A Comparative Study of NBFC in India

Executive summary:



The study presents a
comparative study of NBFCs in India. There are almost 13000 registeredNBFCs in India.
The study is aimed to provide an holistic view of the NBFC Industry. NBFC fulfills the
financial gap by providing loan at a lower rate of interest. The major players of each field1)
Housing Finance Industry: LIC Housing Finance.2) Infrastructure Finance Industry: IDFC3)
Asset Financing: Shriram Transport Finance4) Composite: Reliance CapitalThe study also
compared the Indian Banks v/s NBFC. It was found that at even at the time of theeconomic
slowdown NBFC was more profitable. Porters Five forces was also used to analyse
theindustry and to find the competitiveness in the industry. The industry is not tightly
regulated asthere are many regulatory bodies. Hence, there was an important need to study
the NBFC as theindustry plays an important role in the financial Services market of INDIA.
It is encouraging that the NBFC sectors importance is finally being acknowledged across FS
market constituents as well as the regulator. However, the importance attached to the sector
isoften transcending into misplaced exuberance. Over simplified and vague drivers for
NBFCvaluations such as strategic fit and customer base, can never substitute dispassionate
businessanalytics. A rational assessment of the intrinsic values of NBFCs factoring issues
such as pastperformance, structural weaknesses of the sector (for instance funding
disadvantages), alongwith an identification of real capabilities are essential to ensure that the
equilibrium betweenprice paid and value realized is reached to the extent possible. In the
absence of this, India issure to witness the re-opening of the NBFC horror story albeit with a
new chapter on theerosion of NBFC investment values affecting investors across categories















Introduction


A Non-Banking Financial Company (NBFC) is a company registered under the
CompaniesAct, 1956 and is engaged in the business of loans and advances, acquisition
of shares/stock/bonds/debentures/securities issued by Government or local authority or
othersecurities of like marketable nature, leasing, hire-purchase, insurance business, chit
businessbut does not include any institution whose principal business is that of agriculture
activity, industrial activity, sale/purchase/construction of immovable property. A non-
banking institution which is a company and which has its principal business of receiving
deposit sunder any scheme or arrangement or any other manner, or lending in any manner is
also anon-banking financial company (Residuary non-banking company).NBFCs are doing
functions akin to that of banks; however there are a few differences:(i)an NBFC cannot
accept demand deposits;(ii) an NBFC is not a part of the payment and settlement system and
as such an NBFC cannot issue cheques drawn on itself; and(iii) deposit insurance facility of
Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors
unlike in case of banks.
1.1 TYPES
OF NBFCS

Originally, NBFCs registered with RBI were classified as:
(i)equipment leasing company;
(ii) hire-purchase company;
(iii) loan company;
(iv) investment company.
However, with effect from December 6, 2006 the above NBFCs registered with RBI have
been reclassified as
(i) Asset Finance Company (AFC
(ii) )(ii) Investment Company (IC)
(iii) (iii) Loan Company (LC)

1.2
REGULATIONS OF NBFC


registered with RBI to commence or carry on any business of non-banking financial
institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.However, to obviate
dual regulation, certain categories of NBFCs which are regulatedby other regulators are
exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant
Banking companies/Stock broking companies registered with SEBI, Insurance Company
holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified
under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of
Section 2 of the Chit Funds Act,1982 or Housing Finance Companies regulated by National
Housing Bank.


A company incorporated under the Companies Act, 1956 and desirous of commencing
business of non-banking financial institution as defined under Section 45I(a) of the RBI Act,
1934 should have a minimum net owned fund of Rs 25 lakh(raised to Rs 200 lakh w.e.f April
21, 1999).The company is required to submit its application
online by accessing RBIs secured
website https://secweb.rbi.org.in/COSMOS/rbilogin.do (the applicant companies donot need
to log on to the COSMOS application and hence user ids for these
companies are not required). The company has to click on CLICK
for Company Registration on the login page. A window showing the Excel application forms
available for download would be displayed. The company can then download suitable
application form (i.e. NBFC or SC/RC) from the above website, key in thedata and upload
the application form. The company may note to indicate the name of
the correct Regional Office in the field C
-
8 of the Annx
-
Identification Particulars
worksheet of the Excel application form. The company would then get a Company
Application Reference Number for the CoR application filed on-line. Thereafter, the
company has to submit the hard copy of the application form (indicating the Company
Application Reference Number of its on-line application), along with the supporting
documents, to the concerned Regional Office. The company can then check the statusof the
application based on the acknowledgement number. The Bank would issue Certificate of
Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the
RBI Act, 1934 are satisfied

RESPONSIBILITIES
The NBFCs accepting public deposits should furnish to RBI

Audited balance sheet of each financial year and an audited profit and loss account inrespect
of that year as passed in the annual general meeting together with a copy of the report of the
Board of Directors and a copy of the report and the notes on accounts furnished by its
Auditors;
ii. Statutory Annual Return on deposits - NBS 1;

iii. Certificate from the Auditors that the company is in a position to repay the deposit as and
when the claims arise;

iv. Quarterly Return on liquid assets;

v. Half -yearly Return on prudential norms;

vi. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore andabove
or with assets of Rs. 100 crore and above irrespective of the size of deposits ;

vii .Monthly return on exposure to capital market by companies having public depositsof Rs.
50 crore and above; and

viii. A copy of the Credit Rating obtained once a year along with one of the Half-yearly
Returns on prudential norms as at (v).

CURRENT SCENARIO
Nearly 11 years after the last of the two banking licences were issued by RBI to private
sectorentities, the government has again started the process of allowing the better-managed
non-banking finance companies (NBFCs) to graduate to full-fledged banks. FM Pranab
Mukherjees Budget proposal on Friday was
the first step towards the same.The second step will be enacted on Tuesday morning. A select
group of officials from topNBFCs, under the aegis of the Finance Industry Development
Council (FIDC), the trade bodyfor NBFCs in India, are meeting R Gopalan, the banking
secretary in the finance ministry, to present a case for select NBFCs to be converted into full-
fledged banks, sources said. About12-15 NBFCs and corporate houses having presence in the
financial sector are expected to join the race to float a bank.
The finance minister is convinced that there is a huge need for low-cost financing at the semi-
urban and rural areas in India, said a industry source. The financial services industry
believes the Budget proposal was a reflection of the same.
In the finance ministry things are moving in the right direction and the banking secretarys
meeting proves the same, said the source. FIDC office bearers could not be contacted
during the extended weekend.
RESEARCH DESIGN
Since the research is for industry analysis and it is structured for NBFCS. The research uses
secondary data for analysis and interpretation.
3.2 OBJECTIVE
The confined objectives of the present study are;
To analyse the market of NBFCs in India
To study the financials of NBFCs
3.3 SCOPE OF THE STUDY
The study was limited to the Financial Service market of India which included NBFCs
mainly from the . The study was completed within the time frame of 60 days(2
months)starting from 1st April, 2010 and ending on 1st June, 2010. The target group of the
study were the NBFCs.
3.4 DATA COLLECTION
There are two methods of data collection that can be considered when collecting data
forresearch purpose. These data collection types include the following:
1.Primary data
2.Secondary data
Both the secondary and primary data collection methods were used in the study.
3.4.1 PRIMARY DATA
The primary data required for this study was collected by visiting the financial services and
analysing the information provided by them.
3.4.2 SECONDARY DATA
The secondary data for the research was collected from journals, research articles, books and
internet websites, annual reports etc. The source of the secondary data was British
Library, NBFCs and Internet.
Secondary data was the main source in formulating the constructs of A comparative study
of NBFCs in India.

3.5 FIELD WORK PLAN
The study was conducted in New Delhi (NCR and Bangalore visiting different institutions
and analysing the different NBFCs work.
LIC HOUSING FINANCE
4.1.1 Housing Finance Industry
Indias housing finance industry comprises of banks and housing finance companies. They
have contributed to new residential home loans at a compounded annual growth rate
(CAGR)of more than 30 percent during the period 2002-2007. This has been due to the
combined effect of a booming economy and low interest rates. Further, steady prices and
continuation of tax concessions to self-occupied residential home borrowers are contributors
to the growth of the industry. The average age of borrowers has declined over the years,
while the number of double income households has grown significantly enabling them to
borrow higher loan amount due to higher repaying capacity. The scenario of unprecedented
growth in housing finance, driven by low interest rates, increasing purchasing power and
attraction of the yield in this sector has begun to show signs of change last year. There has
been a decrease in demand during the last one year. Earlier to that i.e., during 2006 to 2007
home prices increased at a CAGR of 30 to 40 percent against a 20 percent increment in
salaries witnessed in metros and large cities. This had affected the buyers affordability.
As the borrowing cost for banks and housing finance companies steadily increased in line
with rising interest rates in the economy in the past two years up to Q3 of 2008-09, banks and
housing finance companies resorted to hike in interest rates so as to maintain their interest
spreads. Interest rates on new home loan originations have increased significantly by
200basis points during April 2008 to September October 2008. As a result a higher
proportion of monthly income was being paid out as home loan equated monthly installments
(EMI).The combined effect of an increase in property prices and interest rates has meant that
home loan buyers, who would have had to borrow less at an interest rate of 8.75 percent a
year ago, now have to borrow more to buy the same property due to higher property prices at
higher interest rates of 10.5 to 11 percent. This trend has resulted in both lower affordability
i.e., an average home at a higher multiple of annual income, and higher debt burden (meaning
that a larger proportion of income gets spent as home loan EMI). Further, the increase in
interest rates on fresh loans to 10.5 to 11 percent from 8.75 percent meant increase in debt
burden i.e., higher instalment to income ratio. Along with, the economic down turn and
consequential apprehensions of job insecurity and income reduction led to slump in the
market. However the scenario has taken the reverse turn in the last quarter of the financial
year 2008-09, which was evident from the higher booking of flats, and sharp increase in the
disbursements. Real estate developers have taken sensible decision in reducing or slashing
rates in major centres specially Mumbai, Thane, Navi Mumbai, Delhi NCR and Bangalore to
en cash on the existing demand in the real estate market. The good deals might be offered for
a few weeks or for the first ten properties or for a killer deal for a time-bound two days or
similar schemes but yes, the writing is clear on the wall that the willingness to connect with
the real pricing has dawned on the developers to sell at reduced prices to encourage more
and more sales. The sales teams in the builder/ developer offices are at their all-time creative
best with sales tactics. They now understand clearly that with buyers unwilling to relent on
unrealistic pricing, there is an even greater need to price competitively, maybe with a lower
profit margin, than holding on to the price and project as the interest meter runs. These
proactive steps should ensure renewed demands and increased volumes during the current
year. The Indian economy, which was on a robust growth path up to 2007-08, averaging at
8.9 percent during the period 2003-04 to 2007-08, witnessed moderation in 2008-09, with the
deceleration turning out to be somewhat sharper in the third quarter. Industrial growth
experienced a significant downturn and the loss of growth momentum was evident in all
categories, viz., the basic, capital, intermediate and consumer goods. However, the fiscal
stimulus packages of the Government and the monetary easing of the Reserve Bank will,
however, arrest the moderation in growth and revive consumption and investment demand,
though with some lag, in the months ahead. Furthermore, prospects of the agricultural sector
also remain bright, and this will continue to support the rural demand. Finally, in the wake of
expected improvement in agricultural production as well as low international commodity
prices, inflationary pressures are also anticipated to remain at a low level through the greater
part of the 2009-10.
4.1.2 Indian Housing Finance scenario
Indias housing finance industry comprises of banks and housing finance companies. They
have contributed to new residential home loans at a compounded annual growth rate
(CAGR)of more than 30 percent during the period 2002-2007. The scenario of unprecedented
growth in housing finance, driven by low interest rates and booming economy, has begun to
show signs of change last year. There has been a decrease in home prices during the last one
year
Earlier to that i.e., 2006 to 2008 home prices increased at a CAGR of 30 to 40 percent again
to 20 percent increment in salaries witnessed in metros and larger cities. This had affected the
buyers affordability. The average home buyer spent around 4 times his net annual income
for purchasing a new residential home in the 3-4 years till March 2005. (source CRISIL
report 19th February, 2009) As the borrowing cost for banks and housing finance companies
steadily increased in line with rising interest rates in the economy in the past two years upto
September 2008, banks and housing finance companies resorted to hike in interest rates so as
to maintain their interest spreads. Interest rates on new home loan originations had increased
significantly by 200 basis points during April 2008 to August September
2008. As a result a higher proportion of monthly incomes was paid as home loan equated
monthly instalments(EMI). But, the scenario has taken the reverse turn in the last quarter of
the financial year2008-09 which was evident from the higher booking of flats and sharp
increase in the disbursements. As interest rates are heading southward, public sector banks
have set the pace. Housing finance companies would follow the suit. It may be mentioned
here that with the decline in interest rates, LIC Housing Finance has passed on 150 basis
points rate cut to the customers i.e. 75 basis points each on 1st January, 2009 and 1st April,
2009. Our interest rates are among the lowest in the industry. This has helped our company in
retaining customers and maintaining high growth rates even in tough conditions. And interest
rate is just one of the factors. Transparency, hassle-free services, property prices and buyers
repayment capacity are equally important. The customer would not arrive at a decision solely
based on the reduction in interest rates for one year. LIC Housing Finance is one of the best
players in the industry in terms of EMI as our company has no hidden costs.
4.1.3 LIC Housing Finance

LIC Housing Finance Ltd. is one of the largest Housing Finance Company in India.
Incorporated on 19th June 1989 under the Companies Act, 1956, the company was promoted
by LIC of India and went public in the year 1994. The Company launched its maiden GDR
issue in 2004. The Authorized Capital of the Company is Rs.1500 Million (Rs.150 Crores)
and its paid up Capital is Rs.850 Millions (Rs.85 Crores). The Company is recognized by
National Housing Bank and listed on the National Stock Exchange (NSE) & Bombay
Stock Exchange Limited (BSE) and its shares are traded only in Demat format. The GDR's
are listed on the Luxembourg Stock Exchange.
The main objective of the Company is providing long term finance to individuals for
purchase / construction / repair and renovation of new / existing flats / houses. The Company
also provides finance on existing property for business / personal needs and gives loans to
professionals for purchase / construction of Clinics / Nursing Homes / Diagnostic Centres
/ Office Space and also for purchase of equipment. The Company possesses one of the
industry's most extensive marketing network in India :Registered and Corporate Office at
Mumbai, 6 Regional Offices, 13 Back Offices and 158marketing units across India. In
addition the company has appointed over 1352 Direct Sales Agents (DSAs), 7085 Home
Loan Agents (HLAs) and 777 Customer Relationship Associates(CRAs) to extend its
marketing reach. Back Offices spread across the country conduct the credit appraisal and
administrative functions. The Company has set up a Representative Office in Dubai and
Kuwait to cater to the Non-Resident Indians in the GLCC countries covering Bahrain, Dubai,
Kuwait, Qatar and Saudi Arabia. Today the Company has a proud group of over 10,00,000
prudent house owners who have enjoyed the Company's financial assistance.
Profile & Progress
Provides loans for homes, construction activities, and corporate housing schemes.
Around 91% of the loan portfolio derived from the retail segment and the rest fromlarge
corporate clients Formed three new wholly owned subsidiaries in 2007-08 to promote
marketing of financial products and venture capital fund Rated AAA by CRISIL for the 8th
consecutive time in 2008-09; maiden Fixed Deposit program received an FAAA/stable rating
by CRISIL. An offshoot of Life Insurance Corporation of India (LIC), incorporate in 1989.
Registered & Corporate Office at Mumbai with 6 regional offices, 13 Back Offices and 130
marketing units across the country .1352 Direct Sales Agents (DSAs), 7085 Home Loan
Agents (HLAs) and 777Customer Relationship Associates (CRAs) comprise its pan-Indian
marketing network.
Representative overseas presence in Dubai and Kuwait, Listed on the Bombay Stock
Exchange Limited, National Stock Exchange of India Limited and the Luxembourg Stock
Exchange. More than 10,00,000 satisfied customers across the country since inception
Reported a 23.90 percent increase in disbursals in 2008-09.
Improved return on net worth by 267 basis points to 23.80 percent in 2008-09.
Reduced net NPA to a record low of 0.21 percent in 2008-09.
Enhanced PAT 37.30 percent to Rs. 531.62 crore in 2008-09.
Un-interrupted dividend payment record since 1990.

Recommended 30 percent increase in dividend over previous year i.e from 100 percent to 130
percent.
4.1.4 Financial Performance

debt equity ratio















8.5
9
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CONTINOUS GROWTH IN LOAN BOOK

Interest income from housing loans increased 34.90 percent from Rs. 2036.79 crore in 2007-
08 to Rs. 2747.65 crore in 2008-09. The net interest income grew by 31.97 percent from
Rs.553.94 crore in 2007-08 to Rs. 731.04 crore in 2008-09. Profit after tax surged 37.30
percent from Rs. 387.19 crore in 2007-08 to Rs. 531.62 crore in 2008-09.
















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Operations:
Funds mobilized grew 49.38 percent from Rs. 7489.70 crore in 2007-08 to Rs.11,188.33
crore in 2008-09.
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Sanctions (Ind.+Proj.) increased 26.46 percent from Rs. 8617.88 crore in 2007-08 toRs.
10898.47 crore in 2008-09.

Disbursements (Ind.+Proj.) grew 23.90 percent from Rs. 7071.48 crore in 2007-08 toRs.
8762.01 crore in 2008-09.

Loan portfolio grew 26.18 percent from Rs. 21936.41 crore in 2007-08 to Rs.27679.28 crore
in 2008-09

Margins :
Net interest margin improved by 10 basis points from 2.85 percent in 2007-08 to 2.95percent
in 2008-09.

Return on equity grew by 267 basis points from 21.13 percent in 2007-08 to 23.80percent in
2008-09.

Net profit margin improved by 49 basis points from 17.82 percent in 2007-08 to 18.31percent
in 2008-09.

Asset Quality: Gross NPA declined by 63 basis points from 1.70 percent in 2007-08to 1.07
percent in 2008-09.Net NPA levels declined 43 basis points from 0.64 percent in 2007-08 to
0.21 percent in 2008-09.





The amount of gross Non-Performing Assets (NPA) as on 31st March, 2009 was Rs.
297crores, which is equivalent to 1.07 percent of the housing loan portfolio of the Company,
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Q1
FY07
Q2
FY07
Q3
FY07
Q3
FY07
Q1
FY08
Q2
FY08
Q3
FY08
Q4
FY08
Q1
FY09
Q2
FY09
Q3
FY09
Q4
FY09
as against Rs. 372.92 crore i.e., 1.70 percent of the housing loan portfolio as on 31st
March,2008. The net NPA as on 31
st
March, 2009 is reduced to Rs. 57 crore i.e. 0.21 percent
of the housing loan portfolio vis--vis Rs. 140.90 crore i.e., 0.64 percent of the housing loan
portfolio as on 31st March, 2008. The total cumulative provision towards housing loan as
on31st March, 2009 is Rs. 240.25 crore. During the year, the Company has written off Rs.
5.40crore of housing loan portfolio as against Rs. 38.99 crore during the previous year. Fund
raising The Company raised funds aggregating to Rs. 11,188.33 crore through term loans
from banks, Non-Convertible Debenture (NCD), sub-ordinate debts, commercial paper,
Public Deposit and others which were used for fresh disbursements as well as
repayments/prepayments of past borrowings. The Companys NCD issue was rated AAA
and Public Deposit was rated as FAAA/STABLE by CRISIL.


























RELIANCE CAPITAL:
INDIAN ECONOMY:
After several quarters of around 9 per cent GDP growth, the rate moderated to 7.6per cent
and 5.3 per cent in the last two quarters of 2008, and is expected to average 7 per cent for
Financial Year (FY) 2009. The slowdown has been largely caused by a deceleration in
industrial growth from about 8.5 per cent in FY 2008 to 2.4 per cent in the third quarter of
FY2009. Surprisingly, the agriculture sector slowed down from 4.5 per cent in FY 2008
to-2.2per cent in the third quarter of FY 2009. In contrast, the remarkable service sector
success story remained intact as output grew 9.9 per cent in third quarter, down only slightly
from10.8 per cent in 2008. The moderation from previous years was due to several
factors. The financial crisis and global slowdown affected both export growth in goods,
services and hence industrial production as well as corporates access to diverse and low cost
funding.
Moreover, high inflation during the first half of FY 2009 forced RBI to pursue a tight
monetary policy, which further dampened investment and consumption. However, the fact
that Indias growth in the last few years has been fairly broad based (across sectors and
regions) and balanced (with consumption, investment, savings and exports all rising) bodes
well for the structural transformation of the economy as the business cycle enters a recovery
phase, in the second half of FY 2010.
RBI cuts rates aggressively: Indias Wholesale Price Index, which was as high as 12.9 per
cent in August 2008 fell to 0.3 per cent by March 2009 resulting in an average inflation
of around 8 per cent for FY09. The sharp fall in inflation was caused by a high base, a
significant fall in commodity prices and various duty cuts announced by the Government.
Inflation is expected to remain low and may even enter the negative territory for a short time
before moving up again towards the end of 2009.Falling inflation and slowing growth gave
the Central bank enough room and reason to cut rates aggressively. From September 08 to
March 09, the RBI has cut Repo, Reverse Repo and CRR by 400, 250 and 400 bps
respectively. This easing in monetary policy is likely to translate, with a lag, into a significant
boost for the economy. Indias Trade Deficit widens, largely due to increasing import growth:
Global demand destruction due to the recent crisis led to a mere 3.4 per cent growth in
exports in FY 2009 while higher commodity prices(including oil) pegged the imports growth
at 14.3 per cent. This resulted in a trade deficit of US$119 billion in FY09 compared to
US$88.5 billion in FY 2008. For the first three quarters in FY 2009, the higher trade deficit,
coupled with negative capital flows, reduced Indias Balance of Payments (BoP) surplus to a
deficit of US$20.4 billion. After 10 consecutive quarters of surpluses, this is the second
time in three quarters that BoP has ended in a deficit. The capital a/c balance too turned
negative (-US$ 3.7 billion) in third quarter FY 2009 mainly due to net outflows under
portfolio investment, banking capital and short-term trade credit. Outflows under portfolio
investment were led by large sales of equities by FIIs and slowdown in net inflows under
ADRs/ GDRs. Indias foreign exchange reserves declined by about US$59 billion in FY
2009, but still remained at an impressive US$250 billion in March 2009. The countrys
current foreign exchange reserves far exceed its total official and private sector external
debt making Indias balance of payments position quite comfortable. Import declines more
than export in recent months, thereby improving trade deficit: Since January 2009, Imports
have declined more than exports due to both lower oil import bills and slowing domestic
investment and consumption. This has helped in narrowing our trade deficit further. The trade
deficit for the month of March narrowed to US$4 billion (4.1 per cent of GDP, annualized)
compared to US$14 billion in August 2008.
FINANCIAL PERFORMANCE:

DEBT-EQUITY RATIO


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The Companys gross income for the financial year ended March 31, 2009 increased to
Rs.3,017.29 crore, from Rs.2,079.79 crore in the previous year, registering a growth of
over45.08 per cent. The operating profit (PBDIT) of the Company increased 46.24 per cent
toRs.2,334.99 crore during the year, up from Rs.1 596.69 crore in the previous year. Interest
expenses for the year increased by 203.02 per cent to Rs.1,236.75 crore, from
Rs.408.15crore, in the previous year. Depreciation was at Rs.21.22 crore as against Rs.17.09
crore in the previous year. The provision for taxation during the year was Rs.109 crore. The
net profit for the year decreased by over 5.60 per cent to Rs.968.02 crore from Rs.1,025.45
crore in the previous year. An amount of Rs.193.61 crore was transferred to the Statutory
Reserve Fund pursuant to section 45-IC of the Reserve Bank of India Act, 1934, and an
amount of Rs.96.81 crore was transferred to the General Reserve during the year under
review.
The Companys Net worth as on March 31, 2009, stood at Rs.6,697.42 crore, as against
Rs.5,927.50 Fixed Deposits The Company has neither accepted nor renewed any fixed
deposits during the year. Five deposit accounts, aggregating to Rs.26,000, remained
unclaimed on the due dates as on March 31, 2009. The Company has intimated the deposit
holders individually of their unclaimed amount with a request to return the Fixed Deposit
Receipts duly discharged to enable the Company to repay the amount.
NBFC VS INDIAN BANKS
2008-09 was a difficult year, especially for the financial segment across the globe. However,
Indias strong macro-economic fundamentals and financial policies have shielded it from the
turmoil. The study considered those banks that have announced their results between
15thApril -20th May 2008- 09 posted on the website of Bombay Stock Exchange. The have
analysed in total 29 banks (both public & private sector) and 7 NBFCs The) study has
examined and compared the profitability of banks with NBFCs during the financial year2008-
09. Simple average and profitability ratio of the two segments have been studied.
Methodology - The AFP analysis of the Indian commercial banks & NBFCs profitability is
calculated using two broad parameters including net profit and total income. Profitability
Ratio is a class of financial metrics that is used to assess a business's ability to generate
earnings as compared to its expenses and other relevant costs incurred during a specific
period of time.

Profitability is calculated as:(Net Profit/Total income)*100

NBFCs more profitable than commercial banks despite slowdown Even as the world wide
financial crisis and slowdown in key sectors of the Indian economy led the Non Banking
Financial Companies to face severe cash shortage during the financial year 2008-09, the
overall profitability of NBFCs has remained higher than the scheduled commercial banks.
During the financial year 2008-09, Non- Banking Financial Companies (NBFCs) average
profitability stood higher at 18.90 per cent as compared to the banks with 10.08 per cent. The
NBFCs generally operates on the model of lending to riskier projects with interest rates
higher than offered by the banking institutions. As the financial markets faced the heat
of global crisis during the financial year 2008-09, most of the NBFCs faced problems in
fundraising. Among the seven NBFCs, in 2008-09 the highest profitability was reported by
Infrastructure Development Finance Company Limited at 20.89 per cent, with total income
stood at Rs.3626.38 crore and net profit at Rs.757.73 crore. It was followed by Housing
Development Finance Companies Limited (HDFC) and Power Finance Companies
Limited(PFCL) at 20.76 per cent and 20.67 per cent respectively. The Reserve Bank of
India (RBI) monetary measures by cutting interest rates during 2008-09 has benefited the
NBFCs since many of them finance their operations through market borrowings said Mr.
Sajjan JindalPresident.























Top five banks and NBFC with high profitability
PROFITABILITY NON BANKING PROFITABILITY
BANK RATIO
(2008-09) IN %
FINANCIAL
COMPANIES(NBFCs)
RATIO(2008-09)
IN %
INDIAN BANK 15.83 INFRASTRUCTURE
DEVELOPMENT
FINANCE COMPANY
LIMITED
20.89
BANK OF INDIA 15.50 HOUSING
DEVELOPMENT
FINANCE
COMPANIES
LIMETED(HDFC)
20.76
AXIS BANK 13.22 POWER FINANCE
COMPANIES
LIMETED
20.67
STATE BNAK OF
TRAVANCORE
12.94 LIC HOUSING
FINANCE LTD.
18.46
UNION BANK OF
INDIA
12.91 MANAPPURAM
GENERAL FINANCE
AND LEASING
LIMITED
17.86

Among the 17 public sector banks, the highest profitability was reported by Indian Bank
and Bank of India at 15.83 per cent and 15.50 per cent respectively. Out of the private sector
banks the top positions were occupied by Axis Bank and Yes Bank at 13.22 per cent
and12.46 per cent respectively, among others. The 7 NBFCs, aggregate total income grew by
hooping 57.3 per cent to Rs.28,208.72 crore in FY09
from Rs.17,906.84 crore in the previous fiscal. However, the aggregate total income of 29
banks have increased by 25.3 per cent from Rs 2,69,055 crore in 2007-08 to Rs 3,37,206.9
crore in 2008-09. Year-on-year performance of the 29 banks regarding net profit to total
income ratio at the aggregate level showed a marginal decline during FY09 with 10.08
per cent as against FY08 recorded at 10.52 per cent, while in the case of 7 major NBFCs, the
ratio declined during 2008-09 at18.90 per cent as against 21.80 per cent in FY08.










Banking versus NBFC regulatory arbitrage in India


BANKS NBFC
FUNCTIONAL
RESTRICTIONS

Carrying on checking
accounts,remittance
functions and typical retail
banking
Permited Not permited
Acceptance of term
deposite
Permited subject to term
restrictions(short term
deposites are accepted by
banks)
Permitted subject to
limitations,but the term of
deposite is atleast 1 year
Other functional
limitations
Bnaking regulation act
expressly bar any
business other than that
permitted by the act
sec6(1)
For domestic NBFC, no
bar on non-financial
business,except that on
crossing of a ceratain
barrier,(50% of income or
assests),the NBFC will
lose its character as an
NBFC
Trusteeship functions,
nominee
permitted no express bar is their
Leasing and hire purchase Banks are allowed to a
limt of 10% of their assets
No limit
Operating lease Treated as a non financial
business, not permited
Permitted,though treated
as non-financial business
securitisation Permitted subject to
capital norms and other
limitations
Permitted subject to
capital norms and other
limitations
LEASING
RESTRICTIONS

Need for a licence Any new bank needs a
licence.licencing norms
are tightly controlled and
generally,it is perceived to
be quite difficult to get a
licence for a bank
It is comparatively much
eaier to get registration as
an NBFC. Besides, there
are some 30,000 NBFCs
currently registered, many
of which may be available
for sale.
Ownership
structure/change in
ownership

Indian ownership Not more than 10% of
capital in a bank may be
acquired without the
approval of the RBI
While prior intimation of
takeover is required in
case of NBFCs ,there is
no need for express
permission for a change in
voting control. Ther is no
limit as to the percentage
holding permitted in case
of NBFCs
Foreign ownership Upto 74% capital in
banking companies may
be acquired fior foreign
owners.
100% capital may be held
by foreign iowners subject
to minimum capitalisation
requirements under FDI
norms
Credit control and sectrol
asset restrictions

SLR/CRR norms Substantial part of assests
of banks is blocked due to
statutory liquidity
ratio(SLR) and cash
reserve ratio(CRR). These
are periodically changed
to control the expansion of
M3 in the economy
Only 15% of the deposite
liabilities of NBFCs is to be
held in certain permitted
securities.
Sectoral exposure Periodic regulations place
limits on the extent to
which banks may invest in
capital market and other
specific segments. There
are certain segments in
which banks need to
allocate minimum %age of
their assests.
Very scanty limitations
have been placed on
assests of NBFCs.
Investment in real estate
and unquoted equity share
are controlled. Capital
market exposure is only
required to be reported.
Capital adequacy
requirements and
provisioning

Basel norms Presents capital
regulations are based on
basel I. basel II is
proposed to be
implemented effective
2007. Capital requriment
generally 9% of risk
weighted assests.
Prudential regulations
which lay down capital
adequacy have been
substituted in feb 2007,but
they are based on basel I
and not basel II. Capital
requirements generally
10% of risk weighted
assests.
Provisioning 90 days past due lead to
NPA characterization and
calss for provisioning as
per international standards
As much as 12 months
overdue is permitted in
case of lease and hire
purchase transaction.