PROJECT DISSERTATION

ON

“Modeling Determinants of Financial Performance of Non Banking

Finance Companies in India”
SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE AWARD OF
THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION

SUBMITTED BY:
ABHISHEK RANA
Enrollment No. 130219002
MBA, Semester III
Batch 2019 – 2021

Project Guide
Ms. Ambkia bhatia Faculty Guide
Ms. Ambika Bhatia

Community Center, Plot No. 2

&3, Near, Police Station Rd, Sector 3, Rohini, Delhi,
110085
 TABLE OF CONTENTS
Page No.

Student Declaration……………………………………………………………………………i

Certificate from Faculty Guide ……………………………………....…....................ii

Acknowledgement.........................................................................................................iii

Executive Summary…………………………………………………………………………...iv

List of Tables……………………………………………………………………………………v

INTRODUCTION Page No. 1-34

1.1 About the Topic

1.2 About the Industry or About the Company
1.3 Literature Review

RESEARCH METHODOLOGY Page No. 35-36

2.1 Purpose of the study

2.2 Research Objectives of the study
2.3 Research Methodology of the study
2. 3.1 Research Design
2.3.2 Method of Data Collection
2.3.3 Sample Design
2.3.3.1 Sample Unit
2.3.3.2 Sample Size
2.3.4 Designing Questionnaire
2.4 Limitations

ANALYSIS& INTERPRETATION Page No. 37-42

3.1 Analysis & Interpretation

FINDINGS AND SUGGESTIONS Page No.43

4.1 Findings
4.2 Suggestions

CONCLUSION Page No. 44-45

5.1 Conclusion
5.2 Scope for future research

REFERENCES

ANNEXURES
 Student’s Declaration

This is to certify that I have completed the Project titled “Modeling Determinants of

Financial Performance of Non Banking Finance Companies in India”

for the award of t he degree of “Masters in Business Administration” from “Jagannath
institute of Management and Science, New Delhi.”

It is also certified that the project of mine is an original work and the same has not been
submitted earlier elsewhere.

Abhishek Rana
Enrollment No. 130219002
MBA III Semester

i
 Certificate from Faculty Guide

This is to certify that the project titled “ Modeling Determinants of Financial

Performance of Non Banking Finance Companies in India ” is an acad emic

work done by “Abhishek Rana” submitted in the partial fulfillment of the requirement
for the award of the degree of “Masters in Business Administration” from “Jagannath
institute of Management and Science, New Delhi.” under my guidance and direction.

To the best of my knowledge and belief the data and information presented by him / her
in the project has not been submitted earlier elsewhere.

Place & Date

Signature and name(s) Signature of Head of the Department

of the Supervisor(s)
Department

ii
 ACKNOWLEDGEMENT

First and foremost, I‟d like to thank my guide Ms. Amandeep Kaur, for
providing me with an opportunity to work under him through the medium of this
research project. She has been instrumental in my being able to complete this
project to the best of my capabilities.

I would also take this opportunity to express my gratitude and thank all other
individuals who have been kind enough to spare their precious time in sharing
insights with me, which has facilitated in making this project a more fruitful
outcome. A special mention to acknowledge the assistance provided by some of
our esteemed faculty members, my friends, family and industry professionals, for
always being available to attend to all my doubts, inhibitions and queries.

A word of thanks also to the administrative staff at RDIAS for their perennial
support in making available all possible facilities, in turn aiding my research for
this project.

Finally, I wish to thank all my colleagues at RDIAS for their constant support and
motivation, which has contributed in making this project a better effort.

iii
 EXECUTIVE SUMMARY

A study was conducted based on modeling of financial performance of top performing

NBFCs in India. The study takes into account 8 financial variables of concerned
companies. The study‟s sample size consists of 10 Non Banking financial companies
having significant asset size across India. The study has been prepared using 3 years‟ of
data. So the dataset is both cross-sectional and time-series data. The mathematical
modeling, statistical inferences have been drawn using EViews.

The financial performance gets reflected in the profitability of the firm and thus this study
entails modeling of profitability and finding its relationship with different financial
parameters. Traditionally Return on Asset and Return on Net Worth have been taken as
measure of profitability in different studies. But here, besides modeling profitability with
ROA as measure of profitability , in an another case Net Profitability Margin has been
chosen as the proxy for measuring profitability in accordance with CRISIL‟s
methodology of ranking NBFCs; an approach completely focused on NBFCs in India as
regulatory environment vary a lot in different economies and thus measures of
performance can vary.

Profitability equation has been modeled using different financial parameters which are a
part of CAMELS (Capital, Adequacy, Asset-quality Management, Earnings, Liquidity,
and Sensitivity) approach concerning asset quality ,liquidity ,operating efficiency, credit
costs, earnings of the companies to result into development of a robust financial
performance model.

The implications from the statistical inferences have also been documented in the report.
The study shows the relationship between the dependent variables and independent
variables and its business implications. This helps in interpreting the behavior of financial
variables and establishes a meaningful connection with operational activities.
 List of Tables-

Serial No Table No Table Title

1 1.1 Regulatory Authorities of NBFC’s

2 1.2 Companies Overview

3 3.1 Descriptive Analysis

4 3.2 Correlation Matrix

5 3.3 Multiple Regression Analysis

 CHAPTER 1
INTRODUCTION

1.1 About the topic

Financial performance is a subjective measure of how well a firm can use assets from its
primary mode of business and generate revenues. The term is also used as a general measure of a
firm's overall financial health over a given period.
Analysts and investors use financial performance to compare similar firms across the same industry
or to compare industries or sectors in aggregate.

There are many ways to measure financial performance, but all measures should be taken in
aggregate. Line items, such as revenue from operations, operating income, or cash flow from
operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to
look deeper into financial statements and seek out margin growth rates or any declining debt. Six
Sigma methods focus on this aspect.

There are many stakeholders in a company, including trade creditors, bondholders, investors,
employees, and management. Each group has its own interest in tracking the financial performance
of a company. Analysts learn about financial performance from data published by the company in
Form 10K, also known as the annual report. Public companies must publish the SEC required 10K
form. The purpose of the report is to provide stakeholders with accurate and reliable financial
statements that provide an overview of the company's financial performance.

In addition, company leaders audit and sign these statements and other disclosure documents. In this
way, the 10K represents the most comprehensive source of information on financial performance
made available to investors annually. Included in the 10K are three financial statements: the balance
sheet, the income statement, and the cash flow statement.

The financial performance identifies how well a company generates revenues and manages its assets,
liabilities, and the financial interests of its stakeholders.

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Balance Sheet-

The balance sheet is a snapshot of the financial balances of an organization. It provides an overview
of how well the company manages its assets and liabilities. Analysts can find information about
long-term vs. short-term debt on the balance sheet. They can also find information about what kind
of assets the company owns and what percentage of assets are financed with liabilities vs.
stockholders' equity.

Income Statement-

The income statement provides a summary of operations for the entire year. The income statement
starts with sales or revenues and ends with net income. Also referred to as the profit and loss
statement, the income statement provides the gross profit margin, the cost of goods sold, operating
profit margin, and net profit margin. It also provides an overview of the number of shares
outstanding, as well as a comparison against performance the prior year.

Cash Flow Statement-

The cash flow statement is a combination of both the income statement and the balance sheet. For
some analysts, the cash flow statement is the most important financial statement because it provides
a reconciliation between net income and cash flow. This is where analysts see how much the
company spent on stock repurchases, dividends, and capital expenditures. It also provides the source
and uses of cash flow from operations, investing, and financing.

For any financial professional, it is important to know how to effectively analyze the financial
statements of a firm. This requires an understanding of three key areas:

 The structure of the financial statements

 The economic characteristics of the industry in which the firm operates and
 The strategies the firm pursues to differentiate itself from its competitors.

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  There are generally six steps to developing an effective analysis of financial
statements.

1. Identify the industry economic characteristics.

First, determine a value chain analysis for the industry —the chain of activities involved in the
creation, manufacture and distr ibution of the firm’s products and/or services. Techniques such as
Porter’s Five Forces or analysis of economic attributes are typically used in this step.

2. Identify company strategies.

Next, look at the nature of the product/service being offered by the firm, including the uniqueness of
product, level of profit margins, creation of brand loyalty and control of costs. Additionally, factors
such as supply chain integration, geographic diversification and industry diversification should be
considered.

3. Assess the quality of the firm’s financial statements.

Review the key financial statements within the context of the relevant accounting standards. In
examining balance sheet accounts, issues such as recognition, valuation and classification are keys to
proper evaluation. The main question should be whether this balance sheet is a complete
representation of the firm’s economic position. When evaluating the income statement, the main
point is to properly assess the quality of earnings as a complete represe ntation of the firm’s economic
performance. Evaluation of the statement of cash flows helps in understanding the impact of the
firm’s liquidity position from its operations, investments and financial activities over the period— in
essence, where funds came from, where they went, and how the overall liquidity of the firm was
affected.

4. Analyze current profitability and risk.

This is the step where financial professionals can really add value in the evaluation of the firm and its
financial statements. The most common analysis tools are key financial statement ratios relating to
liquidity, asset management, profitability, debt management/coverage and risk/market valuation.

3
With respect to profitability, there are two broad questions to be asked: how profitable are the
operations of the firm relative to its assets —independent of how the firm finances those assets —and
how profitable is the firm from the perspective of the equity shareholders. It is also important to learn
how to disaggregate return measures into primary impact factors. Lastly, it is critical to analyze any
financial statement ratios in a comparative manner, looking at the current ratios in relation to those
from earlier periods or relative to other firms or industry averages.

5. Prepare forecasted financial statements.

Although often challenging, financial professionals must make reasonable assumptions about the
future of the firm (and its industry) and determine how these assumptions will impact both the cash
flows and the funding. This often takes the form of pro-forma financial statements, based on
techniques such as the percent of sales approach.

6. Value the firm.

While there are many valuation approaches, the most common is a type of discounted cash flow
methodology. These cash flows could be in the form of projected dividends, or more detailed
techniques such as free cash flows to either the equity holders or on enterprise basis. Other
approaches may include using relative valuation or accounting-based measures such as economic
value added.

The next steps

Once the analysis of the firm and its financial statements are completed, there are further questions
that must be answered. One of the most critical is: “Can we really trust the numbers that are being
provided?” There are many reporte d instances of accounting irregularities. Whether it is called
aggressive accounting, earnings management, or outright fraudulent financial reporting, it is
important for the financial professional to understand how these types of manipulations are
perpetrated and more importantly, how to detect them.

4
 Ratios used to determine Profitability of the firm.

 Loan-to-Value Ratio-

The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the
value of an asset purchased. The term is commonly used by banks and building societies to represent
the ratio of the first mortgage line as a percentage of the total appraised value of real property. For
instance, if someone borrows $130,000 to purchase a house worth $150,000, the LTV ratio is
$130,000 to $150,000 or $130,000/$150,000, or 87%. The remaining 13% represent the lender's
haircut, adding up to 100% and being covered from the borrower's equity. The higher the LTV ratio,
the riskier the loan is for a lender.

The valuation of a property is typically determined by an appraiser, but a better measure is an arms-
length transaction between a willing buyer and a willing seller. Typically, banks will utilize the
lesser of the appraised value and purchase price if the purchase is "recent" (within 1 –2 years).
Combined loan to value ratio (CLTV) is the proportion of loans (secured by a property) in relation to
its value. The term "combined loan to value" adds additional specificity to the basic loan to value
which simply indicates the ratio between one primary loan and the property value. When "combined"
is added, it indicates that additional loans on the property have been considered in the calculation of
the percentage ratio.

The aggregate principal balance(s) of all mortgages on a property divided by its appraised value or
purchase price, whichever is less. Distinguishing CLTV from LTV serves to identify loan scenarios
that involve more than one mortgage. For example, a property valued at $100,000 with a single
mortgage of $50,000 has an LTV of 50%. A similar property with a value of $100,000 with a first
mortgage of $50,000 and a second mortgage of $25,000 has an aggregate mortgage balance of
$75,000. The CLTV is 75%.

Combined loan to value is an amount in addition to the Loan to Value, which simply represents the
first position mortgage or loan as a percentage of the property's value.

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  Non-Interest Margin-

Non interest margin is a financial measurement that helps asses the usefulness of revenue from non-
interest items such as fees and service charges. This is a measurement of significance, particularly
for banks and credit card companies. Also referred as non-interest margin, it is the difference
between non-interest income and non-interest expenses divided by total earning assets.

Calculate non-interest income. Any income a company earns from activities other than its core
business or from investments is termed as non-interest income. This type of income is also referred
to as "fee income," since fees tend to make up for the majority of non-interest income. If the amount
of non-interest income isn't readily available, you can calculate it by adding together such sources of
non-interest incomeas fiduciary duty or trust income, trading revenue, service charges, fee income
and other miscellaneous income not made from core business or investments.

Calculate non-interest expense. Acompany's fixed operating and overhead costs are classified as non-
interest expense. Employee salaries and benefits tend to make up the majority of non-interest
expense. Other non-interest expenses include unemployment tax, insurance, operation and
maintenance of facilities, costs to maintain equipment, furniture, and vehicles. The total amount for
the non-interest expense can be obtained by adding together all items classified or deemed as fixed
operating costs of a business.

No interest margin is a financial measurement that helps asses the usefulness of revenue from non-
interest items such as fees and service charges. This is a measurement of significance, particularly
for banks and credit card companies. Also referred as non-interest margin, it is the difference
between non-interest income and non-interest expenses divided by total earning assets.

Calculate non-interest income. Any income a company earns from activities other than its core
business or from investments is termed as non-interest income. This type of income is also referred
to as "fee income," since fees tend to make up for the majority of non-interest income. If the amount
of non-interest income isn't readily available, you can calculate it by adding together such sources of
non-interest incomeas fiduciary duty or trust income, trading revenue, service charges, fee income
and other miscellaneous income not made from core business or investments.

6
Calculate non-interest expense. Acompany's fixed operating and overhead costs are classified as non-
interest expense. Employee salaries and benefits tend to make up the majority of non-interest
expense. Other non-interest expenses include unemployment tax, insurance, operation and
maintenance of facilities, costs to maintain equipment, furniture, and vehicles. The total amount for
the non-interest expense can be obtained by adding together all items classified or deemed as fixed
operating costs of a business.

Calculate total earning assets. Earning assets are assets that generate revenue without any work
needing to be done. You can calculate the total earning assets by adding together interests on leases
and loans, dividends from investment securities bonds, stocks, certificates of deposit, or any other
items that earn interest or dividends.

Calculate no interest margin. Once you have values for the three required variables in the equation
you can get the no interest margin by calculating the difference between non-interest income and
non-interest expenses and dividing it by total earning assets.

In equation form: no-interest margin= (non-interest income - non-interest expense)/ (total earning
assets).
For instance, if a financial firm earns $500,000 in a month from fees and service charges, registers
fixed operating costs of $400,000 and total earnings on assets are $100,000.
the rate of no interest margin will be 1. Financial firms either want non-interest income to write off
non-interest expense or record a positive no interest margin.

 Capital Adequacy Ratio-

The capital adequacy ratio (CAR) is a measurement of a bank's available capital expressed as a
percentage of a bank's risk-weighted credit exposures. The capital adequacy ratio, also known as
capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability
and efficiency of financial systems around the world. Two types of capital are measured: tier-1
capital, which can absorb losses without a bank being required to cease trading, and tier-2 capital,
which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to
depositors.

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Calculating CAR
The capital adequacy ratio is calculated by dividing a bank's capital by its risk-weighted assets. The
capital used to calculate the capital adequacy ratio is divided into two tiers.

CAR = {Tier~1~Capital + Tier~2~Capital}/{Risk~Weighted~Assets}

Tier-1 Capital
Tier-1 capital, or core capital, consists of equity capital, ordinary share capital, intangible assets and
audited revenue reserves. Tier-1 capital is used to absorb losses and does not require a bank to cease
operations. Tier-1 capital is the capital that is permanently and easily available to cushion losses
suffered by a bank w ithout it being required to stop operating. A good example of a bank’s tier one
capital is its ordinary share capital.

Tier-2 Capital
Tier-2 capital comprises unaudited retained earnings, unaudited reserves and general loss reserves.
This capital absorbs losses in the event of a company winding up or liquidating. Tier-2 capital is the
one that cushions losses in case the bank is winding up, so it provides a lesser degree of protection to
depositors and creditors. It is used to absorb losses if a bank loses all its Tier-1 capital.

The two capital tiers are added together and divided by risk-weighted assets to calculate a bank's
capital adequacy ratio. Risk-weighted assets are calculated by looking at a bank's loans, evaluating
the risk and then assigning a weight. When measuring credit exposures, adjustments are made to the
value of assets listed on a lender’s balance sheet.

All of the loans the bank has issued are weighted based on their degree of credit risk. For example,
loans issued to the government are weighted at 0.0%, while those given to individuals are assigned a
weighted score of 100.0%.

Risk-Weighted Assets

Risk-weighted assets are used to determine the minimum amount of capital that must be held by
banks and other institutions to reduce the risk of insolvency. The capital requirement is based on a
risk assessment for each type of bank asset. For example, a loan that is secured by a letter of credit is

8
considered to be riskier and requires more capital than a mortgage loan that is secured with
collateral.
The reason minimum capital adequacy ratios (CARs) are critical is to make sure that banks have
enough cushion to absorb a reasonable amount of losses before they become insolvent and
consequently lose depositors’ funds. The capital adequacy rati os ensure the efficiency and stability of
a nation’s financial system by lowering the risk of banks becoming insolvent. Generally, a bank with
a high capital adequacy ratio is considered safe and likely to meet its financial obligations.

During the process of winding-up, funds belonging to depositors are given a higher priority than the
bank’s capital, so depositors can only lose their savings if a bank registers a loss exceeding the
amount of capital it possesses. Thus the higher the bank’s capital adequa cy ratio, the higher the
degree of protection of depositor's assets.

Off-balance sheet agreements, such as foreign exchange contracts and guarantees, also have credit
risks. Such exposures are converted to their credit equivalent figures and then weighted in a similar
fashion to that on-balance sheet credit exposures. The off-balance sheet and on-balance sheet credit
exposures are then lumped together to obtain the total risk-weighted credit exposures.

 Return on Equity-

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by
shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt,
ROE could be thought of as the return on net assets
ROE is considered a measure of how effecti vely management is using a company’s assets to create
profits.

Formula and Calculation for ROE-

ROE is expressed as a percentage and can be calculated for any company if net income and equity
are both positive numbers. Net income is calculated before dividends paid to common shareholders
and after dividends to preferred shareholders and interest to lenders.

Return on Equity= Net Income/ Average Shareholders’ Equity

9
Net Income is the amount of income, net of expense, and taxes that a company generates for a given
period. Average Shareholders' Equity is calculated by adding equity at the beginning of the period.
The beginning and end of the period should coincide with that which the net income is earned.

Net income over the last full fiscal year, or trailing 12 months, is found on the income statement —a
sum of financial activity over that period. Shareholders' equity comes from the balance sheet —a
running balance of a company’s entire history of changes in assets and liabilities.
It is considered the best practice to calculate ROE based on average equity over the period because
of this mismatch between the two financial statements. Learn more about how to calculate ROE.

What Does ROE Tell You?

Return on equity (ROE) deemed good or bad will depend on what’s normal for a stock’s peers. For
example, utilities will have a lot of assets and debt on the balance sheet compared to a relatively
small amount of net income. A normal ROE in the utility sector could be 10% or less. A technology
or retail firm with smaller balance sheet accounts relative to net income may have normal ROE
levels of 18% or more.

A good rule of thumb is to target an ROE that is equal to or just above the average for the peer
group. For example, assume a company, TechCo, has maintained a steady ROE of 18% over the last
few years compared to the average of its peers, which was 15%. An investor could conclude that
TechCo’s management is above average at using the company’s assets to create profits.

Relatively high or low ROE ratios will vary significantly from one industry group or sector to
another. When used to evaluate one company to another similar company the comparison will be
more meaningful. A common shortcut for investors to consider a return on equity near the long-term
average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor.

Using ROE to Estimate Growth Rates-

Sustainable growth rates and dividend growth rates can be estimated using ROE assuming that the
ratio is roughly in line or just above its peer group average. Although there may be some challenges,

10
ROE can be a good starting place for developing future estimates of a stock’s growth rate and the
growth rate of its dividends. These two calculations are functions of each other and can be used to
make an easier comparison between similar companies.

To estimate a company’s future growth rate, multiply ROE by the company’s retention ratio. The
retention ratio is the percentage of net income that is “retained” or reinvested by the company to fund
future growth.

ROE and Sustainable Growth Rate-

Assume that there are two companies with an identical ROE and net income, but different retention
ratios. Company A has an ROE of 15% and returns 30% of its net income to shareholders in a
dividend, which means company A retains 70% of its net income. Business B also has an ROE of
15% but returns only 10% of its net income to shareholders for a retention ratio of 90%.

For company A, the growth rate is 10.5%, or ROE times the retention ratio, which is 15% times
70%. business B's growth rate is 13.5%, or 15% times 90%.
This analysis is referred to as the sustainable growth rate model. Investors can use this model to
make estimates about the future and to identify stocks that may be risky because they are running
ahead of their sustainable growth ability. A stock that is growing slower than its sustainable rate
could be undervalued, or the market may be discounting risky signs from the company. In either
case, a growth rate that is far above or below the sustainable rate warrants additional investigation.

This comparison seems to make business B look more attractive than company A, but it ignores the
advantages of a higher dividend rate that may be favored by some investors. We can modify the
calculation to mak e an estimate of the stock’s dividend growth rate which may be more important to
income investors.

Estimating the Dividend Growth Rate-

Continuing with our example from above, the dividend growth rate can be estimated by multiplying
ROE by the payout ratio. The payout ratio is the percentage of net income that is returned to
common shareholders through dividends. This formula gives us a sustainable dividend growth rate,
which favors company A.
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The company A dividend growth rate is 4.5%, or ROE times payout ratio, which is 15% times 30%.
Business B's dividend growth rate is 1.5%, or 15% times 10%. A stock that is growing its dividend
far above or below the sustainable dividend growth rate may indicate risks that need to be
investigated.

Using ROE to Identify Problems-

It’s reasonable to wonder why an average or slightly above average ROE is good rather than an ROE
that is double, triple, or even higher the average of their peer group. Aren’t stocks with a very high
ROE a better value?

Sometimes an extremely high ROE is a good thing if net income is extremely large compared to
equity because a company’s performance is so strong. However, more often an extremely high ROE
is due to a small equity account compared to net income, which indicates risk.

Inconsistent Profits

The first potential issue with a high ROE could be inconsistent profits. Imagine a company, LossCo,
that has been unprofitable for several years. Each year’s losses are on the balance sheet in the equity
portion as a “retained loss.” The los ses are a negative value and reduce shareholder equity. Assume
that LossCo has had a windfall in the most recent year and has returned to profitability. The
denominator in the ROE calculation is now very small after many years of losses which makes its
ROE misleadingly high.

Excess Debt

Second is excess debt. If a company has been borrowing aggressively, it can increase ROE because
equity is equal to assets minus debt. The more debt a company borrows, the lower equity can fall. A
common scenario that can cause this issue occurs when a company borrows large amounts of debt to
buy back its own stock. This can inflate earnings per share (EPS), but it doesn’t affect actual growth
rates or performance.

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Negative Net Income

Finally, there’s negative net income and negative shareholder equity that can lead to an artificially
high ROE. However, if a company has a net loss or negative shareholders’ equity, ROE should not
be calculated.

If shareholders’ equity is negative, the most common issue is excessive debt o r inconsistent
profitability. However, there are exceptions to that rule for companies that are profitable and have
been using cash flow to buy back their own shares. For many companies, this is an alternative to
paying dividends and it can eventually reduce equity (buybacks are subtracted from equity) enough
to turn the calculation negative.

In all cases, negative or extremely high ROE levels should be considered a warning sign worth
investigating. In rare cases, a negative ROE ratio could be due to a cash flow supported share
buyback program and excellent management, but this is the less likely outcome. In any case, a
company with a negative ROE cannot be evaluated against other stocks with positive ROE ratios.

ROE vs. Return on Invested Capital

While r eturn on equity looks at how much in profit a company can generate relative to shareholders’
equity, return on invested capital (ROIC) takes that calculation a couple of steps further.

The purpose of ROIC is to figure out the amount of money after dividends a company makes based
on all its sources of capital, which includes shareholders equity and debt. ROE looks at how well a
company utilizes shareholder equity, while ROIC is meant to determine how well a company uses all
its available capital to make money.

Limitations of Using ROE

A high return on equity might not always be positive. An outsized ROE can be indicative of a
number of issues—such as inconsistent profits or excessive debt. As well, a negative ROE, due to the
company having a net loss or ne gative shareholders’ equity, cannot be used to analyze the company.
Nor can it be used to compare against companies with a positive ROE.

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  Deposit Ratio-

The loan-to-deposit ratio (LDR) is used to assess a bank's liquidity by comparing a bank's total loans
to its total deposits for the same period. The LDR is expressed as a percentage. If the ratio is too
high, it means that the bank may not have enough liquidity to cover any unforeseen fund
requirements. Conversely, if the ratio is too low, the bank may not be earning as much as it could be.
To calculate the loan-to-deposit ratio, divide a bank's total amount of loans by the total amount of
deposits for the same period. You can find the figures on a bank's balance sheet. Loans are listed as
assets while deposits are listed as liabilities.

What Does LDR Tell You?

A loan-to-deposit ratio shows a bank's ability to cover loan losses and withdrawals by its customers.
Investors monitor the LDR of banks to make sure there's adequate liquidity to cover loans in the
event of an economic downturn resulting in loan defaults.

Also, the LDR helps to show how well a bank is attracting and retaining customers. If a bank's
deposits are increasing, new money and new clients are being on-boarded. As a result, the bank will
likely have more money to lend, which should increase earnings. Although it's counterintuitive, loans
are an asset for a bank since banks earn interest income from lending. Deposits, on the other hand,
are liabilities because banks must pay an interest rate on those deposits, albeit at a low rate.

The LDR can help investors determine if a bank is managed properly. If the bank isn't increasing its
deposits or its deposits are shrinking, the bank will have less money to lend. In some cases, banks
will borrow money to satisfy its loan demand in an attempt to boost interest income. However, if a
bank is using debt to finance its lending operations instead of deposits, the bank will have debt
servicing costs since it will need to pay interest on the debt.

As a result, a bank that borrows money to lend to its customers will typically have lower profit
margins and more debt. A bank would rather use deposits to lend since the interest rates paid to
depositors are far lower than the rates it would be charged for borrowing money. The LDR helps
investors spot the banks that have enough deposits on hand to lend and won't need to resort to
increasing their debt.

14
The proper LDR is a delicate balance for banks. If banks lend too much of their deposits, they might
overextend themselves, particularly in an economic downturn. However, if banks lend too few of
their deposits, they might have opportunity cost since their deposits would be sitting on their balance
sheets earning no revenue. Banks with low LTD ratios might have lower interest income resulting in
lower earnings.

Multiple factors can drive changes in the loan-to-deposit ratios. Economic conditions can impact
loan demand as well as how much investors deposit. If consumers are unemployed, they're unlikely
to increase their deposits. The Federal Reserve bank regulates monetary policy by raising and
lowering interest rates. If rates are low, loan demand might increase depending on the economic
conditions. In short, there are many outside factors that impact a bank's LDR.

What Is an Ideal LDR?

Typically, the ideal loan-to-deposit ratio is 80% to 90%. A loan-to-deposit ratio of 100% means a
bank loaned one dollar to customers for every dollar received in deposits it received. It also means a
bank will not have significant reserves available for expected or unexpected contingencies.

Regulations also factor into how banks are managed and ultimately their loan-to-deposit ratios. The
Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System,
and the Federal Deposit Insurance Corporation do not set minimum or maximum loan-to-deposit
ratios for banks. However, these agencies monitor banks to see if their ratios are compliant with
section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate
Act).

 Cost to Income Ratio-

In accounting, the cost-to-income ratio measures the cost of running a business compared to its
operating income. The lower the cost-to-income ratio is, the more profitable the company should
be. It's a useful metric for gauging the efficiency of the operation.

15
Calculating the Cost-to-Income Ratio

To obtain the cost-to-income ratio, simply divide the organization's operating expenses by its
operating income for the same period. Operating expenses in this context comprise all the costs of
running the business such as fixed costs (rent, mortgage, insurance, utilities, property taxes and so
on) and administrative expenses (salaries, stationery and marketing costs). Revenue includes sales
receipts, fee income and interest earned on loans.

Example of Cost-to-Income Ratio

Say that Acme Corporation has $150,000 of operating expenses in June. It also has an operating
income of $275,000. To find the cost-to-income ratio, divide Acme's operating expenses by its
operating income. In this example, $150,000 divided by $275,000 gives a cost-to-income ratio of
0.545. The company will usually express this as a percentage, being a 54.5 percent cost-to-income
ratio.

Why It Matters

A cost-to-income ratio of 54.5 percent means that Acme Corporation is spending $0.54 to generate
$1 of revenue. So, you can see at a glance how efficiently a company is being run. A low cost-to-
income ratio means the company is managing its costs well and is not overspending to generate
revenue. A high cost-to-income ratio, on the other hand, suggests that a company is not being as
efficient as it might be in controlling costs. What constitutes a high or low cost-to-income
percentage depends on the business and the industry. In most industries, 50 percent is the
maximum acceptable ratio.

Changes in the cost-to-income ratio can indicate problems for the business. If the ratio rises – either
sharply or gradually across multiple accounting periods – it suggests that costs are increasing at a
faster rate than income. Either the expenses are spiraling upward, or the revenues are dropping. As a
result, the company is having to spend more money than before to earn the same amount of income,
a signal for management to step in and bring costs under control or develop strategies for attracting
more business.

16
Who Uses the Cost-to-Income Ratio?

The cost-to-income ratio is a critical financial metric for any business, but it's a particular feature of
the financial sector. Banks and financial institutions often use the ratio to track how costs are
changing compared to income so they can make strategic growth decisions. For example, investing
in customer service might immediately lower a bank's cost-to-income ratio but improve its overall
profit. The idea is to use the cost-to-income ratio as a jumping- off point for creating additional
revenue streams that have a relatively low cost associated with them, such as selling other services to
existing customers, so income rises faster than expenses.

 Non Interest Income Margin-

Non-interest income is bank and creditor income derived primarily from fees including deposit and
transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges,
inactivity fees, check and deposit slip fees, and so on. Credit card issuers also charge penalty fees,
including late fees and over-the-limit fees. Institutions charge fees that generate non-interest income
as a way of increasing revenue and ensuring liquidity in the event of increased default rates.

Understanding Non-Interest Income-

Interest is the cost of borrowing money and is one form of income that banks collect. For financial
institutions, such as banks, interest represents operating income, which is income from normal
business operations. The core purpose of a bank's business model is to loan money, so its primary
source of income is interest and its primary asset is cash. That said, banks rely heavily on non-
interest income when interest rates are low. When interest rates are high, sources of non-interest
income can be lowered to entice customers to choose one bank over another.

Strategic Importance of Non-Interest Income-

Most businesses that are not banks rely entirely on non-interest income. Financial institutions and
banks, on the other hand, make most of their money from loaning and re-loaning money. As a result,
these firms view non-interest income as a strategic line-item on the income statement. This is
especially true when interest rates are low since banks profit from the spread between the cost of

17
funds and the average lending rate. Low interest rates make it difficult for banks to make a profit, so
they often rely on non-interest income to maintain profit margins.

From a client perspective, non-interest income sources like fees and penalties are annoying at best.
For some people, these fees can quickly add up and do real financial harm to a budget. From an
investor's perspective, however, a bank's ability to dial up non-interest income to protect profit
margins or even increase margins in good times is a positive. The more drivers of income a financial
institution has, the better it is able to weather adverse economic conditions.

Drivers of Non-Interest Income-

The degree to which banks rely on non-interest fees to make a profit is a function of the economic
environment. Market interest rates are driven by benchmark rates such as the Federal funds rate. The
Fed funds rate, or the rate at which banks lend money to one another, is determined by the rate at
which the Federal Reserve pays banks interest. This rate is referred to as the interest rate on excess
reserves (IOER). As the IOER increases, banks can make a higher profit from interest income. At a
certain point, it becomes more advantageous for a bank to use the reduction of fees and charges as a
marketing tool to lure new deposits, rather than as a way to increase profits. Once one bank makes
this move, the market competition on fees begins anew.

1.2 About the Industry-

NBFC sector is undergoing through a landmark shift due to tightening regulatory norms
and expanding business portfolios of the companies. The new guidelines propose that all
NBFCs, whether deposit taking or not, are mandatorily required to maintain Tier l capital
at 10% vs. 7.5% required to be maintained presently while the norms for overall capital
adequacy ratio have been kept unchanged at 15%.It would be an interesting situation to
see how the profitability of the these financial companies would get affected by the new
capital requirements of the companies. Thus it is very important in present context to
come up with a model to express true relationship between profitability and its
determinants.

18
The NBFC sector is facing the dual heat of increasing credit costs and elevated funding
costs in current times; however, credit rating companies like CRISIL and ICRA have been
doing stress tests on the asset quality, capital provisions and funding costs of top
performing NBFCs which show that the efficient and safe level of pre-provision operating
profit gives a strong cushion against upcoming credit quality issues. Cost of funds for
firms continue to sustain on the higher level as the pie of bank funding in the overall
borrowings of NBFCs remains be high along with the high levels of bank base rates
during financial year 2013.

Furthermore, the cost of funding in future years of would be significantly influenced by

the RBI guidelines on the funds that can be raised by NBFCs through private issue of
debentures. According to industry estimates, private placements with retail investors form
close to 6.5% of entire borrowings. On the contrary the pie for individual NBFCs can go
as high as 50% of borrowings; in such a scenario funding cost of these firms could get
elevated in future by 4-50 bps as NBFCs would bring in policies to replace their retail
fund mobilization from the private route to the more expensive bank borrowing/ public
issue route depending upon the companies share of retail private issues and the amount of
outstanding retail private issue debentures. Credit costs is a major determinant of long
term profitability of a company and impacts in a big way. Its of utmost importance to
decipher how increasing credit costs can impact the profitability of the top NBFCs.

Post financial crisis of 2008,drastic changes in economic environment has led to acute
pressure on asset quality of the companies. Non-performing loans have shot up putting
pressure on the profitability. Especially, the difficult operating economic environment
around the heavy and medium commercial vehicle and construction equipment segments
will be keeping the a quality of the asset under huge pressure. The light commercial
vehicles segment which has grown its share aggressively in recent years across regions is
also likely to face moderate to high asset quality issues in its business portfolio.

Another important part of the discussion is impact of RBI‟s tightening of rules on

financial performance of NBFCs that lend against gold .To keep check on the aggressive
growth of gold loan providing NBFCs, RBI first took strict measures in 2011 and
removed the priority sector status it had provided them since a long time under which
they can receive loans advanced banks to them for further lending the money against gold

19
Non-banking financial companies (NBFCs) constitute an important segment of the financial
system in India. NBFCs are financial intermediaries engaged primarily in the business of
accepting deposits and delivering credit. They play an important role in channelizing the scarce
financial resources to capital formation. NBFCs supplement the role of the banking sector in
meeting the increasing financial needs of the corporate sector, delivering credit to the
unorganized sector and to small local borrowers. NBFCs have a more flexible structure than
banks. As compared to banks, they can take quick decisions, assume greater risks, tailor- make
their services and charges according to the needs of the clients. Their flexible structure helps in
broadening the market by providing the saver and investor a bundle of services on a competitive
basis.
A non-banking financial company has been defined vide clause (b) of Section 45-1 of Chapter
IIIB of the Reserve Bank of India Act, 1934, as (i) a financial institution, which is a company; (ii)
a non-banking institution, which is a company and which has as its principal business the
receiving of deposits under any scheme or arrangement or in any other manner or lending in any
manner; (iii) such other non-banking institutions or class of such institutions, as the bank may
with the previous approval of the central government and by notification in the official gazette,
specify.

NBFC has been defined under Clause (xi) of Paragraph 2(1) of Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve B ank) Directions, 1998, as: ‘non -banking

20
financial company’ means only the non -banking institution which is a loan company or an
investment company or a hire purchase finance company or an equipment leasing company or a
mutual benefit finance company.

NBFCs provide a range of services such as hire purchase finance, equipment lease finance, loans,
and investments. Due to the rapid growth of NBFCs and a wide variety of services provided by
them, there has been a gradual blurring of distinction between banks and NBFCs except that
commercial banks have the exclusive privilege in the issuance of cheques.

NBFCs have raised large amount of resources through deposits from public, shareholders,
directors, and other companies and borrowings by issue of non-convertible debentures. In the
year 1998, a new concept of public deposits meaning deposits received from public, including
shareholders in the case of public limited companies and unsecured debentures/bonds other than
those issued to companies, banks, and financial institutions, was introduced for the purpose of
focused supervision of NBFCs accepting such deposits.

EVOLUTION, GROWTH AND DEVELOPMENT OF NBFCS IN INDIA

Till recently NBFCs and Unincorporated Bodies have been competing and complementing the
services of commercial banks all over the world. While, the financial system in a country
generally develops through a process of gradual evolution, it has been observed that here is a
stage in the evolutionary process wherein the growth of NBFCs is more pronounced than other
components of the financial system. Further, they take different forms and sizes depending upon
the needs of their clientele. Thus, in the United States of America, the growth of NBFCs was
more pronounced during the first three decades of this century and two of the top five
commercial lenders are NBFCs and three of the four top providers of consortium finance are non-
bank firms at present. In India such marked growth in the non-bank financial sector was noticed
in the last two decades. The NBFCs, as a group, have succeeded in broadening the range of
financial services rendered to the public during this period.

The evolution, growth and proliferation of financial intermediaries are essentially the reflection
of the different forms of savings (resource) flows and different types of investment (uses) of such
funds – whether for current working capital needs or for capital investments and as between

21
different sectors of the economy. They serve different clientele in their role both as repositories of
the community’s savings and as purveyors of funds for investment needs.

th
The nineteenth and early 20 Centuries witnessed rapid urbanization, both in Europe and
America. The growth of cities created a tremendous need for mortgage finance. To fill this need,
various private groups began to organize building and loan associations (called building societies
in England and Canada).

However, installment credit in the USA took off with the beginning of the mass marketing of
automobiles around 1915. Automobile companies set up specialized subsidiaries called finance
companies to provide installment credit to car buyers and to finance the inventories of dealers and
suppliers. The automobile companies were soon followed by retailers and manufacturers of
consumer and producer durables. The idea spread from the United States to many other countries.

Raymond W. Goldsmith traces the existence of ‘Chit Funds’ and ‘nidhis’ in India before World
War I, that such institutions were more common in Western and Southern India. According to
Goldsmith, “Whatever the fragmentary material exists points to the small size of these
institutions, which seems to have originated in the mid-nineteenth century, and indicates fairly
clearly a rapid decline in their size and importance relative to that of financial institutions of the
th
western type, which developed in India during the 19 century.”

Banking Commission (1972) has noticed the rapid progress made by “Finance Corporation” in
states like Gujarat and Mysore, (present Karnataka Stat e). These ‘finance corporations’ are petty
finance outlets formed under the Partnership Act of India and their capital was always less than
Rs.1 lakh. However, literature on non-banking financial sector reveals that the major NBFCs in
India are concentrated in six states – West Bengal, Maharashtra, Tamil Nadu, Uttar Pradesh,
Karnataka and Delhi.

Among the NBFCs, hire-purchase finance companies have been some of the oldest and most
prominent institutions. They have played an important role in the finance of the road transport
sectors; one estimate puts about 25-30 per cent of all civilian commercial vehicles sales having
been financed by hire-purchase companies. Some NBFCs have started out as support companies
for industrial houses. Their purpose was to act as Fixed Deposit Collection front and at best,

22
 work out leasing deals for clients of these industrial houses.

The last two decades witnessed a phenomenal growth in the number of NBFCs. Table No. 1
shows the number of NBFCs which stood at 7,063 in 1981, increased to 33,520 in 1991 and
further to 55,995 in 1995. The reason for such phenomenal growth of NBFCs was the
liberalization led boom. NBFCs entered merchant banking activities in addition to fund-based
business. With huge demand for finance and low entry barriers almost everyone wanted to start
and own a finance company.

NBFCs (Non Banking Financial Companies) play an important role in promoting inclusive growth in
the country, by catering to the diverse financial needs of bank excluded customers. Further, NBFCs
often take lead role in providing innovative financial services to Micro, Small, and Medium
Enterprises (MSMEs) most suitable to their business requirements. NBFCs do play a critical role in
participating in the development of an economy by providing a fillip to transportation, employment
generation, wealth creation, bank credit in rural segments and to support financially weaker sections
of the society. Emergency services like financial assistance and guidance is also provided to the
customers in the matters pertaining to insurance. NBFCs are financial intermediaries engaged in the
business of accepting deposits delivering credit and play an important role in channelizing the scarce
financial resources to capital formation. They supplement the role of the banking sector in meeting
the increasing financial needs of the corporate sector, delivering credit to the unorganized sector and
to small local borrowers.

However, they do not include services related to agriculture activity, industrial activity, sale,
purchase or construction of immovable property. In India, despite being different from banks, NBFC
are bound by the Indian banking industry rules and regulations. NBFC focuses on business related to
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. The banking sector would always be the most important sector in the field of
business because of its credibility in supporting manufacturing, infrastructural development and even
being the backbone for the common man's money. But despite this, the role of NBFCs is critical and
their presence in a country would only boost the economy in the right direction.

23
The Technology Backbone-

With the increasing role of NBFCs in the Indian Economy, the Reserve Bank of India has issued the
notification Master Direction - Information Technology Framework for the NBFC Sector this year.
The directions on IT Framework for the NBFC sector are expected to enhance safety, security,
efficiency in processes leading to benefits for NBFCs and their customers. NBFCs with asset size
above 500 crores are expected to adhere to the new "recommendations" by 30th September 2018.
Recommendations for smaller NBFCs include developing basic IT systems mainly for maintaining
the database. While larger NBFCs stare at a strict deadline, smaller NBFCs, especially Fintech
startups have a bigger problem at hand; an identity crisis! The business models of startups like
BankBaaar mandate that they do not become a NBFC, while the nature of operations of startups like
Lendingkart makes them a NBFC as part of the legal compliance.

In the last couple of months, the sector has witnessed an acute liquidity situation which, to some
extent, has been alleviated through measures taken by the RBI and the government to boost lending
to NBFCs. While the larger NBFCs (AAA category) with strong parentage are in a better position to
deal with the current problems, the smaller ones have been impacted the most in their ability to
sustain their business because of the liquidity crunch. With the traditional sources of capital drying
up, several NBFCs are raising capital through securitisation of assets for lack of other quick and
viable fund-raising options. NBFCs focused on infrastructure and real estate lending are
experiencing stress in their loan books as evidenced by the growing level of non-performing assets
(NPAs). Additionally, NBFCs are facing stiff competition from new-age FinTechs which have been
capturing a greater market share with their technology-heavy low-cost operating models and by
setting new gold standards for customer experience.

In the wake of these developments, through this report, we have attempted to offer solutions to some
of the key issues pertaining to the profitability and sustainability of NBFCs, which include:
developing new channels of growth by exploring partnerships with aggregators, e-commerce
companies, FinTechs and the MSME marketplace and developing capabilities to build these
partnerships targeting new profitable markets and diversifying the asset base with new products
boosting sales from direct/digital channels by leveraging process automation, data analytics and
digital marketing, and extending the salesforce to the ‘difficult to reach’ tier 1/tier 2 customers
targeting new market segments through the proposed co-origination model with banks and other

24
financial institutions (All India Financial Institutions) exploring alternative borrowing channels to
address the asset liability management (ALM) mismatch and reduce the overall cost of funds •
optimising the operational cost to improve the return on equity (ROE) and free up capital for
investments in growth areas • strengthening governance and risk management controls by using
new-age technologies such as big data analytics, artificial intelligence and mobility solutions. We
strongly believe that a healthy NBFC sector is instrumental in maintaining India’s growth
momentum and achieving the target of a USD 5 trillion Indian economy by 2024. NBFCs have
shown resilience in the past in dealing with such downturns through business innovation. In light of
new regulations, it would be interesting to see how the story unfolds for the NBFC sector in the next
couple of months.

 India has a diversified financial sector undergoing rapid expansion, both in terms of
strong growth of existing financial services firms and new entities entering the market.
The sector comprises commercial banks, insurance companies, non-banking financial
companies, co-operatives, pension funds, mutual funds and other smaller financial
entities.
 The banking regulator has allowed new entities such as payments banks to be created
recently thereby adding to the types of entities operating in the sector. However, the
financial sector in India is predominantly a banking sector with commercial banks
accounting for more than 64% of the total assets held by the financial system.
 The country’s financial services sector consists of the capital markets, insurance sector
and non- banking financial companies (NBFCs). India’s gross national savings (GDS)
as a percentage of Gross Domestic Product (GDP) stood at 30.5% in 2019.
 India is one of the most vibrant global economies, on the back of robust banking and
insurance sectors. The relaxation of foreign investment rules has received a positive
response from the insurance sector, with many companies announcing plans to
increase their stakes in joint ventures with Indian companies.
 During the end of second quarter, amid certain defaults in the NBFC sector, a credit
freeze was witnessed in the bond market especially for NBFCs. The spread of 5-year
AAA corporate bond yield over 5-year G-sec yield went up, further the spread for
NBFCs/HFCs were even higher with availability of liquidity being limited.

25
  As per Union Budget 2019-20, 100% foreign direct investment (FDI) will be
permitted for insurance intermediaries. The insurance sector will also be opened to
74% FDI from 49%. Government has approved 100% FDI for insurance
intermediaries.
 The Government of India launched India Post Payments Bank (IPPB), to provide every
district with one branch which will help increase rural penetration. As of August 2018,
two branches out of 650 branches are already operational.
 Under the Union Budget 2018-19, the government has allocated Rs 3 trillion (US$ 46.3
billion) towards the Mudra (Micro-Units Development & Refinance Agency Ltd) Scheme.
As per the Union Budget 2018-19, the recapitalisation of PSBs is expected to allow banks
to lend additional Rs 5 lakh crore (US$ 77.2 billion).
 As of September 2018, the Securities and Exchange Board of India (SEBI) has limited the
total expense ratio (TER) charged by mutual fund houses having equity assets up to Rs
500 billion (US$ 7.1 billion) to 1.05%.
 NBFCs are rapidly gaining prominence as intermediaries in the retail finance space.
NBFCs finance more than 80% of equipment leasing and hire purchase activities in India
The public deposit of NBFCs increased from US$ 0.3 billion in FY09 to Rs 319 billion
(US$ 4.9 billion) in FY18, registering a Compound Annual Growth Rate (CAGR) of
36.8%.
 In September 2018, corporate investors AUM stood at US$ 127.3 billion, while HNWIs
and retail investors reached US$ 99.2 billion and US$ 80.4 billion, respectively.
 Inflows in India's mutual fund schemes via the Systematic Investment Plan (SIP) route
reached Rs 67,190 crore (US$ 10.4 billion) during FY18 from Rs 43,921 crore (US$ 6.5
billion) during FY17. During April-October 2018, Rs 524.7 billion (US$ 7.5 billion) was
collected.

 The Government of India has introduced several reforms to liberalize, regulate and
enhance this industry. The Government and Reserve Bank of India (RBI) have taken
various measures to facilitate easy access to finance for Micro, Small and Medium
Enterprises (MSMEs). These measures include launching Credit Guarantee Fund Scheme
for Micro and Small Enterprises, issuing guideline to banks regarding collateral
requirements and setting up a Micro Units Development and Refinance Agency
(MUDRA).

26
  The country is on a fast pace growth and is expected to become a US$ 5 trillion economy
by 2022. Going by the estimates of Government of India, the country will need
investments of US$ 4.5 trillion to build sustainable infrastructure by 2040.
 A host of factors has enabled this growth, which includes a highly developed financial
system, infrastructure requirements and proactive government regimes. Domestic and
foreign investments both have had made an impact on the country’s growth.
 The Government of India has taken various steps to deepen the reforms in the capital
markets, including simplification of the Initial Public Offer (IPO) process which allows
qualified foreign investors (QFIs) to access the Indian bond markets.
 India's mobile wallet industry is estimated to grow at a Compound Annual Growth Rate
(CAGR) of 150% to reach US$ 4.4 billion by 2022 while mobile wallet transactions to
touch Rs 32 trillion (US$ 492.6 billion) by 2022.
 The government’s focus o n infrastructure development in the country is expected to
provide huge scope to NBFCs engaged in infrastructure financing. By 2022, India’s
personal wealth is forecasted to reach US$ 5 trillion at a CAGR of 13%.

TYPES OF NBFCs-

NBFCs can be classified into different segments depending upon the type of activities they
undertake. The important ones are as follows:

27
1. Equipment Leasing Company: Any company which is carrying on as its principal business
as the activity of leasing equipment or the financing of such activity is termed as Equipment
Leasing Company.
2. Hire-Purchase Finance Company: Any company, which is carrying as its principal business
as hire purchase transaction or the financing of such transactions is known as Hire-purchase
Finance Company.

3. Housing Finance Company: Any company which is carrying on as its principal business the
financing of acquisition or development of plots of land in connection therewith is called
Housing Finance Company.

4. Investment Company: Any company which is carrying on as its principal business the
acquisition of securities is termed as Investment Company.

5. Loan Company: It is a company which is carrying on as its principal business the providing
of finance whether by making loans or advance or otherwise for any activity other than its own.
This category does not include an equipment leasing or hire purchase finance company or a
housing finance company.

6. Mutual Benefit Finance Company (Nidhi Company): It is those companies which are
notified by the Central Government as a Nidhi Company under section 620-A of the Companies
Act 1956.

7. Mutual Benefit Company (Potential Nidhi Company): A company which is working on the
lines of a Nidhi Company but has not yet been declared by the Central Govt. as minimum NOF of
Rs. 10 lakh, has applied to the RBI for certificate of Registration (COR) and also to the
Department of Companies Affairs (DCA) for being notified as Nidhi Company and has not
contravened directions / regulations of RBI / DCA.

8. Non-Banking Financial Company: Any hire purchase finance, housing finance, investment
loan, equipment leasing or mutual benefit financial company, but does not include an insurance
company or a stock Exchange or a stock broking company.

28
9. Miscellaneous Non-Banking Company: A company carrying on all or any of the following
types of business:
(1) Managing, conducting or supervising as a promoter, foreman or agent of any transaction or
arrangement by which the company enters into an agreement with a specified number of
subscribers that everyone of them shall subscribe a certain sum in instalments over a definite
period and that everyone of such subscribers shall in his turn as determined by lot or by auction
or by tender or in such other manner as may be provided for in the agreement be entitled to the
prize amount.
(2) Conducting any form of chit or Kuri which is different from the type of business referred to in
sub paragraph (9.1) above.
(3) Undertaking / carrying on or engaging on or executing any other business similar to the
business referred to in sub paragraph (9.1) and (9.2).

10. Residuary Non-Banking Company: A company which receives any deposit under any
scheme or arrangement, by whatever name called, in one lump-sum or in instalments by way of
contributions or subscription or by sale of units of certificates or other instruments or in any other
manner and which, according to the definitions contained in the Non-Banking Financial
Companies in the (Reserve Bank) Directions, 1977 or the Miscellaneous Non Banking
Companies (Reserve Bank) Directions, 1977, as the case may be, is not

i) an equipment leasing company

ii) a hire purchase finance company
iii) a housing finance company
iv) an insurance company
v) an investment company
vi) a loan company
vii) a mutual benefit financial company, and
viii) a miscellaneous non-banking company.

29
REGULATORY AUTHORITIES OF NBFCS

All the NBFCs are not regulated by the RBI. The regulatory authorities of different types of
NBFCs are shown in Table No.1.1

TABLE NO. 1.1: REGULATORY AUTHORITIES OF NBFCS

Sl. No. Type of NBFCs Name of Regulatory Authority
1 Equipment Leasing Companies RBI
2 Hire-Purchase Finance Companies RBI
3 Loan Companies RBI
4 Investment Companies RBI
5 Residuary Non-Banking RBI
Companies
6 Misc. Non-Banking Companies RBI and Registrar of Chits of the
(Chit Funds) concerned
States
7 Mutual Beneft Finance Department of Company Afairs, GoI
Companies
(Nidhis and Potental Nidhis)
8 Micro Finance Companies Department of Company Afairs, GoI
9 Housing Finance Companies NHB
10 Insurance Companies Insurance Regulatory and Development
Authority of India(IRDA)
11 Stock Broking Companies SEBI
12 Merchant Banking Companies SEBI
Source: Report on Trend and Progress of Banking in India, 2003-04, RBI, Page 147.

SUPERVISION OF NBFCS

In order to ensure that NBFCs function on sound lines and avoid excessive risk taking, the RBI's
Department of Non-Banking Supervision has developed a four-pronged supervisory framework
based on the following:
(a) On-site inspection structured on the basis of assessment and evaluation of CAMELS (Capital,
Assets, Management, Earnings, Liquidity, and Systems) approach.
(b) Off-site monitoring supported by state-of-the-art technology. It is through periodic control
reports from NBFCs.
(c) Use of market intelligence system.
(d) Reports of statutory auditors of NBFCs

30
 Table No-1.2 Companies Undertaken

COMPANY TOTAL ASSETS (Rs MARKET CAP(Rs

Mn) Mn)
Shriram Transport 539057 1,30,253

IDFC LTD 535330 1,69,210

L&T Finance 245980 39970

SREI Infra 226591 9181

Cholamandalam 215707 31365

Finance
Bajaj Finance 203207 58330

Sundaram Finance 158227 55975

Shriram City 155886 63201

Magma Fincorp 50963 12051

Muthoot Finance 179300 86525

Shriram Transport-

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.

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 fashionable. Shriram started
lending to the Small Truck Owner to buy new trucks. But we found a mismatch between the

31
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.

We did not have the heart to send the Truck Operator back empty handed; we decided to fund Pre-
owned Trucks. This was the most momentous decision that we made. What followed was Sheer
magic.

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.

IDFC Ltd-

IDFC was incorporated on 30 January 1997 with its registered office in Chennai and started
operations on 9 June 1997.

In 1998 the company registered with the Reserve Bank of India (RBI) as a non-banking financial
company and in 1999 it formally became a Public Financial Institution. IDFC registered with
the Securities and Exchange Board of India (SEBI) as a merchant banker and as an underwriter in
2000 and in 2001 as a debenture trustee. The company also set up Infrastructure Development
Corporation (Karnataka) Ltd (IDECK) pursuant to a shareholders’ agreement between IDECK and
the State of Karnataka, HDFC and IDFC.

In 2002, the company incorporated IDFC Asset Management Company Ltd as a subsidiary company
and Uttaranchal Infrastructure Development Company Ltd, a joint venture with the Government of
Uttarakhand. In 2003 it became an investor in and sponsor of the India Development Fund.

In August 2005 the company's equity shares were listed at the National Stock Exchange of
India (NSE) and Bombay Stock Exchange (BSE) after an initial public offering.

In 2006 IDFC raised $450 million for their second infrastructure focused private equity fund. In June
2006, the company agreed a memorandum of understanding with SBI Capital Markets for
syndication of debt financing for Infrastructure projects.

In 2006-07, the company increased its stake in National Stock Exchange of India Ltd from 2.2% to
8.2% and acquired an 8.71% stake in the Asset Reconstruction Company (India) Ltd. The company
along with Citigroup, India Infrastructure Finance Company Ltd. and the global private equity

32
company Blackstone, launched a USD 5 billion initiative for financing infrastructure projects in
India. During the year, the company also set up IDFC Project Equity Company Ltd to manage the
proposed USD 2 billion third party equity component of the 'India Infrastructure Initiative', the
company acquired 33.33% stake in SSKI Securities Pvt Ltd (SSKI), which is a domestic mid-size
investment bank and an institutional brokerage and research platform, with membership of the BSE
and the NSE.

In May 2008, the company entered into asset management by acquiring the AMC business
of Standard Chartered Bank in India, namely Standard Chartered Asset Management Company Pvt
Ltd and Standard Chartered Trustee Company Pvt Ltd; the acquired companies was re-branded as
IDFC Asset Management Company Pvt Ltd and IDFC AMC Trustee Company Pvt Ltd respectively.

In 2008-09, the company subscribed 100% of equity shares of IDFC Capital (Singapore) Pte Ltd.
During the year, the company established IDFC Foundation to focus on capacity building, policy
advisory and sustainability initiatives.

The company increased their equity stake from 80% to 100% in IDFC Securities Ltd. Also, the
company along with their wholly owned subsidiary subscribed 100% equity shares of IDFC Pension
Fund Management Company Ltd. IDFC Capital Ltd subscribed 100% of equity shares of IDFC Fund
of Funds Ltd and IDFC General Partners Ltd. company

In January 2009, IDFC Projects Ltd signed a Memorandum of Understanding with Gujarat State
Energy Company Ltd and Bharat Heavy Electricals Ltd (BHEL) to establish a 1600 MW Thermal
Power plant at Sarkhadi based on supercritical technology. During the year 2010-11, Jetpur Somnath
Highway Ltd (earlier known as IDFC Capital Company Ltd and a direct subsidiary of IDFC) became
a subsidiary of IDFC Projects Ltd. A company under the name of Jetpur Somnath Tollways Ltd was
incorporated as a Subsidiary of IDFC Projects Ltd. IDFC Projects, along with the other companies,
further floated Dheeru Powergen Ltd, which was converted from Private Limited Company to a
Public Limited Company. IDFC Asset Management Company Ltd further floated IDFC Pension
Fund Management Ltd, one of the Pension Fund Managers appointed by the Pension Fund
Regulatory and Development Authority (PFRDA) to manage retirement funds under the New
Pension Scheme (NPS) open to individuals in the private sector, and IDFC Investment Advisors Ltd.
A company under the name of IDFC Investment Managers (Mauritius) Ltd has been incorporated as
a Subsidiary of IDFC Asset Management Company Ltd.

During the year, IDFC Foundation (a Non-Profit Organisation) was incorporated as a wholly owned
subsidiary company of IDFC. The shares of the three Joint ventures Infrastructure Development

33
Corporation (Karnataka) Ltd, Uttarakhand Infrastructure Development Company Ltd, and Delhi
Integrated Multi-Modal Transit System Ltd, which were initially held by IDFC, was transferred to
IDFC Foundation. Similarly, the units of the Trust, namely India Infrastructure Initiative Trust &
India PPP Capacity Building Trust which were initially held by IDFC was also transferred to the
IDFC Foundation. Further during the year, Uniquest Infra Ventures Pvt Ltd was incorporated as a
direct subsidiary of the company and IDFC Capital USA Inc. was also incorporated as a subsidiary
company of IDFC Securities Ltd.

In November 2011, SNC-Lavalin Group Inc. and the company announced a joint venture that began
with an introduction by Export Development Canada. The new company, called Piramal Roads
Infrastructure Ltd, will work to develop a portfolio of road assets in India.

April 2, 2014: RBI grants in-principle approval to IDFC to set up banks. The in-principle approval
will be valid for 18 months. RBI gets green signal to issue bank licences.

June 24, 2015;RBI officially granted a banking licence to IDFC

IDFC Bank started operating banking services on 1 October 2015.

SREI Infrastructure-

Srei, a Kanoria Foundation entity, is one of India's leading asset finance and leasing institutions,
constantly and consistently delivering innovative solutions in the infrastructure sector. Srei, which in
Sanskrit means ‘to accord credit’ has completed over thirty years and has come a long way after
starting its journey perhaps in one of the most challenging environments.
Our journey of over three decades has made us both ‘Dynamic and Innovative’. With
'Entrepreneurship' as our hallmark, we have grown over the years to become the preferred partners in
‘Asset Finance & Leasing’ in the infrastructure sector.
To broad base shareholding we were the first Indian infrastructure NBFC to be listed on the London
Stock Exchange way back in 2005. We also have the distinction of having a wide spectrum of
international institutions as our stakeholders:IFC (International Finance Corporation - World Bank
Group) KfW & DEG Germany (Financial Institutions owned by the Government of Germany), FMO
(Financial Institution owned by the Government of Netherlands), BIO (Financial Institution owned
by the Government of Belgium), FINFUND (Financial Institution owned by the Government of
Finland), Fidelity, Norges Bank and many more.

34
Srei is also the first company to lay the ground for passive telecom infrastructure sharing in India.
We realize the importance of technology and it is the one thing that differentiates us from our
competitors.
A robustness of any Company can be assessed by how it performs in its most challenging times. Our
edge, over the others, is the ability to provide all asset finance and leasing services under one roof,
making us the most preferred partner for infrastructure players in India.

Cholamandalam Finance-
Cholamandalam Investment and Finance Company Limited (CIFCL) is a financial and
investment service provider in India. It is headquartered in Chennai and has 1029 branches across the
country. It is one of the 28 businesses under the Murugappa Group. It employees over 7,000
employees and also has about 16,000 people who assist in various business activities, with the
majority being in smaller towns.

The company has total assets under management at Rs 54,279 crore with a Net income of Rs
1,885.34 crore as on March 31, 2019. The company was ranked 9th among the top 50 NBFCs in
India by The Banking and Finance Post.

Bajaj Finance-

Bajaj Finance Limited, a subsidiary of Bajaj Finserv, is an Indian Non-Banking Financial

Company (NBFC). The company deals in Consumer Finance, SME (Small and Medium-sized
Enterprises) and Commercial Lending, and Wealth Management.

Headquartered in Pune, Maharashtra, the company has 294 consumer branches and 497 rural
locations with over 33,000+ distribution points. The company reported a pre-tax profit of Rs.626
crores and a post-tax profit of Rs.408 crores at a ROA of 0.8% and ROE of 5.1% in Q2 FY17.

Originally incorporated as Bajaj Auto Finance Limited on March 25, 1987, the non-bank singularly
focused on providing two and three wheeler finance. After 11 years in the auto finance market, Bajaj
Auto Finance Ltd launched its initial public issue of equity share and was listed on
the BSE and NSE.

At the turn of the 20th century, the company ventured into the durables finance sector. In the
subsequent years, Bajaj Auto Finance diversified into business and property loans as well.

35
In the ye ar 2006, the company’s assets under management hit the Rs.1,000 crore mark and is
currently at Rs.52,332 crore. 2010 saw the company’s registered name change from Bajaj Auto
Finance Limited to Bajaj Finance Limited.

The parent company, Bajaj Finserv Limited, holds 57.28% of the total shares and has a controlling
stake in the subsidiary. Other major investors include Maharashtra Scooters Limited, Government
of Singapore, Smallcap World Fund INC and AXIS Long Term Equity Fund

Sundram Finance Ltd-

Sundaram Finance Limited is a financial and investment service provider in India. It is based
in Chennai and has more than 640 branches across the country. The company offers Vehicle loan,
construction equipment loan, consumer loans, wealth management, commercial finance, and
infrastructure finance, among others.
Sundaram Finance Limited, a subsidiary of Sundaram Finance Group, was established in the year
[4]
1954. It is the financial services arm of the USD 5 billion Sundaram Finance Group. The company
is registered with the Reserve Bank of India (RBI) as a Systematically Important Deposit Accepting
Non-Banking Financial Company. Sundaram finance offers services like commercial
finance, investment banking, consumer loans, private equity, treasury advisory, and credit cards. It
serves corporate, retail, and institutional customers through its Investment Arm.
It is one among the fastest growing Investment and Finance company in India, growing at an annual
rate of 26% for the past three years. The company has been moving to a fifth generation tech-driven
business platform that has helped it access international markets, driving the business using
consumer analytics technology initiatives. As of 2017, December the group has a revenue of 26,000
Crores.

Sundaram Finance Group is the holding company for all financial service businesses of the group
and is a Non-Banking Financial Institution (NBFC).

The company has six subsidiaries and manages assets worth ₹69 billion (US$970 million) and has
over 4,000 employees as of March, 2017. Through various subsidiaries, the group is in the business
of life insurance, asset management, private equity, corporate finance, structured finance, insurance
broking, wealth management, equity broking, currency broking, commodity broking, financial
advisory services, housing finance, pension fund management and health insurance.

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Subsidiaries

The six subsidiaries of the group are as follows,

 Sundaram Finance Limited

 Royal Sundaram General Insurance
 Sundaram BNP Home Finance
 Sundaram Mutual Fund
 Sundaram Finance Holding
 Sundaram Business Services

Magma Fincorp-

Magma Fincorp Limited (MFL) is a Kolkata based non-banking financial company registered with
the Reserve Bank of India as an Asset Finance Company. The company operates more than
310 branches in 22 states and a union territory and has a strong presence in rural and semi-
rural India.
Magma Fincorp Limited (formally known as Magma Leasing Limited) was incorporated in 1988 by
Mr. Mayank Poddar and Mr Sanjay Chamria, Magma commenced operation in 1989. In 1996,
Magma entered retail financing business for vehicles and construction equipment. In the year 2000,
with the Acquisition of Consortium Finance Ltd, Magma expanded its network across Northern
India. In 2007, Shrachi Infrastructure Finance merged with Magma increasing the company's
footprint in southern and western India. In the same year, the company formed a joint venture with
International Tractors Limited (ITL) to enter tractor financing business. In 2008, Magma re-branded
and renamed itself as Magma Fincorp Limited. In 2009, Magma inked a joint venture with German
insurer HDI Global to enter general insurance business. The company has received its R1 license in
April 2011. In the same year, Magma picked up 7% stake in the newly formed Experian Credit
Information Company of India Pvt Ltd, the Indian arm of the global credit information services
company. In 2011, Kohlberg Kravis Roberts – a large global PE firm and International Finance
Corporation, an arm of the World Bank Group invested about $100 mn in Magma. In 2012, Magma
acquired GE Money Housing Finance and GE Money Financial Services. In 2016 Mr. Mayank
Poddar stepped down as the chairman and was succeeded by Mr. Narayan K Seshadri as the new
chairman.

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Magma Fincorp Limited has a "diversified product portfolio" and has a strong presence in semi-
urban and rural areas. Magma's financial products include:

 commercial vehicles finance

 cars & utility vehicles finance
 construction & strategic construction equipment finance
 tractor finance
 SME loans
 used assets finance
 housing loans
 auto lease
 insurance

Commercial vehicle finance

 Finances new commercial vehicles.

 Focuses on first-time buyers across semi – urban and rural areas.
 Emerged as a preferred financing partner for vehicle manufacturers like Tata Motors, Mahindra
& Mahindra, Ashok Leyland, Volvo and Eicher Motors among others.
 Provides escorts services for old vehicles which are off the road for at least 3 years.

Cars and utility vehicles finance

 Provides loans to customers with or without proof of income, through its 'Income Proof' and
'Non-Income Proof' schemes, extending its service to a wide range of customers.
 Facilitates exchange schemes, where Magma buys old cars at attractive prices and finance new
cars at customer-friendly terms.
 Vertical segregation of sales, credit and collection functions has helped Magma achieve a rapid
turnaround time in customer service.

38
Construction and strategic construction equipment finance

 Finances construction equipment in the retail segment.

 Magma has entered into tie-ups with Telcon and JCB and works closely with L&T, Ace,
Caterpillar, Volvo and others to attain market leadership.
 Helps customers take up large projects in India and abroad because of the LC facilities for import
and export of various kinds of equipment to help


Tractor finance

 Focused on rural tractor financing.

 Entered into a joint venture with agri-equipment manufacturer International Tractors Limited
through Magma ITL Finance Limited.
 Has strategic alliances including Mahindra & Mahindra, TAFE, John Deere and New Holland.

SME loans

 Engaged in unsecured lending for mid and semi large corporates following comprehensive
balance sheet appraisal.

Used assets finance

 Magma Fincorp initiated the financing of used vehicles and financed first-time buyers and
commercial vehicles 2 – 15 years old through schemes addressing the needs of the lower-end of
the customer segment.
 Magma established equipment valuation norms, which were checked by independent valuers and
resident equipment managers prior to disbursement.
 Installed a credit programme that ensured the customers’ compliance with existing practices.


Magma Housing Finance

In Feb 2013, the company acquired 100% equity share capital of GE Money Housing Finance (an
affiliate of GE Capital India) engaged in Housing Finance in India and the home equity loan

39
portfolio of GE Money in two separate transactions. Following the acquisitions, GE Money Housing
Finance (GEMHF) has been renamed as Magma Housing Finance Company. This acquisition
marked the entry of Magma into the mortgage finance business. Magma Housing Finance Co
commenced fresh disbursement in May 2013 and started offering financing products under 3 broad
product lines viz. Home Loans, Home Equity (Loan against Property) & Construction Finance.

Magma Fincorp Auto Lease

Provides financing facility to small, medium and large businesses in need of fleet of cars Serves over
140 large & medium company's fleets across 14 states in India.

Magma HDI General Insurance Co Ltd

Magma HDI General Insurance Co Ltd. is a joint venture between Magma Fincorp Limited and HDI-
Gerling Industrie Versicherung AG. HDI Gerling is part of Talanx Group, the third largest insurance
group in Germany.

 Joint venture agreement signed and company registered in September 2009

 Licence for carrying out General Insurance business issued by IRDA in May 2012
 Business operations commenced in October 2012
 Business operating out of 86 Branches & 5 Zonal offices as on 31 May 2017
 Magma HDI offers Motor Insurance, Health Insurance, Liability Insurance, Fire Insurance,
Engineering Insurance, Marine Insurance and Burglary & Risk Insurance.

Mumbai-based asset finance company, Magma Fincorp Limited announced the Q3FY19 results,
posting a robust growth in profits driven by higher disbursements, lower NPAs and stable net interest
margins (NIMs). Profit after tax for the quarter grew at an impressive 65% YoY, despite sharp
increase in cost of funds due to the prevailing uncertainty in the financial services industry. NIMs
remained healthy at 8.4%. Assets under management (AUM) increased 6% YoY to Rs 16,507 Crore
as on 31 December 2018. The profit after tax (PAT) for nine months ended 31st December 2018
stood at Rs. 219 Crore, up 39%. Magma reported substantial improvement in its portfolio quality
with the Gross NPAs reducing to 6.3% in the current quarter compared to 9.5% in the previous
quarter.

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Muthoot Finance-

The Muthoot Group is an Indian multinational conglomerate headquartered in Kochi, Kerala. It has
interests in financial services, information technology, media, healthcare, education, power
generation, infrastructure, plantations, precious metal, tourism, and hospitality. Muthoot Group
operates in 29 states in India, and has presence in Nepal, Sri Lanka, US, UK and UAE. The group
manages assets of over $4.5 billion. It is owned and managed by the Muthoot Family.

The group takes its name from the Muthoot Family based in Kerala. The company was set up by
Muthoot Ninan Mathai in 1887 at Kozhencherry, a small town in the erstwhile Kingdom of
Travancore (Kerala). It was then later taken over by his son M George Muthoot, who incorporated
the finance division of the group, which was until then primarily involved in wholesale of grains and
timber. The company is now managed by the third and fourth generation of its family members.

Muthoot Finance: Established in 1939 when M. George Muthoot ventured into financial services
through a partnership firm under the name of Muthoot M. George & Brothers (MMG). MMG was
a chit fund based out of Kozhencherry . In 1971, the firm was renamed as Muthoot Bankers, and had
begun to finance loans using gold jewellery as collateral. In 2001, the company was renamed once
again and came to be known as Muthoot Finance. Muthoot Finance falls under the category of
systematically important Non-banking financial company(NBFC) of the RBI guidelines.

The company has more than 4,500 branches spread across 29 states and union territories of India.
Muthoot Finance, according to the IMaCS Research & Analytics Industry Reports [Gold Loans
Market in India, 2009 and the 2010 update to the IMaCS Industry Report 2009], is the largest Gold
Loan NBFC and has the largest network of branches for a gold loan NBFC in India. Muthoot
Finance is also the highest-credit-rated gold loan company in India, with a credit rating of AA
(CRISIL) and AA (ICRA) for its long-term debts and P1+ (CRISIL) & A1+ (ICRA) for its Short
Term Debt Instruments.

Muthoot Finance has played an instrumental role in organizing and professionalizing gold
collateralized loans in India, a concept which emphasizes mobilising household Gold jewelry as a

41
channel of credit to borrowers. The total gold holdings among individuals is estimated to be more
than 20000 tonnes, In 2010, Muthoot Finance privately placed 4% of its paid up capital to private
equity – Barings Bank and Matrix Partners for Rs. 1.57 billion, Later in 2011, Muthoot Finance
publicly listed its shares on the two biggest stock exchanges in India National Stock Exchange of
India and Bombay Stock Exchange. In terms of market capitalisation, Muthoot Finance Ltd is the
second largest company in Kerala, first being Federal Bank.

Incorporated in 2013, Muthoot Homefin (India) Limited is a Housing Finance company (HFC)
registered with the National Housing Bank. The company has its Corporate Office in Mumbai, and
operates primarily in the Western and Central states of India. In an effort to promote the Indian
government's initiative of Housing for all, Muthoot Homefin operates primarily in the affordable
housing segment, wherein the loans are below Rs.30 lakhs. Muthoot Homefin has a long-term credit
rating of AA- (ICRA) and a short-term rating of P1+ (ICRA)

The securities brokerage business of the group is undertaken through the subsidiary Muthoot
Securities. It operates over 65 business centres in Kerala, Tamil Nadu, Andhra Pradesh and
Karnataka. The company offers Equity & Currency trading, Online trading, Portfolio Management
Services, Depository services, Mutual funds, PAN card services and Market Research. Muthoot
Precious Metals Corporation (MPMC) was established in May 2006, the company sells coins & bars
of 999 Pure 24 Carat gold and silver throughout India. They carry out the sales of these bars and
coins through more than 4250 branches of Muthoot Finance. MPMC imports gold bullion from
Switzerland and converts them into gold coins of smaller denominations so as to suit the investment
requirements of people from different income groups. The group provides wire transfer services
through the branch network of Muthoot Finance since 2002. As of December 2012, there are 7
inward remittances that Muthoot Finance offers Western Union, Xpress Money, Instant Cash, Ez
Remit, Transfast, Money Gram, Global Money.

In 2013, the group also acquired a majority stake in an NBFC in Sri Lanka operating under the brand
name of Asia Asset Finance Limited. Asia Asset Finance primarily provides loans to small
businesses as well as Gold Loans. The group expanded its Gold Loan business to the UK, wherein it
operates under the brand name Muthoot Finance UK. In 2014, the group also acquired a majority
stake in a Microfinance company operating under the brand name Belstar Investments.

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Larsen & Turbo-

Larsen & Toubro Limited, commonly known as L&T is an Indian multinational conglomerate
company headquartered in Mumbai, Maharashtra, India. It was founded by two Danish engineers
taking refuge in India. The company has business interests in basic and heavy engineering,
construction, realty, manufacturing of capital goods, information technology, and financial services.
As at March 31, 2018, L&T Group comprises 93 subsidiaries, 8 associates, 34 joint-venture and 33
joint operations companies.
L&T Technology Services
L&T Technology Services, a subsidiary of Larsen & Toubro, is an engineering services company
that operates in the global Engineering, Research and Development (“ER&D”) space. L&T
Technology Services offers design, development and testing services for the industrial products,
medical devices, transportation, aerospace, telecom and process industries. The company serves
customers across the product engineering life cycle from product conceptualization to
implementation. Services include consulting, design, development, testing, maintenance, and to-
market integration services. L&T Technology hits the Indian Capital Markets with its IPO offering
10.4 million shares at a price band of Rs.850 to Rs.860.

L&T Solar
L&T Solar, a subsidiary of Larsen & Toubro, undertakes solar energy projects. In April 2012, L&T
commissioned India's largest solar photovoltaic power plant (40 MWp) owned by Reliance Power at
Jaisalmer, Rajasthan from concept to commissioning in 129 days. In 2011, L&T entered into a
partnership with Sharp for EPC (engineering, procurement and construction) in megawatt solar
project and plan to construct about 100 MW in the next 12 months in most of the metros. L&T Infra
Finance, promoted by the parent L&T Ltd, is also active in the funding of solar projects in India. It is
governed by Rebel Enterprises

Electrical and automation-

L&T is an international manufacturer of electrical and electronic products and systems. The
company also manufactures custom-engineered switchboards for industrial sectors like power,
refineries, petrochemicals and cement. In the electronic segment, L&T offers a range of metres and
provides control and automation systems for industries.

43
Medical equipment and systems-

L&T used to operate multiple facilities in Mysore as part of its medical equipment and systems
business unit. In November 2012, L&T sold it to Skanray Technologies Pvt Ltd. Currently, L&T
Mysore division manufactures Single-phase and Three-phase static solid-state Electricity Meters to
various utilities pan India. The range of meters varies from Residential, Industrial, Prepayment and
Smart Meters. There are both Whole current and CT operated meters. It also houses a relay servicing
unit.
Larsen & Toubro Infotech (LTI)-

Main article: Larsen & Toubro Infotech

Larsen & Toubro Infotech Limited, a wholly owned subsidiary of L&T, offers information
technology, software and services with a focus on manufacturing, BFSI and communications and
embedded systems. It also provides services for embedded intelligence and engineering.

Machinery and industrial products-

L&T manufactures, markets and provides service support for construction and mining machinery,
including surface miners, hydraulic excavators, aggregate crushers, loader backhoes and vibratory
compactors; supplies rubber processing machinery and manufactures and markets industrial valves
and allied products along with application-engineered welding alloys.[citation needed]

EWAC Alloys Limited-

EWAC Alloys Limited is a wholly owned subsidiary of Larsen & Toubro, India. The company is
engaged in design & development, manufacture and supply of special welding electrodes, gas
brazing rods and fluxes, welding torches and accessories, atomised metal powder alloys, flux cored
continuous wires & wire feeders, polymer compounds & wear-resistant plates.
Prof Wasserman, founder of Eutectic Castolin, and Henning Hock Larsen, founder of Larsen &
Toubro, founded the Eutectic Division in India in the year 1962. Eutectic Castolin was later merged
into the Messer Group of companies, Germany and referred as Messer Eutectic Castolin (MEC). In
2010, Larsen & Toubro Limited, bought the entire stake from Messer to become the wholly owned
subsidiary of it. The current headquarters is in Ankleshwar, Gujarat (India), and the products are sold
under the name EWAC.
44
In line with its strategy to divest non-core businesses, L&T is planning on selling its entire stake in
unlisted subsidiary EWAC Alloys to UK-registered ESAB Holdings for a total consideration of Rs
522 crore. The share purchase agreement has been executed on October 11, 2017. The acquirer
ESAB offers products for welding and cutting process. In 2012, ESAB was acquired by Colfax
Corp., a diversified industrial manufacturing company based in the US.
As of March 2018, L&T has 93 subsidiaries, 8 associate companies, 34 joint ventures, and 33 joint
operation companies.
L&T Infrastructure Engineering Ltd. is one of India's engineering consulting firms offering technical
services in transport infrastructure. The company has experience both in India and Globally,
delivering single point ‘Concept to Commissioning’ consulting services for infrastructure projects
like airports, roads, bridges, ports and maritime structure including environment, transport planning
and other related services. Established in 1990 as L&T-Rambøll Consulting Engineers Limited, the
company became the wholly owned subsidiary of L&T in September 2014. Today, L&T Infra
Engineering is an independent corporate entity managed by a Board of Directors. The company
enjoys complete freedom to set and pursue its goals, drawing, as and when required, on the technical
and managerial resources of L&T Infrastructure Engineering Limited.

L&T Kobelco Machinery Private Limited: this is a joint venture of L&T and Kobe Steel of Japan,
to manufacture internal mixers and twin screw roller-head extruder's for the tyre industry. The
company has a factory at Karai Village, Kanchipuram, that manufactures internal mixers and twin-
screw roller head extruder's for the tyre industry, which commenced commercial operations on 1
December 2012.
L&T – Construction Equipment Limited: having its registered office at Mumbai, India and focusing
on construction equipment and mining equipment, L&T-Komatsu Limited[24] was a joint-venture of
Larsen and Toubro, and Komatsu Asia Pacific Pte Limited, Singapore, a wholly owned subsidiary of
Komatsu Limited, Japan. Komatsu is the world's second largest manufacturer of hydraulic
excavators and has manufacturing and marketing facilities. The plant was started in 1975 by L&T to
manufacture hydraulic excavators for the first time in India. In 1998, it became a joint-venture.The
Bengaluru works comprise machinery and hydraulics works, with a manufacturing facility for
design, manufacture, and servicing of earth moving equipment. The hydraulics works have a
precision machine shop, manufacturing high-pressure hydraulic components and systems, and
designing, developing, manufacturing and servicing hydraulic pumps, motors, cylinders, turning
joints, hose assemblies, valve blocks, hydraulic systems, and power drives as well as allied

45
gearboxes. In April 2013, L&T bought the 50% stake held by Komatsu Asia & Pacific. The
company's name was changed to L&T Construction Equipment Limited.

L&T-John Deere: In 1992, L&T established a 50-50 joint venture with John Deere to manufacture
tractors in India, called L&T - John Deere. L&T sold their interest to John Deere in 2005.
L&T Case: In 1992, L&T established L&T-Case Construction with CNH Global as a 50-50 joint
venture to build backhoes. In 2011, L&T decided to exit this joint venture and sold its share to CNH,
and the company was renamed Case New Holland Construction Equipment India.
They also have a joint venture with Qatari company albalagh group which they jointly are the main
contractors for alrayyan stadium, the 2022 FIFA World Cup stadium which will host matches up to
the quarter-final.
L&T Finance: Larsen & Toubro Financial Services is a subsidiary which was incorporated as a
non-banking financial company in November 1994.[30] The subsidiary has financial products and
services for corporate, construction equipments etc. This became a division in 2011 after the
company declared its restructuring. A partnership between L&T Finance and Sonalika Group farm
equipment maker International Tractors Ltd in April 2014 provided credit and financing to customers
of Sonalika Group in India.
L&T Mutual Fund is the mutual fund company of the L&T Group. Its average assets under
management (AuM) as of May 2019 is ₹ 73,936.68 crore.

Larsen & Toubro Infrastructure Finance: this wholly owned subsidiary commenced business in
January 2007 upon obtaining Non-Banking Financial Company (NBFC) license from the Reserve
Bank of India (RBI). As of 31 March 2008, L&T Infrastructure Finance had approved financing of
more than US$1 billion to select projects in the infrastructure sector.[citation needed] It received the
status of "Infrastructure Finance Company" from the RBI within the overall classification of "Non-
Banking Financial Company".

L&T Technology Services, a subsidiary of Larsen & Toubro, is a global engineering services
company headquartered out of Vadodara, Gujarat, India. It offers design, development, and testing
solutions across the product and plant engineering value chain, for various domains including
Industrial Products, Transportation, Aerospace, Telecom & Hi-tech, and the Process Industries. As of
2016, L&T Technology Services employs over 10,000 workers and has operations in 35 locations
around the world. Its clientele includes a large number of Fortune 500 companies globally.

46
L&T Valves business group markets valves manufactured by L&T's Valve Manufacturing Unit and
L&T's joint-ventures, Audco India Limited, India and Larsen & Toubro Valves Manufacturing Unit,
Coimbatore as well as allied products other manufacturers. The group's manufacturing unit in
Coimbatore manufactures industrial valves for the power industry, along with flow control valves for
the oil and gas, refining, petrochemical, chemical and power industries, industrial valves and
customised products for refinery, LNG, GTL, petrochemical and power projects. L&T Valves
Business Group has offices in the US, South Africa, Dubai, Abu Dhabi, India and China, and
alliances with valve distributors and agents in these countries.
L&T-MHPS Boilers is a joint venture between L&T and Mitsubishi Hitachi Power Systems. The
group specialises in engineering, manufacturing, erecting and commissioning of supercritical steam
generators used in power plants. It is mainly headquartered in Faridabad with a manufacturing
facility in Hazira and an engineering centre in Chennai and Faridabad. Currently, the group is
engaged in projects for JVPL, MAHAGENCO, Nabha Power & RRVUNL.

L&T MHPS Turbine Generators Pvt Ltd: in 2007, Larsen & Toubro and Mitsubishi Heavy Industries
set up a joint-venture manufacturing agreement to supply a supercritical steam turbine and generator
facility in Hazira. This followed a technology licensing and technical assistance agreement for the
manufacture of supercritical turbines and generators between L&T, MHI, and Mitsubishi Electric
Corporation (MELCO), headquartered in Tokyo, Japan. In February 2014, MHI and Hitachi Ltd
integrated the business centred on thermal power generation systems (gas turbines, steam turbines,
coal gasification generating equipment, boilers, thermal power control systems, generators, fuel cells,
environmental equipment and so on) and started a new company as Mitsubishi Hitachi Power
Systems (MHPS) Ltd, headquartered in Yokohama, Japan.

L&T Howden Pvt Ltd is a joint venture between L&T and Howden to manufacture axial fans and air
pre-heaters in the range of 120-1200 MW to thermal power stations. L&T Howden is an ISO 9001
and ISO 5001 certified organisation, with a plant located in Surat Hazira and a marketing office in
Faridabad.

L&T Special Steels and Heavy Forgings Pvt Ltd. is a joint venture between L&T and NPCIL,
headquartered at Hazira. It is the largest integrated steel plant and heavy forging unit in India,
capable of producing forgings weighing 120 MT each. LTSSHF currently is engaged in projects
from the nuclear, hydrocarbon, power and oil and gas sectors.

47
L&T-Sargent & Lundy Limited (L&T-S&L), established in 1995, is a premier Engineering &
Consultancy firm in the Power Sector, born out of shared vision of two renowned organizations -
Larsen & Toubro Limited (L&T), India's largest engineering and construction company and Sargent
& Lundy L.L.C. - USA, a global Consulting firm in Power industry since 1891.

L&T General Insurance

In 2015, the company began developing commercial, retail and office space around the Hyderabad
Metro Rail project.
In June 2019, the company acquired a controlling stake in IT services company Mindtree Ltd.

SHRIRAM CITY-

Shriram Group is an Indian conglomerate founded on 5 April 1974 by Ramamurthy Thyagarajan,

AVS Raja and T. Jayaraman. They have their headquarters in Chennai, Tamil Nadu, India.The group
had its beginning in chit funds business and later on entered the lending business through Shriram
Transport Finance (Commercial Vehicle Finance) and Shriram City Union Finance (Consumer and
MSME Finance). In 2018, the company forayed into metallurgy by setting up a unit in Odisha.

1.3 Literature Review-

Kumar and Sanjeev (2016) expressed that Reserve Bank of India recommended two supervisory
rating models named as CAMELS and capital adequacy, assets quality, compliance, systems and
controls for rating of Indian commercial, private and foreign banks operating in India. The study
examined each parameter of CAMELS system by review of literature and empirical studies.

Samad (2015) in his article "Determinants Bank Profitability: Empirical Evidence from Indian
Commercial Banks" claimed that loan deposit ratio, capital risk, credit jeopardy and bank
efficiency are influencial factors for determining the profitability of Indian banks

Kumar and Sanjeev (2014) applied capital adequacy, assets quality, management, earning, liquidity,
systems and controls (CAMELS) model on the secondary data Indian old private sector banks the period

48
from 2007 to 2012. The study reveal that 6 banks out of 13 selected banks have shown good and
excellent financial performance. Tamil Nadu Mercantile Bank secured first position in terms of overall
composite ranking followed by Federal Bank. On the basis of CAMELS criteria Tamil Nadu
Mercantile Bank, Federal Bank and Nainital Bank have shown excellent financial performance.

Afroze (2014) revealed that Loans, Management Efficiency, Liquidity and Sensitivity have statistically
significant influence on the capital adequacy of private sector banks. However, the independent
variable asset quality has negligible influence on capital adequacy of Indian private sector banks.
Moreover, the study reveals that the Indian private sector banks maintain a higher level of capital
requirement than prescribed by Reserve Bank of India.

Kumar and Sanjeev (2014) applied capital adequacy, assets quality, management, earning, liquidity,
systems and controls (CAMELS) model on the secondary data Indian old private sector banks the period
from 2007 to 2012. The study reveal that 6 banks out of 13 selected banks have shown good and
excellent financial performance. Tamil Nadu Mercantile Bank secured first position in terms of overall
composite ranking followed by Federal Bank. On the basis of CAMELS criteria Tamil Nadu
Mercantile Bank, Federal Bank and Nainital Bank have shown excellent financial performance.

Afroze (2014) revealed that Loans, Management Efficiency, Liquidity and Sensitivity have statistically
significant influence on the capital adequacy of private sector banks. However, the independent
variable asset quality has negligible influence on capital adequacy of Indian private sector banks.
Moreover, the study reveals that the Indian private sector banks maintain a higher level of capital
requirement than prescribed by Reserve Bank of India

Perumal and Satheskumar (2013) studied on the topic “NBFCs” analyzing the Balance Sheets and
income statements of two sample companies, viz., Sundaram Finance Limited and Lakshmi
General Finance Limited for the period 2007–2012 using primary and secondary data. The study was
performed using various statistical techniques such as average, standard deviation, co-efficient of
variation, trend analysis, index number, etc. and concluded that the contribution of NBFCs to economic
development is highly significant.

Naresh (2013) conducted a study using CAMEL ranking approach to assess relative
performance of Indian public sector banks. The study observed that there is significant

49
difference between the mean values of CAMEL ratios of public sector banks. It is found
that the top two performing banks are Bank of Baroda and Andhra Bank because of high
capital adequacy and asset quality. The study recommends that banks has to improve its
management efficiency, asset, earning quality and liquidity position.

Sornaganesh et al. (2013) investigated the fundamental analysis of NBFC in India to analyze the
profitability position of 5 sample NBFC companies, like STF, SF, BF, and M and MF for the period
from April 2008 to March 2012, using Ratio Analysis. The study revealed that SF has performed
better in terms of Earnings Per Share but STF and M&MF are far better than other in NPM.

Kumar and Kumar (2013) highlighted that though ranking of ratios is different for different
banks in State Bank group. But there is no statistically significant difference between the
CAMEL ratios. It signifies that the overall performance of State Bank group is same; this may
be because of adoption of modern technology, banking reforms and recovery mechanism.
SBI needs to improve its position with regard to asset quality and capital adequacy, SBBJ
should improve its management efficiency and SBP should improve its earning quality.

Kantawala(2011) examined the financial performance of different groups of NBFCs Separately on

account of the fact that business model of different categories of NBFCs differ along with the
operating environment and market dynamics.It was concluded from the study that
profitability,liquidity and leverage ratios bear a significant difference depeding on the NBFC
category for which they are being measured.Four categories of NBFCs have been considered in the
study viz. Leasing,Loan finance,Hire purchase,Trading and investment companies.From the analysis
of the study it was inferred that that Gross profit to Total income ratio,Profit before Tax to Total
Income ratio, Profit after Tax to Asset ratio and Retained earnings to Profit after Tax ratios have
come out to be maximum.

Suresh Vadde (2011) evaluated the financial and organizational performance of private financial and
investment companies (excluding insurance and banking companies) during the year 2008- 09.The
post analysis results showed that growth in both main income and other income ,went down during
the year. Though on the other side, growth in total expenditure also decreased, still it was at higher
level than the income growth. The major reason for the growth in expenditure was attributed to the

50
growth in interest payments.Following, operating profits of the studied companies went down along
with the decreasing profitability. A huge chunk of funds raised during this financial year was in form
of borrowings.

Syal & Goswami(2011) analyzed financial performance and growth of the non-banking financial
institutions in India in the last 5 years which was insightful for the potential investors to get the
knowledge about the financial performance of the non-banking financial institutions and be helpful
in taking effective long-term investment decisions. The growth of NBFCs has been mainly due to
their advantage over the commercial banks because of their strong customer orientation and connect
which is inherently a result of the customer oriented and customized services they provide to their
clients, fast and simplified service policies adopted by them and relatively high rate of interests on
the term and other deposits.

Khalil (2011) analyzed the financial performance of those non-bank finance companies which
are providing the services of investment advisory, asset management, leasing and investment finance
for 2 years from 2008 to 2009. Ratio analysis method has been used to analyze the. The study
concluded that the financial performance of NBFCs was better in 2008 as compared to the overall
decline in 2009 caused by many factors.

Suresh (2011) investigated the performance of NBFCs in India (other than banking, insurance,
and chit fund companies) during the year April 2008 –March 2009. Study highlighted that
Financial and Investment Companies’ growth in income, main as well as other, decelerated
during the period and growth of total expenditure also decelerated but it was higher than the
income growth.

Sundaram (2010) has analyzed the growth, profitability and Financial Performance of
NBFCs. The researcher suggested that the RBI must exercise full control over the NBFCs
like that of its control over commercial banks, since these companies are growing very fast as
that of banks

Jafor (2009) stated that the NBFCs have been playing a very significant role in the present
day rigorous money-market conditions. They are serving the nation by supporting the
economic reconstruction and giving a booster to industrial production. They are engaged

51
into the business of providing loans and advances of small amounts for a short-period to
small borrowers. The NBFCs play an important role in channelizing these savings into
investment. They have supplemented the role played by the banks.

Dubey and Shubhashish (2007) analysed that NBFC’s in India had a great revolution after
1991 liberalization which led to simple regulatory mechanisms and allowance to greedy
investors to park their money with NBFC’s. With more customers’ base and unwise
investments started rising to have large profitability. This in turn leads to weak not
compatible with strong players and fading of golden era for NBFC’s.

Balachandran (2006) in his study on NBFCs has revealed that in the financial market,
different financial products are available which provide on effective payment and credit
system and thereby facilitate the channelizing of funds from savers to investors in the
economy and thus the NBFCs play an important role in Indian financial system. The
researcher has also traced the growth of NBFCs from 7000 in 1981 to 40,000 in 1995.
Deposits in these NBFCs have been growing at a much higher rate than with commercial
banks.

Kantawala’s (2002) study attempted to examine the financial performance of different

groups of NBFCs in terms of profitability, leverage and liquidity. Study found that
different categories of NBFCs behave differently and it is the entrepreneur’s choice in the
light of behavior of some the parameters that go along with the category of NBFC.

Hossain and Shahiduzzaman (2002) focused on the role played by nonbanking sector in the
economic development of the country and identifies the underlying problems existed within
the sector.

Vaidyanathan (2001) observed that the role of non banking sector in the credit delivery
system in both manufacturing and service sectors like trade, construction, hotels and
restraints, transport etc was significant and they played a more dominant role compared to
the commercial banks.

Gayathri and Madhusudhanan (2000) observed NBFCs increased their deposit base
aggressively by offering attractive rates of interest and reaching the far flung areas. The
52
matter of interest differential was a motivating factor for transfer of deposits from
commercial banks to NBFCs.

Sorab (1999) stated that the main areas of operations of NBFCs were hire purchase, leasing
and auto financing. The study estimated that nearly 60% of all trucks sold in India were
through hire purchase schemes. Almost 99% of second hand trucks and taxis exchange hands
through NBFC support and 75% of two - wheelers and 25% of white goods are sold with
NBFC finance.

Lakshmi (1998) explained the role of NBFCs and stated that their success was due to their
distribution capabilities, customer relation management, operating culture and quick
processing of loans.

Harihar (1998) studied the performance of all NBFCs taken together in terms of cost of debt,
operating margin, net profit margin (NPM), return on net worth, asset turnover ratio etc.
The study revealed that the aggregate performance of NBFCs and does not throw light on
the financial performance of different groups of NBFCs.

53
 CHAPTER 2
RESEARCH METHODOLOGY

2.1 Purpose of study-

The present study will discover the factors involved for determination of financial
performance of Non Banking Financial companies in India.
There has been always a disagreement over which is the better measure of profitability:
Return on Asset, Return on Net Worth or Net Profitability margin. Traditionally Return on
Asset and Return on Net Worth have been used to measure profitability but with changing
market environment and regulatory policies, firms have been changing their financial
yardsticks to measure profitability and financial performance.
In current scenario, credit rating companies like ICRA are moving towards using Net
profitability margin as a core measure of profitability; a better measure than Return on
Asset.
The study also covers comparative analysis of how ROA depends on its determinants vs
how Net profitability margin is related to set of financial parameters. We will be able to
find out the level of correlation between parameters and how strongly they change with
variations in values.

2.2 Research Objective of Study-

 To Study different Financial Parameters significant for measuring the performance of

NBFC’s.
 To Establish the Relationship between different financial parameters and the profitability of
NBFC’s from the financial year 2017 -2019.

2.3 Research Methodology of the Study-

Research Hypothesis-
We tested the following research hypotheses that have been formulated based on empirical

54
literature:

H1: There is a significant relationship between Firm Size and profitability of NBFIs.
H2: There is a significant relationship between Capital Adequacy Ratio and profitability
of NBFIs.
H3: There is a significant relationship between Loan Ratio and profitability of NBFIs.
H4: There is a significant relationship between Deposit Ratio and profitability of NBFIs.
H5: There is a significant relationship between Net Interest Margin and profitability of NBFIs.

H6: There is a significant relationship between Non-interest Income Margin and

profitability of NBFIs.

H7: There is a significant relationship between Cost to Income Ratio and profitability of
NBFIs.

2.3.1 Research Design

 Descriptive Research Design

2.3.2 Methods of Data Collection

Document Analysis, Observation, Case Studies, Bloomberg terminal, audited financial results
published by companies and other sources like research reports, journals, financial newspapers and
websites, etc.

2.3.3 Sample Deign-

2.3.3.1 Sample unit

10 most prominent NBFC’s are used in this project b ased on their relative market share and being
operational during the analysis period.

2.4 Limitations

 The analysis was made with the help of the secondary data collected from the company and
secondary may sometime give false results.

 Collection of data and calculation of ratios was a Time-consuming process.

55
 CHAPTER 3
ANAYLSIS & INTERPRETATION

The research is empirical in nature. The data of 10 topmost listed NBFCs of India in terms
of asset size were selected for previous Annual year. The reason to select these 10
companies were many-fold. Firstly NBFC market in India is still very concentrated and
these top 10 companies combined have a major share in total asset size of all listed players
in India.
Secondly, these 10 companies are truly representative of separate NBFC types of companies whether
it be gold loan, asset financing, leasing, vehicle financing or others. Vast and mix of business
portfolios of the sample companies make it representative of effects that can happen on NBFC
market either due to economic conditions or market specific reasons. Thirdly, getting all the data
required for the empirical analysis was a major obstacle too as number of listed NBFCs in India is
still very less and getting their financial data is also a major task. The data for this study was
collected from different sources like from the Bloomberg terminal, audited financial results
published by the l10 companies. Further, other sources like research reports, journals, financial
newspapers and websites, etc. were considered whenever found necessary. Hence the data is totally
transparent in context of authenticity.

A total of eight variables have been chosen for this study. Among them, one was the dependent
variable and the other 7 were the explanatory or independent variables.

Dependent Variable
In most literatures, bank or NBFI’s performance has been measured by Return on Asset (ROA) or
Return on Equity (ROE). In this study, Return on Equity (ROE) has been used as the measure of
financial institution’s profitability. ROE is measure as a firm’s net profit divided by its total
equity. It indicates a firm’s efficiency at generating profit from each unit of shareholders’ equity.
The formula for ROE is defined as: ROE = Profit after tax / Total shareholders’ equity.

Independent Variables

We reviewed the relationship between profitability and other firm specific factors for non-bank
financial institutions in India and identified several independent variables from literature. These

56
independent variables were size, capital strength, loan ratio, asset quality, deposit ratio, interest
income, non-interest income and operational efficiency. These variables have been briefly
described below:

a) Firm Size: It is measured as the natural logarithm of total assets of a firm. A firm may
improve its financial performance as it grows bigger. Therefore, firm size is expected to have a
positive impact on profitability. However, large firms may sometimes face diseconomies of scale
which may cause poor return to the firm.

b) Capital Adequacy Ratio (Capital Strength): It is measured as total equity divided by total
assets. This ratio represents the capital strength of a firm. The higher the ratio the lower the need
of external financing and thus lower the risk of going bankrupt, which reduces the firm’s cost of
funds. This ratio is expected to have positive relationship with profitability.

c) Loan Ratio: Loans generate interest income for a financial institution. Loan ratio represents
total loans as percentage of total assets. More loans in the asset portfolio are expected to
generate more income for a firm and thus a positive relationship is expected between loan ratio
and profitability.

d) Deposit ratio: Deposits have the lowest cost of fund for a financial institution. The interest
spread is higher for loans that are originated from deposits which enhances the profit margin for
the firm. However, if a firm fails to transform its deposits into loans efficiently it may impact
profitability negatively. This ratio is measured as total deposits divided by total assets.

e) Net Interest Margin: It is measured as net interest income divided by total assets. It is one of
the most important indicators of performance of a financial institution because these firms
depend highly on interest generating activities. It is expected to show positive relationship with
profitability.

f) Non-interest Income Margin: Non-interest income of a financial institution is generated

from non-traditional financial activities such as commissions, fees, investment income from
government or private securities, and other operating incomes. It is measured as total non-
interest income divided by total assets. It is expected to impact profitability positively.

g) Cost to Income Ratio (Operational Efficiency): It shows a company’s costs in relation to its
income. It is measured by dividing a firm’s operating costs by operating income. It shows how
efficiently a firm is running. The lower the ratio, the more profitable the firm will be.

57
 Descriptive Analysis-

Table No -3.1 Descriptive Analysis

Variable Mean(%) Std. Minimum(%) Maximum(%)

Deviation(%)
ROE 14.86 11.74 3.05 42
FS 17.21 32.42 0.17 61.17
CAR 24.02 15.43 15.93 66.93
LR 63.75 37.58 0.12 91.88
DR 8.03 11.94 0 39.65
NIM 11.42 4.51 3.08 19.19
NIIM 3.43 1.92 0.03 19.64
CIR 73.77 3.92 55 94.06

The above table shows mean, standard deviation, minimum and maximum values for the
year(2017-2019) each variable. From the table we can see that, on an average, the NBFCs have a
return on equity of 14.86%. The ROE varies significantly with a standard deviation of 11.74%.
While all the firms achieved positive return during our observed time period, the ROE has a wide
dispersion from 3.05% to 42%.

Size of the firms has been determined by the natural logarithm of total assets, the mean of which
is 17.21 and standard deviation is 32.42. It suggests that our data includes firms of different sizes.
The firms have an average capital adequacy ratio of 24.02% which goes as high as 66.93%.Loan
ratio show an average of 63.75% of NBFCs’ total assets are loans.

Even though NBFCs can only collect term deposits of three months and above, the average
deposit ratio is 8.03%. One of the firms in our study does not have any deposit financing. As a
result, the minimum value of deposit ratio is 0% while the maximum value is 39.65%.

Average net interest margin is 11.42% while average non-interest income margin is 3.43%. Lower
non-interest income margin compared to net interest margin indicates that NBFCs do not generate
much income from non-traditional financial activities.

Average cost to income ratio is 73.77%. The minimum and maximum values are 55% and 94.06%
which imply that some firms are very efficient in their operation while other firms incur more than
50 INR operating expense to generate every 100 INR operating income.

58
Correlation Matrix-

Table No-3.2 Correlation Matrix

Variables ROE FS CAR LR DR NIM NIIM CIR

ROE 1
FS -0.35 1
CAR 0.82 -0.14 1
LR -0.60 0.38 -0.49 1
DR -0.36 -0.01 -0.28 0.36 1
NIM -0.59 0.24 -0.69 0.04 0.17 1
NIIM -0.29 0.02 -0.07 0.15 -0.24 0.18 1
CIR -0.19 0.16 0.00 0.15 0.31 -0.34 -0.01 1

The correlation matrix shows that, there are some positive and some negative correlations
between independent variables. Firm size and capital adequacy ratio are negatively related to loan
ratio whereas deposit ratio, net interest margin, non-interest income margin and cost to income
ratio are positively correlated. Firm size has inverse relationship with all the independent variables
except for cost to income ratio. Net interest margin has positive correlation with capital adequacy
ratio and loan ratio. The table shows that the correlation is not higher than 0.85 between any two
independent variables.

The matrix also shows that firm size and net interest margin are positively related to ROE whereas
capital adequacy ratio, deposit ratio, non-interest income margin and cost to income ratio are
negatively correlated. Loan ratio apparently shows negative correlation with ROE. The degree of
correlation suggests that Net Interest Margin has the strongest correlation with ROE whereas Cost
to Income ratio has the weakest correlation.

59
Multiple Regression-

Table No-3.3 Multiple Regression Analysis

Dependent Variable: ROE
Method: Least Squares
Date: 03/19/20 Time: 18:13
Sample: 1 30
Included observations: 30

Variable Coefficient Std. Error t-Statistic Prob.

C 24.67507 9.717127 2.539338 0.0187

FIRM_SIZE_CR_ 4.07E-08 1.12E-06 0.036420 0.9713
CAR 0.377705 0.148840 2.537653 0.0188
LOAN_RATIO -0.059697 0.046908 -1.272629 0.2164
DEPOSIT_RATIO -0.088404 0.149782 -0.590221 0.5611
NET_INTEREST_MARGIN -0.480388 0.460712 -1.042708 0.3084
NON_INTEREST_INCOME_MARG -0.415868 0.325917 -1.275992 0.2153
COST_TO_INCOME_RATIO -0.130598 0.100475 -1.299795 0.2071

R-squared 0.728312 Mean dependent var 13.04867

Adjusted R-squared 0.641865 S.D. dependent var 10.24464
S.E. of regression 6.130841 Akaike info criterion 6.687719
Sum squared resid 826.9187 Schwarz criterion 7.061372
Log likelihood -92.31579 Hannan-Quinn criter. 6.807254
F-statistic 8.425016 Durbin-Watson stat 1.331424
Prob(F-statistic) 0.000051

ROE=α+β1*Firmsize+β2*car+β3*loanratio+β4*depositratio+β5*netinterestmargin+β6*noninteresti
ncomemargin+β7*costtoincomeratio

R – Squared and Adjusted R-Squared:-

2
Regression output shows that, the R value is 0.728 which suggests that the independent variables in
2
our model can explain 95.1% variation in ROE. The adjusted R is 0.641 which is also reliable. The
F statistics is very significant at 8% level which suggests that there is significant relationship
between the dependent variable and at least one independent variable.

60
Durbin-Watson stat:-

The Durbin-Watson stat value is 1.331424 which is less than 2. It means there is auto-
correlation between the variables.

Prob(F-Statistics):-

It represents the cumulative p-value of the Independent variables. In this study the p-
value is 0.000051 i.e. .0051% which is less than 5% that indicates all Independent
variables are significant enough to determine the dependent variable ROE.

61
 CHAPTER 4
FINDINGS & SUGGESTIONS

In the above Analysis we have found out significant or insignificant levels for the various
independent variables which are explained below.

Firm size is positively related to ROE. However, the coefficient value suggests that the impact of
firm size on ROE is negligible. We also see that, firm size is statistically insignificant at 5% level.
Therefore, we cannot conclude that there is significant relationship between firm size and
profitability of Indian NBFCs and Capital adequacy ratio shows an inverse relationship with ROE.
It could be due to the fact that, if equity capital increases then the denominator in ROE increases
which ultimately reduces the measurement of ROE. We also see that, this variable is statistically
significant at 5% level whereas Loan ratio also has a negative impact on ROE. However, it is
statistically insignificant at 5% level. Therefore, we cannot conclude that there is significant
relationship between loan ratio and profitability of NBFCs. Deposit ratio has a positive
relationship with ROE. It is also statistically significant at 5% level. It suggests that NBFCs in
India are not efficiently transforming deposits into loans which is affecting their profitability
negatively. The coefficient value indicates that, 1% increase in deposit ratio will result in 0.68%
increase in ROE. Net interest margin is negatively related to ROE. It is statistically significant at
5% level. Keeping other things constant, 1% increase in net interest margin will result in 2.39%
decrease in ROE.

Non-interest income margin has a positive relationship with ROE which implies that earnings
from non-traditional financial activities enhance ROE. However, it is statistically insignificant at
5% level. Therefore, we cannot conclude that there is significant relationship between non-interest
income and profitability of NBFCs and Cost to income ratio has inverse relationship with ROE
which implies that higher operational efficiency results in higher profitability. However, this
variable is statistically insignificant at 5% level. Therefore, we cannot conclude that there is
significant relationship between operational efficiency and profitability of NBFCs.

62
 CHAPTER 5
CONCLUSION

This study investigates the factors affecting the financial performance of non-bank financial
institutions in India. There are currently more than 11,000 NBFCs operating in the country. Along
with the rising number of commercial banks, the competition is quite intense in the NBFI industry
and intense competition can drive the average profitability of the industry down. In our analysis,
we have identified seven factors that may affect the profitability of the NBFCs. We have found
that, not all of them show significant relationship with profitability. Among the independent
variables, deposit ratio and net interest margin expressively influence the profitability of NBFCs
in India.

The inverse relationship between capital adequacy ratio and return on equity implies that, if
increase in equity capital fails to increase net profit at the same rate the higher equity value will
drive ROE down. Therefore, NBFCs need to convert their equity capital into profit generating
assets otherwise it will pose negative impact on their profitability. The same goes for deposit
ratio. Deposits need to be efficiently converted into loans. Otherwise, increasing deposit will
hamper profitability because idle deposit does not generate any income, but it incurs interest
expense.

The rising of loans is one the major concerns for the financial sector in India. If NBFCs can
decrease their individual rate of Loan, our analysis shows that, their profitability will be increased
significantly. There are three main causes behind the rise of Non recoverable loans: weakness in
project analysis, lack of skilled manpower, and monitoring. Project analysis is of the essence in
granting loans, but financial institutions still give priority to mortgaged property instead of
looking at project viability. The loan recovery from mortgaged property is very insignificant, so
financial institutions should give loans analyzing project viability. If the project becomes viable
and have adequate cash flow, the loan will be out of default risk, even if there is no adequate
collateral. Also, keeping down Loan ratio will improve the overall net interest margin which, our
study shows, will enhance ROE significantly.

Scope for Future Research-

We hope that government, institutions, investors and policymakers will find the findings of this
study useful. While investors can use these factors to identify which firms to invest in, firms can
63
consider these factors to enhance their profitability. These factors will also help regulators
monitor and assess the chance of bankruptcy by these NBFCs.

Suggestions-

 The data for the concerned project is taken for the financial year 2017-2019, data taken for
different period might give different results

 One can take different variables for measuring the financial performance of companies
and it might give different results.

 Significant relationship within variables helps in choosing the best NBFC’s one wants to
deal with.

64
 BIBLIOGRAPHY

Refernces-

Abbaiah, R. "FINANCIAL INCLUSION STATUS OF NON-BANKING FINANCE COMPANIES –

MICRO FINANCE INSTITUTIONS (NBFC-MFIS) ECONOMIC EMPOWERMENT IN INDIA."
Global Journal For Research Analysis (GJRA) 9.1 (2020).

Alam,Raza & Akram ,2011, „Financial Performance of Leasing Sector. The Case of
Pakistan‟, Interdisciplinary journal of contemporary research in business,Vol 2 No 12

Gremi, E., & Ballkoci, V. (2016). The Determinants of Non Banking Financial Institutions
Profitability.

Harihar T.S. “Non -Banking Finance Companies, The Imminent Squeeze”, Chartered
Financial Analyst, February 1998, p. 40-47.

Kaur, Davinder. "A study of financial performance of NBFCS." International Journal of

Management, IT and Engineering 8.10 (2018): 48-55.

Kantawala, Amita S. "Financial performance of non banking finance companies in India." Indian
Economic Journal 49.1 (2001): 86-92.

Khandoker, Raul and Rahman, ’ Determinants of profitability of Non Bank Financial

Institutions: Evide nce from Bangladesh‟, International Journal of Management Sciences
and Business Research Volume 2, Issue 4.

Kaur, Davinder. "A study of financial performance of NBFCS." International Journal of

Management, IT and Engineering 8.10 (2018): 48-55.

Kantawala 2011, Financial performance of non banking finance companies in India.

Nanda, Amitabh, and Surya Kumar Misra. "Customer Relationship Management Practices in Non-
Banking Financial Companies with Special Reference to CitiFinancial." Siddhant-A Journal of

65
Decision Making 12.2 (2012): 152-157.

Nibedita Roy,2013, „The golden route to liquidity: a performance analysis of gold loan
companies‟, International journal of research in commerce, it & management, Volume No.
3 (2013), Issue No. 06 (June)

Nazneen, Afroze, and Sanjeev Dhawan. "A Review of Role and Challenges of Non-banking
Financial Companies in Economic Development of India." International Journal of Economics and
Financial Issues 8.6 (2018): 90.

NBFC Microfinance Institutions with Special Reference to Microfinance Information Exchange

(MIX)." International Journal in Management & Social Science 4.11 (2016): 183-193

P Vijaya Bhaskar,2013‟ Non -Banking Finance Companies: Game Changers‟,

Workng Paper,RBI

Syal & Goswami,2012,’ Financial Evaluation of Non-Banking Financial

Institutions: An Insight‟, Indian journal of applied research,Vol 2 Issue 2 Nov
2012.

Suresh Vadde, 2011 „Performance of non -banking financial companies in india - an

evaluation‟ Journal of Arts Science & Commerce ,Vol.– II, Issue –1,January 2011

Seema Saggar, “Financial Performance of Leasing Companies, During the Quinquennium

Ending 1989- 90” Reserve Bank of India: Occasional Papers, Vol. 16, No. 3 September
95, pp. 223-236.6.

Syal & Goswami,2012,’ Financial Evaluation of Non-Banking Financial

Institutions: An Insight‟, Indian journal of applied research,Vol 2 Issue 2 Nov 2012

Sinha, Akinchan Buddhodev. "Non-Banking Financial Institutions of India-Their Onset, Growth and
Performance of Selected NBFCs." The Institute of Company Secretaries of India. Retrived from
https://www. icsi.edu/Portals/86/Manorama/DBIMS% 20Journal 20.

66
WEBSITES REFERRED-

https://www.stfc.in/about-us/about-way/

http://www.idfc.com/our-firm/overview.htm

https://www.ltfs.com/about-us.html

https://www.srei.com/company-overview

http://www.cholafhl.com/article/profile/8

https://www.bajajfinserv.in/corporate-bajaj-finserv

https://www.sundaramfinance.in/about-us

https://www.stfc.in/about-us/about-way/

https://magma.co.in/about-us/company/introduction/who-we-are/

https://www.muthootfinance.com/corporate/about-us

BOOKS-

Ravi Pullani & Mahesh Pullani, ”Manual of Non-Banking Finance

Companies(NBFC’s)
Publisher- Bharat Law House, Delhi; 2016 Edition.

Jafor Ali khan, “Non Banking Financial Companies(NBFC’s) in India: Functioning

and Reforms
Publisher- New Century Publication; 1 Edition ( 1january 2010)

67
ANNEXURES –

Financial Data Excel

 FY-2019

Companies ROE Firm CAR loan Deposit Net Non- Cost to

Size(cr) ratio ratio Interest Interest Income ratio
Margin Income
Margin

Shriram 15.04 1,05,29,248 20.27 91.88 9.82 14.61 0.13 75.8

Transport
IDFC Ltd 15 98200 16.25 1.2 0.52 19.19 1.41 55

SREI Ltd 3.05 1557090 16.08 60.3 9.6 9.72 0.9 94.06

Cholamandalam 20.9 57426 17.4 38 0.76 12.17 7.48 73.93

finance
Bajaj Finance 4.4 108499 20.66 87.72 12.15 14.14 1.87 65.31

Sundram 42 30820 66.93 0.12 0 3.08 0.96 77.92

Finance
Sriram City 3.49 2941525 23.12 91.75 3.37 13.29 19.64 73.73

Magma fincorp 13 1451922 17.6 90.48 1.3 8.5 1.34 84.34

Muthoot 22.4 380687 26.05 91.76 2.56 7 0.13 55.3

Finance
L&T Finance 9.4 55836 15.93 84.37 39.65 12.55 0.03 82.34

68
  FY-2018

Companies ROE Firm CAR loan Deposit Net Non- Cost to

Size(cr) ratio ratio Interest Interest Income
Margin Income ratio
Margin
Shriram 6.4 98,266 18.65 88.23 7.36 12.63 5.23 66.4
Transport

IDFC Ltd 7.2 87620 14.25 5.2 2.3 18.17 2.24 84

SREI Ltd 4.06 1667890 16.08 70.3 0.25 8.62 1.2 89.36

Cholamandalam 17.7 39456 15.15 35 0.76 11.23 0.78 72.36

finance

Bajaj Finance 5.3 107763 24 74.54 7.65 7.82 2.27 64.21

Sundram 36 89141 56.21 1.23 0 2.12 0.85 47.52

Finance

Sriram City 4.89 3749624 12.11 88.54 4.54 8.1 14.44 70.2

Magma fincorp 11.23 4158466 5.4 92.32 0 3.25 2.3 80.32

Muthoot 22.4 400214 22.36 85.63 4.11 9 0.18 51.21

Finance

L&T Finance 8.61 88741 14.52 74.21 25.3 11.55 1.2 79.23

69
  FY-2017

Companies ROE Firm CAR loan Deposit Net Non-Interest Cost to

Size(cr) ratio ratio Interest Income Income
Margin Margin ratio
Shriram 3.2 88,456 16.25 86.35 5.32 11.65 4.23 74.21
Transport

IDFC Ltd 4.2 96250 12.23 6.2 1.2 14.21 4.21 42

SREI Ltd 8 2665410 15.21 69.32 0 7.62 2.1 86.32

Cholamandalam 25 87452 8.52 34 1.2 10.24 0.65 54.21

finance

Bajaj Finance 8.9 109542 20 72.21 4.21 6.85 1.17 65.32

Sundram 33 65472 45.36 2.21 0.45 1.25 1.2 52.21

Finance

Sriram City 8.74 5862314 11.25 86.35 3.25 7.5 12.25 69.36

Magma fincorp 10.25 6547124 6.5 90.21 0 2.26 0.95 74.21

Muthoot 21.36 330014 19.65 84.54 2.12 8.5 1.21 85.21

Finance

L&T Finance 7.45 741256 14.52 65.24 26.32 10.65 0.65 74.36

70