 year
2008-09 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 ininterest 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.

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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 equipments.
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 158
marketing 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 from
large 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 777
Customer
 Relationship Associates (CRAs) comprise its pan-Indian marketing network.
 Representative overseas presence in Dubai and Kuwait.
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 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 networth 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

Interest income from housing loans increased 34.90 percent from Rs. 2036.79 crore in 2007-
08 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.

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Debt-Equity Ratio
12

10

6
Debt-Equity Ratio
4

0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

RONW (%)
30

25

20

15
RONW (%)
10

0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

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PBDTM (%)
30

25

20

15
PBDTM (%)
10

0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

PAT
600
500
400
300
200
PAT
100
0

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ROG-Sales (%)
40
35
30
25
20
15
10 ROG-Sales (%)
5
0

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 to
Rs. 10898.47 crore in 2008-09.
 Disbursements (Ind.+Proj.) grew 23.90 percent from Rs. 7071.48 crore in 2007-08 to
Rs. 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 2.95
percent in 2008-09.
 Return on equity grew by 267 basis points from 21.13 percent in 2007-08 to 23.80
percent in 2008-09.
 Net profit margin improved by 49 basis points from 17.82 percent in 2007-08 to 18.31
percent in 2008-09.

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 Asset Quality: Gross NPA declined by 63 basis points from 1.70 percent in 2007-08
to 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.

On funds

On the performance of the Company : In the turbulent times when Housing sector was
passing through rough patch, LIC Housing Finance largely could manage the environment
well, inspite of various global as well as domestic economic challenges and was successful in
producing good business growth by its inherent strength in meeting difficult challenges
through unceasing and untiring efforts. The Company has not only ensured consolidation of
the gains achieved in the past years, but also ensured further growth and increased
profitability. The year 2008-09 has been a year of further containment of defaults and NPA
levels when compared to previous years.

Lending operations
The main thrust continues on individual loans with a growth of 25 percent as against 20
percent in the previous year. However, project loans were also given due weightage
resulting in a modest growth of 20 percent over previous year. During the year, the Company
sanctioned 67,886 individual loans for Rs. 8,186.02 crore and disbursed 67,237 loans for Rs.
7,351.09 crore during 2008-09. Individual retail loans constitute 75.11 percent of the total
sanctions and 83.94 percent of the total disbursements for the year 2008-09 compared to the
last year‘s figure of 75.84 percent and 83.47 percent respectively. The retail (individual) loan
portfolio grew by over 22 percent from Rs. 20,618.78 crore as on 31st March, 2008 to Rs.
25,252.87 crore as on 31st March, 2009. The cumulative sanctions and disbursements since
the incorporation, in respect of individual oans are: Amount sanctioned : Rs. 45,624.24 crore
Amount disbursed : Rs. 42,993.98 crore

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Non-Performing Assets and provisions:

The amount of gross Non-Performing Assets (NPA) as on 31st March, 2009 was Rs. 297
crores, 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 on
31st March, 2009 is Rs. 240.25 crore. During the year, the Company has written off Rs. 5.40
crore 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.

4.1.5 Macro Economic Analysis

Competition

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The Housing Finance Industry is one of the most keenly competitive segments of the
Economy, with the Banking sector having a significant presence. However, Housing Finance
Companies with a dedicated focus on the industry and better understanding of the underlying
real estate markets stand on a better footing when it comes to understanding the needs and
requirement of the customers as also assessing the risks in the industry. 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 during the calendar year 2009 so far 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 customer affordability are equally important. NHB has lowered
its interest rates on refinance to housing finance companies. Refinance for rural housing at
concessional rate of 8 percent per annum for seven years has also been provided. Its‘ PLR has
been reduced to 10.75 percent per annum. The refinance facility of Rs. 4,000 crore extended
by RBI to NHB will be on-lent by NHB to housing finance companies with a cap of Rs. 400
crore per housing finance company with the condition that the refinance would be available at
an interest of 8 percent, only for loans below Rs. 20 lakh. Housing Finance, the Company,
through its competitive pricing, transparency in operations, wide distribution network and
good customer service, has not only been able to show a good growth in new business, but
has shown an improved retention rate, which is reflected in high growth of loan book.

Opportunities
There are many unique characteristics of housing distinguishing it from other goods. It is a
universal necessity. Home ownership is a social goal, bringing social status to the buyer.
Housing is also a relatively expensive asset, often soaking up a lifetime‘s savings. Housing
properties have a downward sloping demand curve, which means that less people would
effectively buy when prices are high and vice versa. At high prices, buyers postpone their
buying decisions and opt for rented accommodation. At low prices, people often purchase
more than one house. Disposable incomes determine purchasing power. Government policies
relating to interest rates, mortgage subsidies, tax rebate and other taxes like stamp duty etc.
also impact the housing property market. The housing sector is marked by a variety of taxes
and regulations. These are meant to ensure the safety of houses for occupation and to confer
rights of ownership to enable further transactions. Given that building or acquisition of a
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house usually involves several intermediary agents (either statutory like registration of
various title documents or facilitating agents such as brokers, builders or financiers), the final
cost of acquisition includes not just the price of the property that is paid to the seller (in case
the property is purchased) but also all the intervening transaction costs. As for the housing
property market in India, the residential housing property segment constitutes about 75
percent of the real estate market in terms of value. Real estate development activity has
shifted from metros to their suburbs and tier-two cities. A gradual shift to tier-three cities and
rural areas is taking place. Easy availability of finance from the housing finance companies
and commercial banks at lower interest rates, increased salaries and availability of fiscal and
tax benefits are propelling the demand for housing properties. The growth of the Information
Technology Enabled Services (ITES), industry has been a significant contributor of housing
property demand in recent years. ITES firms are moving from traditional centres like
Mumbai, Delhi, Bangalore, Hyderabad and Chennai to the National Capital Region, Pune,
Chandigarh, Jaipur, etc. in order to be cost effective. This is resulting in not only the boom in
residential property markets but also in the institutional property markets in these cities.
There is great demand for modern office buildings and commercial spaces in India.

Threats (bottlenecks)
Impact of legal charges and documentation fees
There are taxes / duties / fees payable to the state at the construction stage. There are two
aspects of the cost namely:
i) monetary cost and;
ii) cost in terms of time devoted in obtaining various permissions and
clearances.
The number of permissions and documentation required can be quite large. Further,
permissions have to be taken from different departments and that too sequentially. This
delays the process of housing construction and occupation. The actual fees imposed by the
government are not necessarily high but the time taken to obtain requisite permissions is very
long, procedures cumbersome and sometimes involves extra payments to facilitate the
movement of files and getting the transaction through, is significant vis-à-vis the statutory
fees. The delays highlight the sluggishness of the market by increasing the gap between
change in demand and the market response to it.

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Future Outlook:
It is estimated that the housing finance industry will be able to maintain a higher growth in
fresh origination of residential home loans over next three to five years mainly due to
increased affordability of the borrower i.e. ratio of average property price to average annual
income, on account of the falling loan interest rates and decrease in property prices. The
average age of borrowers has declined over the years, while the number of double-income
households has grown significantly thereby enabling them to borrow higher loan quantum
due to increased affordability and repayment capacity. The growth drivers will continue to
increase demand for self-occupied residential housing; Revival of economy will certainly
lead to a steady increase in monthly incomes across key sectors. Rising proportion of double
income households, renewed confidence in higher income generation, reassurance of job
security and availability of variety of financing options should stimulate growth of the
housing sector. All these factors will further boost the impact of increased affordability,
leading to the sector‘s steady and comfortable growth. Looking forward, LIC Housing
Finance would like to remain focused in end-user segment for growth and increased
profitability and wish to make the coming year, a year of further consolidation and progress
by crossing greater milestones.

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4.2 RELIANCE CAPITAL:

4.2.1 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 FY
2009. Surprisingly, the agriculture sector slowed down from 4.5 per cent in FY 2008 to -2.2
per 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 from
10.8 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 remainlow 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

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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.

4.2.2 Reliance Capital

(RCL) is a part of the Reliance Anil Dhirubhai Ambani Group and is one of India‘s leading
and fastest growing private sector financial services companies, and ranks among the top 3
private sector financial services and banking groups, in terms of net worth. It is a constituent
of S&P CNX Nifty and MSCI India. Reliance Anil Dhirubhai Ambani Group is amongst
India‘s top 3 business houses with a market cap of US$ 22 billion, and 150 million
customers. It has a strong presence across a wide array of high growth consumer-facing
businesses such as Telecom, Financial Services, Energy, Power, Infrastructure and Media an
Entertainment Reliance Capital has interests in asset management and mutual funds, life and
general insurance, private equity and proprietary investments, stock broking and depository
services, consumer finance, asset reconstruction, institutional broking and distribution of
financial products.
Reliance Capital, a constituent of S&P CNX Nifty and MSCI India, is a part of the Reliance
Anil Dhirubhai Ambani Group (www.relianceada.com). It is one of India's leading, most
valuable and fastest growing financial services companies in the private sector.
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Reliance Capital has interests in asset management and mutual fund; life and general
insurance; consumer finance and industrial finance; stock broking; depository services;
private equity and proprietary investments; exchanges, asset reconstruction; distribution of
financial products and other activities in financial services.
Reliance Mutual Fund is India's largest Mutual Fund with over seven million investors.
Reliance Life Insurance is one of India's fastest growing life insurance companies and among
the top four private sector insurers. Reliance General Insurance is one of India's fastest
growing general insurance companies and among the top three private sector insurers.
Reliance Money is one of India‘s leading retail brokerage houses and distributors of financial
products and services.
Reliance Capital has a net worth of Rs. 7,712 crore (US$ 2 billion) and total assets of Rs.
26,003 crore (US$ 6 billion) as on March 31, 2010.
Reliance Consumer Finance offers a wide range of products, which include personal loans,
vehicle loans (car and commercial), home loans, loan against property, and SME loans. The
focus in this business is primarily the asset quality and the profitability of each loan given;
not merely growth or market share gains. In the September to December quarter of the year,
there was a steep drop in liquidity due to the global financial meltdown that had its fallout on
India. Consequently we slowed our disbursals. This naturally resulted in a smaller loan book,
which fell from Rs.9,513 crore last year to Rs.8,576 crore this year Reliance Consumer
Finance offers a wide range of products which include Home loans, Loans against property,
Vehicle loans (cars and commercial vehicles), SME loans and Personal loans. The focus in
this business is not just on the growth of credit per se but also on the quality of credit. Backed
by the long-standing conservative approach, we have developed stringent in-house credit risk
management systems to ensure the highest quality of credit.There was reduction the size of
our loan book to Rs.8,576 crore (US$ 2 billion) as on March 31, 2009, as against Rs.8,902
crore at the end of December 31, 2008. Our loan book is spread across 1,19,759 customers
and 23 locations. The loan book as on March 31, 2008 was Rs.7,120 crore. Reliance
Consumer Finance generated revenues of Rs.1,200 crore (US$ 261 million) for the year
ended March 31, 2009, as against Rs.395 crore for the corresponding previous period an
increase of 204 per cent. For the year ended March 2009, it achieved a profit before tax of
Rs.91 crore (US$ 20 million) as against Rs.36 crore an increase of 152 per cent. _ Reliance
Capital‘s subsidiaries i.e. Reliance Consumer Finance Pvt. Ltd. and Reliance Home Finance

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Pvt. Ltd. have got approvals from RBI as NBFC and the National Housing Bank for doing the
business of retail financing i.e. consumer finance and homes finance respectively.

Business mix of Reliance Capital

Asset Management Mutual Fund, Portfolio Management, Offshore Fund

Insurance Life Insurance, General Insurance

Consumer Finance & Home Mortgages, Loans against Property , Business Loans, Loans for
Finance Commercial Vehicles, Loans for Construction Equipment,
Auto Loans, Loans against shares, Business Loans

Broking and Distribution Stocks Commodities and Derivatives, Wealth Management

Services, Portfolio Management Services, Investment Banking,
Foreign Exchange and Offshore Investment, Third Party
Products

Other Businesses Asset Reconstruction, Institutional Broking, Private Equity,

Exchanges, Venture Capital

4.2.3 Financial Performance

Debt-Equity Ratio
2
1.8
1.6
1.4
1.2
1
0.8 Debt-Equity Ratio
0.6
0.4
0.2
0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

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PBDTM (%)
100
90
80
70
60
50
40 PBDTM (%)
30
20
10
0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

RONW (%)
25

20

15

10 RONW (%)

0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

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ROG-Sales (%)
160
140
120
100
80
60
40 ROG-Sales (%)
20
0
-20
-40

PAT
1200
1000
800
600
400
PAT
200
0

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 over
45.08 per cent. The operating profit (PBDIT) of the Company increased 46.24 per cent to
Rs.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.408.15
crore, 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

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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.

4.2.4 Macro Economic Analysis

Opportunities
 Low retail penetration of financial services / products in India
 Tremendous brand strength and extensive distribution reach
 Opportunity to cross sell services
 Increasing per-capita GDP
 Changing demographic profile of the country in favour of the young

Threats
 Competition from local and multinational players.
 Execution risk.
 Regulatory changes.
 Attraction and retention of human capital.

Future Outlook
India has survived one of the worst global crises in history better than most other economies.
The recent recovery in many of the leading macro indicators of economic activity has led
many to believe that the worst is over for the Indian economy and we are on our way to a
higher growth trajectory. There has been a resurgence in sales across a variety of sectors
from automobiles to cement, steel and electricity production. Rail and port traffic too has
seen an up tick. The Purchasing Managers‘ Index (PMI) has shown an improvement from a
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low of 49.5 for March to 53.3 for April 2009, signifying a renewed trend of growth in
manufacturing. India is the second major economy after China where the PMI has crossed the
baseline 50 mark, indicating the start of an expansionary ph ase. The growth in first half of
FY 2010 is expected to remain soft, with the economy turning around in the second half. The
drivers of this turnaround include government‘s fiscal stimulus measures, the collapse in
commodity prices, the coming onstream of significant domestic oil and gas output, the recent
infusion of record levels of FDI, the improvement in trade deficit and the environment for
external commercial borrowing (ECB) the fall in the real exchange rate, the RBI‘s aggressive
monetary policy actions and the expected stabilization of the global economy. India remained
the second fastest growing economy in FY 2009 after China. In the light of the ongoing
global recession, India will, even at a modest growth of 6 per cent in FY 2010, be one of the
fastest growing in the world.

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4.3 SHRIRAM TRANSPORT FINANCE

4.3.1 ECONOMIC OVERVIEW

The global economic conditions deteriorated sharply during the year 2008-09 with several
advanced economies experiencing their sharpest declines. The associated adverse effects
spread across emerging market economies (EMEs) particularly by the third quarter of the
year and accentuated the synchronized global slowdown. Inflation conditions witnessed
sharp volatility during the year as headline inflation in major advanced economies firmed up
considerably up to July 2008, but declined sharply thereafter. The global financial
environment entered a crisis phase in mid-September 2008, following the growing distress
among large international financial institutions. India – the third largest economy in Asia is
estimated to have grown less than 7 percent in 2008-09, after growing at an average rate of
around 9 percent or more in three fiscal years to March 2008. This was on account of a
global economic downturn and a contraction in domestic demand.

4.3.2 COMMERCIAL VEHICLE INDUSTRY OVERVIEW

The financial year 2008-09 ended with a net decline of 22.3 percent in new commercial
vehicle (CV) sales (domestic and exports) as compared to the previous year. The industry
witnessed a healthy growth during the first-half of 2008-09, post which the CV sales started
declining at a high rate. This can be primarily attributed to the weakening of macro-
economic indicators, resulting in drop in freight availability, and restricted credit
availability. However, in the fourth quarter, the industry witnessed a slight revival in sales,
on a month-on-month basis, partly driven by the stimulus packages provided by the
government. The key steps taken include reduction in excise duty and provision of
accelerated depreciation to benefit CV buyers. In addition to this, the government also
undertook measures to improve liquidity for NBFCs and provide financial assistance to State
Transport Undertakings for purchasing buses under the Jawaharlal NehruNational Urban
Mission.

MAJOR DEMAND DRIVERS

1. Roadways have remained a dominant transport mode:

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Over the last few decades, roadways have dominantly improved their share due to greater
coverage, higher flexibility of door-to-door delivery and lower risk of handling losses.
Further, the government‘s investment in the development of national highways over the last
few years has led to higher demand for road transport. With further improvement in road
infrastructure and higher growth expected in road transport (which are primarily transported
through roadways), road freight is expected to account for 63.5 percent of the total freight
movement.

2. Higher replacement demand: Higher CV sales over the last few years were also supported
by replacement demand which stemmed from stricter regulations on overloading and
emissions. The Supreme Court, in November 2005, banned overloading of goods‘ trucks and
trailers in excess of prescribed gross vehicle weight.
To reduce pollution, the Automotive Research
OWNERSHIP TREND IN CVS Shriram Transport caters to small truck operators (STO –
owning less than five trucks) and first-time users (FTU),and is currently the only organised
player financing this segment (others are private financiers). STOs and FTUs control around
75 percent of the total truck fleet; however, they have poor freight origination skills and are
therefore dependent on brokers for a majority of their contracts.

4.3.3 Shriram Transport Finance

We are a part of the "SHRIRAM" conglomerate which has significant presence in financial
services viz., commercial vehicle financing business, consumer finance, life and general
insurance, stock broking, chit funds and distribution of financial products such as life and
general insurance products and units of mutual funds. Apart from these financial services,
the group is also present in non-financial services business such as property development,
engineering projects and information technology
Our Company was incorporated in the year 1979 and is registered as a Deposit taking
NBFC with Reserve Bank of India under Section 45IA of the Reserve Bank of India Act,
1934.
STFC decided to finance the much neglected Small Truck Owner. Shriram understood the
power of 'Aspiration' much before marketing based on 'Aspiration' became

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fashionable.Shriram started lending to the Small Truck Owner to buy new trucks. But we
found a mismatch between the Aspiration and Ability. The Truck Operator was honest but
the Equity at his command was not sufficient to support the credit levels required to buy a
new truck.
From Driver to Owner, even if only of a Pre-owned Truck and from Pre-owned Truck to the
New Truck, we have been with him in his journey of Prosperity as he has been our partner in
our road to success and leadership.

4.3.5 Financial Performance

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PBDTM (%)
35

30

25

20

15 PBDTM (%)
10

0
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

RONW (%)
35

30

25

20

15 RONW (%)
10

0
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

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Debt-Equity Ratio
9
8
7
6
5
4 Debt-Equity Ratio
3
2
1
0
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

ROG-Sales (%)
180
160
140
120
100
80
60
ROG-Sales (%)
40
20
0

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ROG-PAT (%)
200
180
160
140
120
100
80
60 ROG-PAT (%)
40
20
0

PUBLICISSUEOFNCDs
To explore and develop additional source of financing and with a view to meet The
Company‘s business operations, The Company, pursuant to the Securities and Exchange
Board of India (Issue and Listing of Debt Securities) Regulations, 2008 and subject to the
necessary approvals, consents and permissions, issued and allotted Secured Non Convertible
Debentures, through a public issue and raised a sum of Rs. 99,999.96 lacs.
Considering the potential in raising funds by issue of non convertible debentures (NCDs),
The Board, at its meeting held on January 18, 2010, has decided to offer and allot, subject to
the aforementioned Regulations and such approvals as may be necessary, secured /
unsecured, NCDs not exceeding Rs. 50,000 lacs in one or more tranches through another
public issue which is expected to open for public subscriptions in May 2010.

4.3.4 SWOTANALYSIS
Strengths

 The pioneer in the pre-owned CVs financing sector

 Knowledge-driven (products as well as local customers) and relationship-based

business model.

 Significant expertise and experience in valuation of pre-owned CVs as well as in

recovery/collection of monthly payments from customers

 Pan-India presence with 484 branch offices all over the country.

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 A well-defined and scalable organisation structure, capable of supporting surging
growth Low delinquency as assets are backed with adequate cover and are easy to
repossess with immediate liquidity

 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

Weaknesses

 The Company‘s business and its growth are directly linked to the GDP growth of the
country.

 Any slowdown in GDP growth may have a negative impact on the business

Opportunities

 Growth in the CV market driven by the economic growth and the infrastructure
development in the country
 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

 Maintaining relationships with customers who are mobile and have no proper
documentation
 Maintaining asset quality
 Regulatory changes in the Non-Banking Financial Company (NBFC) and
transportation sectors

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OUTLOOK AND OPPORTUNITIES

The global financial slump drastically squeezed export demand for our products and services
in the country‘s main US and European markets. The GDP growth for 2008-09 is now
projected to be in the range of 6.5 to 6.7 per cent. The Government of India as well as the
Reserve Bank of India did a splendid task in somewhat insulating the country and its
financial markets from the effects of the world wide crisis. They responded to the challenge
quickly and magnificently, thus minimising the impact of the crisis on India while
maintaining comfortable domestic and foreign exchange liquidity. The Government of India
provided three stimulus packages which, amongst other measures, cut excise duty by four per
cent across the board and increased planned expenditure by Rs. 20,000 crores. Easing of
monetary curbs and regulatory actions of the Reserve Bank ensured that our financial markets
functioned normally in spite of the disturbances across the world. These measures, on one
hand stimulated consumption and on the other hand provided enough liquidity in the financial
markets. These initiatives, coupled with lower commodity prices, are expected to soften the
downswing by stabilising domestic economic activity. Several factors, such as increased
movement of freight at the leading ports, pick-up in project investments, increased hiring, and
encouraging data from a number of key manufacturing segments could be an indicator that
the downtrend has bottomed out and that our economy is poised to regain its lost vigour
shortly. It is reported that auto, cement, steel and capital goods sectors have started
performing strongly which indicates a possible strong turnaround in the economy. Despite
several challenges lying ahead, the Indian economy remains resilient and is widely expected
to grow at around 6 percent in FY 2009-10. The cumulative production data for the Auto
industry for 2008 – 09 recorded a growth of 2.96 percent over 2007 – 08. During 2008-09 the
sales of Commercial Vehicles declined by 21.69 percent when compared to that of last year.
Sales of Medium & Heavy Commercial Vehicles (M&HCV) fell by 33.16 percent and Light
Commercial Vehicles (LCV) recorded a negative growth of 7.10 percent. In spite of the
economic slowdown in the country, Your Company was able to once again post sterling
growth in the FY 2008-09 as well. Your Company was, to a large extent, insulated from the
downswing as it operates mainly in the preowned commercial vehicle segment, and is the
only organised player in this segment.

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4.4IDFC

4.4.1 Global Financial and Economic Crisis

TH E Y E A R 2 0 0 8 - 0 9 SAW the worst global financial and economic crisis in 60 years.
The crisis had a sev ere knock-on effect on the developing and emerging economies,
and caused India to lose much sheen from the stellar economic performance of the past years.
It exacerbated the beginning of a cyclical downturn in India‘s economy and India‘s GDP
growth, which was 9% during 2007-08, slowed to 5.3% in the third quarter of 2008-09.
Although Financial Institutions (FIs) in India have very limited exposure to the ‗toxic‘ or
‗distressed‘ assets, directly or through derivatives, and to the failed and stressed global FIs,
India has felt a strong impact through trade, financial markets and moderation in capital
flows. The impact has also been felt by the infrastructure sector in the country, largely
through weakening of demand, which was pronounced in the transportation sector (see Table
1), and reduced availability of finances, as external capital dried up and the equity market On
the other hand, the global economic slowdown led to softening of commodity prices such as
crude oil, aluminum, iron ore, copper and steel after July 2008, there by reducing the cost of
projects albeit with some time lag. Interest rates also started declining in line with the
monetary policy measures adopted by the Reserve Bank of India. Nevertheless, these positive
effects were offset by the weakening rupee, slackening demand and problems faced by
developers in respect of fund raising. Poor infrastructure continues to hamper the prospects of
economic growth and business in the country.

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meet the growing demand for infrastructure services - regulatory framework and private
sector participation. Notwithstanding such efforts, the progress in capacity expansion in the
different sectors was very limited (see Table 2). The global crisis is only partly to blame as
there are continuing defi ciencies in policy and regulatory frameworks, and delays in decision
making. The delays in allocation of 3G spectrum and allegations of favoured treatment to
some operators for 2G spectrum have done little to strengthen the investment climate in not
only the telecom sector, but in infrastructure per se. Similarly, litigation relating to norms laid
down in the model bid documents for the roads sector delayed the much needed impetus for
new projects under the National Highways Development Programme (NHDP). The
concession agreements finalized for the award of new terminals at major ports in 2007-08
also underwent several revisions during 2008-09. The award and execution of projects also
faced several problems. These include the large number of clearances required from various
government agencies, delays in land acquisition. changes in scope of projects during the
bidding process, inadequate supply of equipment, delays in award of civil works, and weak
project execution capacity.
While financial markets in the US and Europe were feeling the pressure in the second half of
2007-08, other capital markets, especially in emerging economies, did not seem to think that
the sub-prime problem would play out into a full blown crisis of financial confidence. That
changed by the first half of 2008-09, when everyone began to see a clearer picture of the
extent of write-downs undertaken by the major international financial houses on account of
their non-performing assets.

4.4.2 Infrastructure Development Finance

Company Limited (‗IDFC‘ or ‗the Company‘) was set up in 1997 to act as a financier and
catalyst for the development of private sector sponsored infrastructure projects in India. Over
the last 12 years, and more so since the Initial Public Offering (IPO) in July 2005, IDFC has
pursued a focused growth strategy to evolve rapidly into a ‗one-stop-shop‘ for infrastructure
fi nance in India, capable of meeting the increasingly complex and ambitious requirements of
an expanding client base. Infrastructure typically involves projects with long gestation
periods, with each project going through different phases of implementation. Broadly
speaking, it begins with conceptualizing a project. Then the full project plan is developed,
followed by financial closure. Next comes the execution phase, where the underlying

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physical infrastructure is actually created. Finally, the project moves to revenue generation,
when the underlying asset starts getting utilised and generates actual income streams. Each of
the phases has different risk return profiles. IDFC‘s expertise lies in a deep understanding of
the risks and opportunities associated with the different phases of a project‘s lifecycle, and
appropriately packaging differentiated financial solutions that best meet the requirements of
investors and clients at the different stages by progressively expanding the range of its skills,
products and services beyond the traditional project lending to investment banking as well as
different types of asset management. This diversified range of product and service capability
has strengthened IDFC‘s core business model and has propelled the Company into one of
India‘s premier financial services platform leveraging knowledge and talent to span the areas
of infrastructure project finance, asset management and investment banking. Much of IDFC‘s
business is about mobilizing international as well as domestic capital. Naturally, like other
businesses, it has to deal with demand and supply side issues. While the demand side issues
are domestic in nature and relate largely to the appetite for private investment especially in
the Infrastructure sector, the supply side issues are more global. These include factors like
cost of capital, liquidity and investor confidence that are intrinsic to international capital
flows.
On both fronts there were significant developments in the macro-economic environment and
overall market conditions, which played a key role in defining the Company‘s strategy and
progress during 2008-09. In this context, it is important to first analyse the structural changes
that took place in the macroeconomic environment to appreciate the challenges that IDFC
had to face and overcome during 2008-09.

THE BUSINESS ENVIRONMENT AND IDFC

As was reported in last year‘s Annual Report, the fall in housing prices in the US had sparked
off the sub prime lending crisis in the middle of 2007. Credit downgrading by rating agencies
and increased default risk of various housing backed paper, particularly collateralised debt
obligations (CDOs) that were sliced, diced and far removed from the original assets, rapidly
spread throughout the US, and then to the European and Asian financial systems. In a matter
of months, what had started as a US housing problem became a major crisis that affected the
entire global financial system. Several large international financial institutions were left to
grapple with the consequences of large asset write-downs. Soon this led to an unprecedented
contraction of credit in the system — especially in the last three and a half months of 2008,
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after the collapse of Lehman Brothers on 14th September. Thanks to massive financial,
monetary and fiscal interventions by the US as well as major European nations, the acute
financial crisis passed by January 2009. But it scarred the real economy everywhere in the
world. Starting with the US in the third quarter of 2008, every major developed country went
into a recession — which continues till today. At the time of writing this Management
Discussion and Analysis, the global situation remains grim. Indeed, this is the worst
economic downturn that the world has seen since the Great Depression of the 1930s.
 The US has already suffered from three successive quarters of negative GDP growth,
with possibly more to follow. Although it is believed by some that the US economy
will bottom out by the end of the third quarter of 2009, the estimated GDP growth for
2009 will be -2.9%. In April 2009, unemployment was at 8.9%, and rising—the worst
since the early 1980s.
 The Euro area is also in a deep recession, and structurally much worse off than the
US. GDP growth for 2009 is estimated at -3.7%.
 Japan is heading for yet another period of long term de-growth. Industrial output has
been falling by more than 30% every month compared to a year earlier; and GDP
growth for 2009 is being estimated at 6.4%.
 With an estimated 11% to 12% fall in the real value of world trade in 2009, China‘s
growth is expected to reduce to high single digits.
 India‘s growth is down from the 9% plus range of the last three years to 6.7% in
2008-09, with the chances of it being similar in 2009-10.

4.4.3 Financial Performance

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Debt-Equity Ratio
5
4.5
4
3.5
3
2.5
2 Debt-Equity Ratio
1.5
1
0.5
0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

PBDTM (%)
50
45
40
35
30
25
20 PBDTM (%)
15
10
5
0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

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RONW (%)
18
16
14
12
10
8 RONW (%)
6
4
2
0
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

Funding:

IDFC consolidated net profit at Rs. 750 crore for FY 2009

Highlights of FY 2009

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 Profit After Tax of Rs.750 crore for FY 2009 compared to Rs.742 crore in FY 2008
 Balance sheet size as on March 31, 2009: Rs. 29,809 crore : an increase of 7%
 Net NPAs at 0.21% of outstanding loans
 Capital Adequacy Ratio at 23.75% (Tier I – 20.04%; Tier II – 3.71%)
 Net Interest income (NII) of Rs.922 crore : an increase of 33%
 Non Interest Income of Rs. 613 crore in FY 2009
 Assets under management – USD 4.7 bn
 Closure of USD 1.0 bn India Infrastructure Fund and USD 0.70 bn IDFC Private
 Equity Fund III
 At its 72nd Board Meeting held on April 28, 2009, the Board of Directors of
Infrastructure Development Finance Company Limited (IDFC) approved financial
results for the period April 1, 2008 to March 31, 2009 and recommended Dividend at
the rate of Rs. 1.20 per equity share for FY 2009.

ROG-Sales (%)
80
70
60
50
40
30
20 ROG-Sales (%)
10
0

INCOME
 Net Interest Income (NII) increased by 33% from Rs. 694 crore in FY 2008 to
 Rs. 922 crore in FY 2009.
 Net Interest Income (NII) from infrastructure loans increased by 34% from
 Rs. 565 crore in FY 2008 to Rs. 758 crore in FY 2009.
 Net Interest Income from treasury operations increased by 27% from Rs. 129
 crore in FY 2008 to Rs. 164 crore in FY 2009.

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 Non Interest Income for FY 2009 decreased by 1% from Rs. 618 crore in FY 2008 to
Rs.613 crore in FY 2009.
 Fees from IDFC‘s asset management business were Rs. 203 crore in FY 2009.
 Income from Investment banking and broking activity of IDFC was Rs. 115 crore in
FY 2009.
 Income from principal investments was Rs. 184 crore in FY 2009.
 Other fees was Rs.111 crore in FY 2009.

PAT
800
700
600
500
400
300
PAT
200
100
0

PROFITS
 Profit before tax (PBT) increased by 4% from Rs. 1,000 crore in FY 2008 to Rs. 1,036
crore in FY 2009.
 EPS (diluted) at Rs. 5.78 per share
 After accounting for Rs. 278 crore for tax, profit in associate company and minority
interest, the profit after tax (PAT) for FY 2009 increased by 1% to Rs. 750 crore from
Rs. 742 crore in FY 2008.

4.4.5 Macro Economic Analysis

The infrastructure NBFC status, , will allow IDFC to improve fund mobilization and ease
overall funding pressure on the firm. the status will give it higher single-party/group

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exposures, and borrowing from banks could increase to 20% of net worth. Non-infrastructure
NBFCs can currently raise up to 15% of net worth.
Additionally, the firm‘s plan to raise Rs3,500 crore over the next 12 months is a ―pre-
emptive‖ bid to raise capital and stay relevant with the ―SBIs of the world‖, Limaye
told Mint in an interview last week. The state-owned State Bank of India is India‘s largest
lender.
―In the next three years, the opportunity in the infrastructure landscape looks quite attractive
so we think it is a good time to capitalize on the opportunity,‖ he said, estimating that
infrastructure lenders could stand to lend close to Rs3 trillion over the next three-four years,
especially in power, roads and gas distribution.

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CHAPTER-5

INDIAN BANKS V/S

NBFC’S

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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 15th
April -20th May 2008- 09 posted on the website of Bombay Stock Exchange. The have
analyzed 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 year
2008-09. 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 fund
raising. 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) andPower 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 Jindal
President.
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Aggregate net profit to total income ratio of 17 public sector banks and 12 private sector
banks reported to be 10.08 per cent during 2008-09.

5.1 Top 5 Banks and NBFCs with highest profitability

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 and
12.46 per cent respectively, among others. The 7 NBFCs, aggregate total income grew by a
whooping 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 at
18.90 per cent as against 21.80 per cent in FY‘08.

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5.3 Banking versus NBFC regulatory arbitrage in India

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Chapter-6

Porter’s five forces

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PORTER‘S FIVE FORCES MODEL OF COMPETITION

The nature of competition in the industry in large part determines the content of
strategy, especially business level strategy .based it is on the fundamental economics of the
industry, the very profit potential of an industry is determine by competition interaction.
Where these interactions are intense, profittends to be whittled away by the activities of
competing.
Porter‘s model is based on the insight that a corporate strategy shouldmeet the
opportunities and threats in the organizations external environment.Especially, competitive
strategy should base on and understanding of industrystructures and the way they change.
Porter has identified five competitive forces that shape every industry and every market.
These forces determine the intensity of competition and hence the profitability and
attractiveness of an industry. The objective of corporate strategy should be to modify these
competitive forces in away that improve the position of the organization. Porter‘s model
supports analysis of the driving forces in an industry. Based on the information derived from
the Five Forces Analysis, management can decide how to influence or to exploit particular
characteristics of their industry.

Barriers to entry
 Product differentiation is very difficult: As most of the NBFC‘s offer similar types of
loans which caters to same market. Innovation of a product plays a very important
role in the market.
 Licensing requirement: There are already 13000 registered NBFC . So, the licensing
requirement is also low. The regulations are not that stringent as that of a Bank.

Threat of substitute:
 Banks: Banks are important substitutes. As they are leaders in the markets. They have
a quite strong brand presence and a good credit appraisal method also.
 Money Lenders: Small NBFC‘s cater to the rural areas where there is already a very
strong presence. They dominate the market in the rural areas and its mostly the
unorganised market they tap in.

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Bargaining Power of suppliers

 Many alternatives: The suppliers in this case are the depositors or the NBFC‘s funds.
Suppliers have lots of alternatives to put their money. With the risk they can invest
their money. E.g. Low Risks: Banks, Bonds etc. High Risk: Stocks, Investment
 RBI rules and regulations: RBI rules and regulations are not as stringent as of Banks.
NBFC‘s are governed by many bodies. E.g. RBI, FIDC, NHB etc

Bargaining power of consumer very high

 Large no. of alternatives
 Low switching costs
 Undifferentiated services
 Full information about the market
 Threat of competitors
 Large no of NBFC‘s
 High market growth rate
 Low switching costs
 Undifferentiated services
 High fixed cost
 High exit barriers

Rivalry among competitors is very fierce in Indian Non Banking Financial Industry.
The services NBFC‘s offer is more of homogeneous which makes the Company to offer the
same service at a lower rate and eat their competitor market‘s share. Market Players use all
sorts of aggressive selling strategies and activities from intensive advertisement campaigns to
promotional stuff. Even consumer switch from one bank to another, if there is a wide spread
in the interest. Hence the intensity of rivalry is very high. The no of factors has contributed to
increase rivalry those are.

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 A large no of NBFC serving similar loan products: There is so many NBFC‘s and non
financial institution fighting for same pie, which has intensified competition.
 High market growth rate: India is seen as one of the biggest market place and growth
rate in Indian financial industry is also very high. This has ignited the competition.

 Homogeneous product and services: The services banks offer is more of

homogeneous which makes the company to offer the same service at a lower rate and
eat their competitor market‘s share.
 Undifferentiated services: Almost every NBFC provides similar services. Every bank
tries to copy each other services and technology which increase level of competition.
 High exit barriers: High exit barriers humiliate banks to earn profit and retain
customers by providing world class services.

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CHAPTER-7

FINDINGS & MANAGERIAL

IMPLICATIONS

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7.1 FINDINGS

Top-rated NBFCs have not only been successful in managing their market share but also in
protecting their profitability. A combination of the factors cited earlier had helped these
NBFCs earn better returns on their deployment. In fact, almost all the top-rated NBFCs enjoy
a return on total assets that is higher than HDFC Bank's, one of the better-run banks. The
higher return on assets was despite their operating cost ratio being similar to that of HDFC
Bank. For example, operating expenses as a proportion of net margin worked out to 68 per
cent for HDFC Bank. On an average, this was not significantly higher than the ratio for most
top-rated NBFCs. If return on assets were still superior, then it was because of the higher
return on their funds. For top NBFCs, the interest income worked out to 17-21 per cent of
their total assets for the year ended FY. The liquidity in the banking system also helped these
finance companies. Spreads over government securities for AAA rated corporate sector debt
instrument are now only 50 basis points. In other words, if the cost of funds for banking
companies has declined sharply, then top-rated NBFCs have also benefited from such a
decline in interest rates. Some of these companies are now raising funds at 7-8 per cent.

Also, these companies have displayed the ability to manage their portfolio without large
incidence of non-performing assets. For instance, LIC Housing Finance, IDFC and Shriram
Transport Finance boast of net non-performing assets to net advances ratio of less than 1 per
cent. This again has helped them lower the overall cost of operations and, thereby, protect
their profitability. Higher profitability and innovative financing options, such as
securitization, have also helped in boosting the capital adequacy ratio of these NBFCs.
among others, LIC Housing Finance, IDFC and Shriram Transport Finance, Reliance Capital,
boast of capital adequacy ratios upwards of 15 per cent. In other words, their balance sheets
continue to be strong to accommodate further growth in disbursements.

7.1.1 Disbursements - Sharp fall during the crisis

Disbursements were clearly hit during the crisis as is visible from Primary reason for this
initial fall was lack of supply of funds after the market liquidity dried up. Impact however
differed depending on the capital structure of the company, with NBFCs having larger ALM
mismatches and those which had more dependence on mutual funds for funding were
affected more severely as mutual funds themselves faced redemption pressure on their short
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term schemes. To support the sector, RBI undertook several measures to improve liquidity
flow to the NBFC sector. This was a significant development as the regulator highlighted the
systemic importance of the sector.

RBI measures to improve liquidity of NBFCs

 The systemically important non-deposit taking non-banking financial companies
(NBFCs-ND-SI) were permitted to raise short-term foreign currency borrowings.
 Allowed banks to avail liquidity support under the LAF for the purpose of meeting the
funding requirements of NBFCs through relaxation in the maintenance of SLR up to
1.5 per cent of their NDTL.
 Risk weights on banks‘ exposures to claims on NBFCs-NDSI were reduced to 100 per
cent from 150 per cent.
 Setting up of a special purpose vehicle (SPV) for addressing the temporary liquidity
constraints of systemically important non-deposit taking non-banking financial
companies (NBFCs-ND-SI).
 Deferring the higher CAR norms for NBFCs-ND-SI by 1 year.
While liquidity conditions started improving from Q4 FY09, disbursements growth remained
subdued for the sector till the first half of FY10. On a y-o-y basis the cumulative
disbursements showed a fall during Q1 FY10 and H1 FY10. This period saw deterioration in
asset quality of most NBFCs, which was especially high in their unsecured loan portfolios.
Lower disbursements were mainly because of the pull back of NBFCs out of unsecured
lending segments. On a cumulative basis 9ME FY10 disbursements increased by more than
19%. Even if we consider the low base effect of Q3FY09 disbursements, there is clear
indication of pick up in disbursements and a positive outlook for the sector. With
improvement in overall economic activity and higher thrust on infrastructure financing by the
government, the scenario is expected to improve further in FY11.

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7.1.2 Cost of Funding - Shot up during the crisis due to short tenure borrowings,
stabilized now & expected to be less volatile due to larger proportion of long term
funding
Many NBFCs took advantage of the lower interest rate regime at the shorter end of the yield
curve by borrowing short term funds (3months – 1 year) at lower rates and lending for
maturities ranging from 3-4 years at higher rates. However the level of mismatches differed
between NBFCs and those with higher mismatch faced not only liquidity pressure, but their
cost of funding also increased during this period due to inversing of the yield curve and a
general rise in interest rates. Average borrowings costs1 (on an aggregate basis for CARE
rated NBFCs) increased from around 9.5-10.0% in FY08 to 11.5-12.0% in FY09. This shows
the severity of the impact as financial crisis affected funding costs in the second half of FY09
and led to a 200 bps increase for the entire year. The response by NBFCs was to gradually
replace short term funding with long termsources. This is a significant structural change in
the borrowing profiles that will bring more stability in profitability of the sector. However
spreads will also be lower compared to historical levels due to this change. During the 9ME
FY10 cost of borrowing reduced from the average of 11.5-12.0% of FY09 to 10.2 10.5% for
the 9 month period and is expected to remain around these levels for FY10. This however is
still higher than the FY08 levels due to the structural move towards longer term borrowings.

7.1.3 Asset Quality – Deteriorated more due to unsecured loans which is now virtually
stopped by most players, provisioning has improved & asset quality expected not to
worsen further.
Asset quality for the sector deteriorated significantly during the crisis. Aggregate Gross NPA
ratio trended from around 1.1% for FY08 to around 2.1% in FY09. While there was
deterioration in all asset classes, unsecured asset classes (Personal Loans, Unsecured SME
loans) showed the maximum deterioration and were the key drivers for overall increase in
NPAs. Apart from the asset-type financed, another differentiator between asset qualities was
the origination & collection model followed. NBFC‘s which originated majority of their
portfolio through branches & own employees showed better asset quality performance than
those which used the DSA model. Aggregate Gross NPA ratio has further worsened to 3.0%
at the end of 9M FY10, however it is close to peaking out. De-growth in unsecured portfolio
segment has also lowered the portfolio outstanding growth thereby leading to a ‗base effect‘
on the Gross NPA ratio and adding to the rise in reported numbers. Provision coverage has
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increased from around 50% for FY09 to around 60% at the end of 9MFY10 as players have
become more conservative. Unsecured lending has virtually stopped for many NBFCs and
underwriting norms have also been tightened in general for other asset classes. These
developments indicate positive structural changes.

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CHAPTER-8
RECOMMENDATIONS AND
CONCUSION

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8.1 Recommendation:
 Domestic Financial markets can be integrated by making NBFC‘s Channel partners to
Banks. It will help in better allocation and funds availability. It will also help in better
management of Financial services sector in India..
 Enhancing the credit delivery mechanisms: The credit delivery mechanism needs to
be more transparent and hassle free. There should be more stringent norms for the
defaulters.
 Strengthening the professionalism of NBFC sector through education and training:
NBFC‘s are organized players. Regulatory body needs to educate people about
NBFC.
 To reduce in interest cost and hence benefit the ultimate consumer.

8.2 Conclusion
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 is
often transcending into misplaced exuberance. Over simplified and vague drivers for NBFC
valuations such as strategic fit and customer base, can never substitute dispassionate business
analytics. A rational assessment of the intrinsic values of NBFCs factoring issues such as past
performance, structural weaknesses of the sector (for instance funding disadvantages), along
with an identification of real capabilities are essential to ensure that the equilibrium between
price paid and value realized is reached to the extent possible. In the absence of this, India is
sure to witness the re-opening of the NBFC horror story albeit with a new chapter on the
erosion of NBFC investment values affecting investors across categories.
Ratings of the NBFCs whose profitability and asset quality was affected due to the crisis
were supported by their strong parentage. Based on the parental strength some players have
raised further equity and also managed to re-align their business models while maintaining
their solvency. overall positive outlook on the sector due to the better ALM position, focus
on relatively safer asset classes and the demonstrated acceptance of the sector as systemically
important by the regulator. The crisis has imposed an overall sense of ‗caution‘ even for the
newer entrants in the market. Also going forward higher capital adequacy norms will put a

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fairly conservative cap on the leverage of the sector thereby improving the credit profile of
many entities (NBFC-NDSI)

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REFERENCES

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http://www.scribd.com/doc/22498809/Porter‘s-Five-Forces-Model-of-Competition
http://www.financialexpress.com/news/Column---Why-NBFCs-may-not-want-to-be-banks/614492/
http://www.stockwatch.in/nbfcs-offering-high-dividends-yet-again-25964
http://www.livemint.com/2010/04/30204917/IDFC-seeks-infrastructure-NBFC.html
http://www.encyclopedia.com/doc/1G1-143176307.html
http://mba-bba-dissertations.blogspot.com/2010/05/capital-structure-of-indiabulls-nbfc.html
http://www.nbfc.rbi.org.in
http://www.rediff.com/money/2007/jul/20nbfc.htm
http://www.thehindubusinessline.com/2009/11/14/stories/2009111451870100.htm
http://indiabudget.nic.in/es98-99/chap35.pdf
http://www.banknetindia.com/finance/fbanking.htm
http://www.mydigitalfc.com/news/nbfcs-again-doling-out-higher-dividend-fy10-732
www.livemint.com/2008/.../The-multiplicity-of-regulation.html
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Annual Reports:
1) LIC Housing Finance
2) IDFC
3) Reliance Capital
4) Shriram Transport Finance
Research Papers:
 India Vantage by KPMG
 Indian Banks v/s NBFC’s
 NBFC Research by CARE

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