CAPITAL FIRST LIMITED

NBFCs in India Industry Landscape and Market Assessment

Submitted to: Dr. Abhishek Ranga
Adit Mittal 6/7/2013

Project Guide: Saptarshi Bapari

[Type the abstract of the document here. The abstract is typically a short summary of the contents of the document. Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]

ACKNOWLEDGEMENT

Any successful piece of work cannot be done without the help of a few expert hands and that is exactly what made this project successful. First of all, I would like to extend a very special thanks to my Project Guide, Mr. Saptarshi Bapari for giving me such a brilliant opportunity to work on. His willingness to motivate contributed tremendously to this project. His sharing of in-depth knowledge about the industry, growth factors governing it and competitors in it helped me make this project. I would like to take this opportunity to thank the IT department of CFL for providing me with facilities to work smoothly and efficiently. I would also like to extend my thanks to Mr. Abhishek Ranga, my project mentor at Goa Institute of Management, who gave me the opportunity to learn and explore my skills at Capital First Limited. Finally, an honourable mention goes to my family and friends for their understanding and support for the project for the entire duration of the internship. Without the help of above mentioned, this project would have been unsuccessful and unfruitful.

Adit Mittal 2012002

Table of Contents
1.1 Significance ................................................................................................................................... 4 1.2 Meaning and Types of NBFCs....................................................................................................... 4 1.2.i Types OF NBFCs .................................................................................................................... 5 1.3 Scope and Growth Drivers ............................................................................................................ 6 1.4 Key Trends Observed in Recent past.......................................................................................... 7 2. Company Overview ............................................................................................................................. 9 2.1 Vision............................................................................................................................................. 9 2.2 Products Offered ........................................................................................................................... 9 2.2.i Mortgage loans to SMEs ........................................................................................................ 9 2.2.ii Gold Jewellery Loans ............................................................................................................ 10 2.2.iii Two Wheeler Loans ............................................................................................................. 10 2.2.iv Consumer Durable Loans .................................................................................................... 10 3. Project Overview & Methodology .................................................................................................... 11 4. Limitations of the Project .................................................................................................................. 11 5. Competitive Landscape ..................................................................................................................... 11 5.1 Gold Loan Companies ................................................................................................................. 12 5.2 Housing Finance Companies ....................................................................................................... 15 5.3 Retail Finance .............................................................................................................................. 16 5.4 Vehicle Finance ........................................................................................................................... 21 5.5 Infrastructure Finance................................................................................................................. 26 6. Regulatory Framework...................................................................................................................... 27 7. Case Study: Gold Loan....................................................................................................................... 28 Works Cited ........................................................................................................................................... 35

1. Industry Overview 1.1 Significance

The Indian economy has been witnessing high rates of growth in the last few years. Financing requirements have also risen commensurately and will continue to increase in order to support and sustain the tremendous economic growth. NBFCs have been playing a complementary role to the other financial institutions including banks in meeting the funding needs of the economy. They help fill the gaps in the availability of financial services that otherwise occur in bank-dominated financial systems. The gaps are in regards the product as well customer and geographical segments. NBFCs over the years have played a very vital role in the economy. They have been at the forefront of catering to the financial needs and creating livelihood sources of the so-called un-bankable masses in the rural and semi-urban areas. Through strong linkage at the grassroots level, they have created a medium of reach and communication and are very effectively serving this segment.1 (RBI, 2013)

1.2 Meaning and Types of NBFCs

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advance acquisition shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).2

(RBI, 2013)
http://www.rbi.org.in/scripts/FAQView.aspx?Id=71

1.2.i Types OF NBFCs

By the kind of activities NBFCs conduct they can be divided into following categories: i. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising there from is not less than 60% of its total assets and total income respectively. Examples of these would include Sriram Transport Finance, Mahindra and Mahindra Finance, Cholamandlam Finance. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company. For e.g Capital First Ltd, Bajaj Finserv, Muthoot Finance. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs. 300 crore, c) has a minimum credit rating of A or equivalent d) and a CRAR of 15%. For example IDFC, L&T Infra Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities Systemically Important Core Investment Company (CIC-ND-SI) : CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:a. it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies; b. its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets; c. it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment; d. it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies. e. Its asset size is Rs 100 crore or above and f. It accepts public funds Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of
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iii.

iv.

v.

vi.

minimum 5 year maturity. Only Infrastructure Finanace Companies (IFC) can sponsor IDFNBFCs. vii. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a nondeposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria: a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000; b. loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles; c. total indebtedness of the borrower does not exceed Rs. 50,000; d. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty; e. loan to be extended without collateral; f. aggregate amount of loans, given for income generation, is not less than 75 per cent of the total loans given by the MFIs; g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower Non-Banking Financial Company Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring.

viii.

1.3 Scope and Growth Drivers

The number of NBFCs has decreased from 13,014 in FY06 to 12,409 in FY11 however the sector has grown by 2.6 times between FY06 and FY11 at a CAGR of 21%. It accounted for 10.8% in terms of outstanding advances and 13% in terms of assets of the banking system in FY06. This share has risen to 13.2% and 13.78% respectively in FY11. In terms of deposits the share of public deposits held by NBFCs as compared to deposit base of banks has decreased from 1.05% in FY06 to 0.22% in FY11.(RBI Report) Since the 90s crisis the market has seen explosive growth, as per a Fitch Report the compounded annual growth rate of NBFCs was 40% in comparison to the CAGR of banks being 22% only. As of March 2011 Total AUM of Asset Financing Companies and Loan Companies was around Rs 3 Trillion 3(Crisil, 2011) In the past decade CAGR for different types of NBFC has been as follows: Loan Companies 29% AFCs 27% Investment Companies 7%

(Crisil, 2011), page 3

No. of NBFCs Bank Credit of all Scheduled Banks NBFC advances as a % of Bank Credit Asset of all Scheduled Banks NBFC assets as a % of Bank assets

13041 15,72,780 10.77% 25,31,462 13.06%

12630 33,37,659 12.57% 52,58,495 13.33%

12490 40,60,843 13.20% 61,46,590 13.78%

Figure 1 AUM Banks and NBFCs

The scope for tremendous growth in the sector stems due to following reasons: I. Servicing Un- bankable segments NBFCs have traditionally focused on customer segments which were not served by banks like micro, small and medium enterprises (MSMEs), funding of commercial vehicles including old vehicles, farm equipments viz. tracking, harvesters, etc. Strong understanding of customer base and providing customized solutions The ability of NBFCs to produce innovative products in consonance with needs of their clients is well recognized. This, in addition to the proximity to the clients, makes the 12 NBFCs distinct from its banking sector counterparts. In a short period of time, NBFCs have become market leaders in most of the retail finance segments like commercial vehicles, car financing and personal loans.

II.

1.4 Key Trends Observed in Recent past

For NBFCs under analysis
Parameter AUM Net Worth PAT Net Interest Income Average CAGR For Period (2010 to 2012) 28.79% 26.84% 34.68% 21.04%
Figure 2 (Data analysis)

Key Ratios for 2012

Company Name BajajFinance CholamandlamFinance HDFC IDFC IndiaBullsFinance LnTHoldings MagmaFincorp MahindraFinance ManappuramFinanceLtd MuthootFinance RelianceCapital SREIEquipmentFinance SREIInfra SriramCityUnion 43.91% 37.68% 72.07% 38.03% 41.60% 36.98% 8.81% Cost to Income ROA 46.01% 56.14% 6.74% 15.90% 21.49% 4.20% 1.60% 2.80% 2.90% 4.25% 1.96% 2.20% 3.90% 4.88% 4.40% 3.17% 3.75% 1.70% 0.60% 3.10% ROE CAR OPEX to AUM NIM 5.00% 3.25% 0.26% 1.07% 2.93% 2.26% 2.87% 5.60% 3.27% 2.55% 1.85% 1.11% 3.17% 13.28% 7.35% 3.20% 4.30% 6.20% 5.38% 4.70% 10.23% 18.88% 13.07% 4.10% 5.82% 4.40% 2.22% 10.47%

23.50% 17.50% 14.80% 18.08% 22.70% 14.60% 13.00% 20.80% 20.35% 16.61% 16.40% 15.90% 21.20% 22.80% 18.00% 26.57% 23.26% 41.90% 15.82% 4.89% 20.21% 22.82% 24.26% 15.30% 16.90% 2.20% 20.20% 23.14% 17.40%

ShriramTransportFinance 21.73%

Figure 3 (Data Analysis)

2. Company Overview
Capital First is a provider of financial service across consumer and wholesale businesses, with aspirations to grow into a significant financial conglomerate. Capital First Ltd. is a systemically important NBFC with record of consistent growth & profitability. Capital First has a comprehensive product suite to meet multiple financial needs of customers including Consumer Lending, Corporate Lending and Wealth Management services.

2.1 Vision
To be a leading financial service provider, admired for high level of customer service, and respected for our ethics, values and corporate governance. To provide Micro, Small and Medium Enterprises in India with debt capital and services to support the growth of the MSME sector. To finance the growing consumption needs of the Indian consumers, who is driven by increased affluence, growing aspirations and favourable demographics. From being a wholesale financing company earlier known Future Capital Holdings has become a full fledged diverse NBFC with a changed name Capital First ltd. Present Growth Strategy: CFL has de-risked its business model as a result of the change in strategy by the management, with emphasis on retail financing rather than wholesale lending. CFL focuses on middle-income consumers, with an array of products such as mortgages, gold loans and consumer durables. Moving towards this end Company has increased its retail financing contribution from 10% in Fy10 tp 28% in Fy 11 to 56% in FY12 and 74% in March 2013. Company has AUM of Rs 75 Bn as on March 2013 Company has built a strong distribution network of 180 branches and 1232 employees across India covering 40 cities as on March 2013. The Net Worth of CAPF is Rs 9.61 Bn as of 31 March 2013. The Capital Adequacy being 22.84%

2.2 Products Offered

2.2.i Mortgage loans to SMEs Mortgages to SMEs, also commonly referred to as Loan Against Property in India, is the main line of business for the company (Rs46.23bnasofMar2013) and contributes 83% of their tail assets.

Under this product, the company provides long term secured loans to SMEs, self-employed individuals and professionals against collateral of Residential or Commercial property. SME Financing is a large and growing opportunity in Indias growing economy. The SME segment is largely underserved in India, and hence shortfall of financing presents a significant business potential. Loan against Property (LAP) is a well established product in the Indian Financial Market for over 25 years, and largely catered to by Private Sector Banks and Foreign Banks. Typically, the Loan To Value (LTV) offered to customers by the market is in the range of 60%-65%. The credit behaviour of this portfolio is similar to home loans. Annualised credit losses for a matured portfolio in this business have historically been about 25bps, against about 1015bps for home loans. 2.2.ii Gold Jewellery Loans The company provides Loans against Gold Jewellery to customers. Customers avail Gold Loans for various personal uses like medical emergency, down payment for home purchase or renovation of their home. Often, traders and small businesses avail gold loans to finance short term business requirements. The company provides Gold Loans through its extensive network of branches across 22 tier1 and tier-2 cities in 10 states. The loan size is usually Rs. 1,00,000 to Rs.1,20,000. The Loan to Value is 60% on the value of the jewellery. The tenor offered to customers is between 3months to 12 months. Since inception in January 2011, CAPF has grown the Gold Loan book steadily and reached an AUM of Rs.4.41 billion by Mar13. 2.2.iii Two Wheeler Loans Capital First provides financing for Two wheelers through easy EMI to self employed customers like small traders, suppliers, shopkeepers with good credit profiles, and to salaried employees, usually taking up their first job in the organised sector. Two wheeler loans are relatively small ticket size loans of about Rs.30,000-Rs.40,000. The Door to Door tenure for the loan is around 2years.The Two Wheeler Loan assets are Rs.1.63 billion as of Mar13. The portfolio quality of CAPFs Two Wheeler Financing is high because of strong underwriting standards, access to Credit Bureau (CIBIL), robust customer verification process at the time of origination, and a strong and automated collections infrastructure. 2.2.iv Consumer Durable Loans Capital First provides financing for consumer electronic goods like LED, LCDTVs, Washing Machine, Laptops, furniture through easy EMIs to salaried and self employed customers. The Average Ticket Size is Rs. 28,000. The average Loan to Value ratio is ~70%. The Door to Door tenure for the loan is around 8months. Since inception in FY10, the loan book of Consumer Durable financing has grown to Rs. 1.82 billion by Mar13. The portfolio quality of Durable Financing is high because of high penetration of CIBIL (Credit Bureau) track record customers, and statistically valid Application Scoring solutions used at the point of acquisition.

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3. Project Overview & Methodology

Project titled NBFCs in India: Industry Landscape and Competitor Analysis is aimed at analyzing the key variables which determine performance in NBFC industry. Analyzing how major NBFCs have performed during the past 4 years and how they have evolved in terms of their offerings and strategies. Thereby getting a macro view of what can be expected from the industry in times to come. To do Competitor analysis detailed data of past four years has been collected including the quarterly data for past 4 quarters. A dashboard has been created in excel to better interpret this data and use it for further analysis. The data related to OPEX, Credit ratings, Profitability, Product Portfolio, Capital Adequacy and presence is primarily collected. Competitors from all products segments have been analyzed namely Gold loan, Equipment Finance, Vehicle Finance, Home Loan, Infrastructure Finance. Industry average calculated and interpreted. Report contains details about nature of each of these segments and their key data points. Prospective Regulatory Changes and their impact on the NBFC have been discussed. Finally the project is concluded with a detailed case study on Gold Loan market with growth determinants and Recommendations for CFL.

4. Limitations of the Project

Data Availability: All the required data for the given time frame has not been released by some companies by 5th June 2013. Consistency of Data: NBFCs do not follow consistent reporting procedures thereby certain issues with data consistency were encountered.

5. Competitive Landscape
To understand the Competitive Positioning of CFL we divide the NBFC industry into broad categories based on the offerings of different companies. Thereafter look at the key growth factors and nature of business in that particular category. NBFCs has been categorised as Gold Loan Companies Housing Finance Company Retail NBFC Vehicle Finance Infrastructure Finance
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5.1 Gold Loan Companies

Scope & Nature of the market According to an estimate of World Gold Council, about 10 per cent of worlds gold is in Indias possession. Accumulated Gold stock in India is around 18,000 to 19,000 tonnes as per independent estimates. Out of this only 3% has been tapped by organized sector amounting to around Rs 1.6 trillion. Such is the scope of the market. Southern India accounts for almost 80 -85 percent of gold loan market in India. (RBI, 2013) There three major category of players in the market i.e. Banks, NBFCs and unorganized sector. Though no official stats are available approximately 75% of the market is captured by unorganized sector. But organized sector is fast catching up with CAGR between 2008 and 2012 being as follows: Bank Gold Loans: 57.5%; NBFC Gold Loans: 98.5% ; Total Gold Loans: 64.9% (RBI, 2013)4 The evidence then is that gold loans are a safe, liquid and convenient way to transform an economically unproductive asset into an economy driver for some good reasons. One, the business is adequately collateralised. Two, the business revolves around the smaller ticket size short-term credit requirements of people and small businesses, which requires a specialized approach and is generally unviable for commercial banks due to a large volume of transactions. Three, the product offers customers a superior borrowing alternative without service charges, processing fees, upfront interest collections or prepayment penalties (Muthoot, 2013)Although one must consider that asset quality of gold loan portfolio can fall severely with major fluctuations in gold prices. RBI has put a cap on LTV at 60% giving ample cushion for Gold loan companies to operate Industry trends and analysis It is anticipated that the organized gold loan market will grow at a compound annual rate of 25.5% during FY 2012 to FY 20155. .The CAGR of two leading gold loan companies in India Muthoot Finance and Manappuram Finance was 56.06% for the period 2010 to 2012. The total AUM is Rs 363044 Mn. Key Ratios for 2012: Ratio Manappuram Finance Muthoot Finance ROE 7.91% 30.15% ROA 1.58% 4.05% CAR 23.26% 15.82% OPEX to AUM 5.60% 3.27% Cost to Income 41.6% 36.8%
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RBI Report para 6.1, chart 6.8, http://timesofindia.indiatimes.com/business/india-business/RBI-turns-itsfocus-to-gold-loan-companies/articleshow/19552142.cms (Tapped 3%)

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http://www.commodityonline.com/news/indian-gold-loan-market-to-grow-in-coming-years-48700-3-48701.html

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5.2 Housing Finance Companies

Scope and Nature of Market
Housing is one of the basic needs of every individual as besides providing shelter and security, it also enables easy access to the credit market by working as collateral comfort / security. The urban population of India has been growing at a rapid pace. As per the Census 2011, 31.16 per cent of the total population is in the urban areas. The shortage of housing units for the urban areas for 2012 is 1 estimated at 18.78 million units . With time, there has been expansion and improvement in the housing finance market by way of various financial reforms, however the housing loans as a percentage of GDP have remained at around 7 per cent, significantly lower than the levels achieved in most of the developed countries6. (NHB, 2012) It indicates the extent of opportunity for deeper penetration of such market. With improving demographics and economies of scale, the mortgage to GDP ratio is likely to increase.
Total Outstanding Housing Loans by HFC Year 2010 2011 2012 Amount in Crores Rs 153188.73 Rs 186438.25 Rs 222224.74 7 Figure 4 ( (NHB, 2012)

The HFCs have disbursed housing loans amounting to 82,221.58 crore during the financial year 2011-12. . Of these, approximately 83 percent of the total loans were disbursed towards housing loans to individual, 12.60 per cent towards housing loans to builders and rest to corporate bodies and other8s (NHB, 2012)

Major Players
The key players who provide housing finance are 1. Housing Finance Companies 2. Scheduled Commercial Banks 3. Regional Rural Banks 4. Coop Societies Disbursement details for year 2012 Category Amount Rs Crore Percentage HFCs 5302.13 36.85 SCBs 8851.42 61.51 RRBs 143.04 .95 Coop Sec 93.32 .65
Figure 5 ( (NHB, 2012)
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Chapter1, Pg119, National Housing Bank Report National Housing Bank Report Para 6.5.1 8 Table 41 National Housing Bank Report 9 Table 14 National Housing Bank Report

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The share of Banks can be attributed to extensive network and broad customer base, access to stable low-cost funds and other regulatory mandates. However, the share of HFCs is also growing and is indicative of the strength of their focused approach, targeting of special customer segments, relatively superior customer service, and significant growth plans. The NBFCs with greatest market share are HDFC and Dewan Housing Finance Company.

HDFC
Housing Development Finance Corporation Ltd (HDFC) is one of the leaders in the Indian housing finance market with almost 17% market share as on March 2010. Serving more than 44 lakh Indian customers as on March 2013, HDFC also offers customized solutions that fit to the need of the customer. In the FY 2012-13, it registered a net profit of Rs 48480 Mn. It achieved ROE of 22 % and ROA of 2.80%. AUM being Rs 1953310 Mn. (Data Collected) HDFC achieved CAGR of 13.425 over the years 2010 to 2012. Strengths Low average loan to value ratio and instalment to income ratios Efficient recovery mechanisms Steady level of prepayments Quality underwriting with experience of over 35 years

Dewan Housing Finance

Dewan Housing Finance Corporation Limited is one of the largest housing finance solution providers in India with an extensive network of 122 branches, 72 service centers and camps spread across the nation. For the year ended March 31, 2012, DHFL registered a net profit of Rs 306.36 Crore as compared to net profit of Rs 265.13 crore in the previous fiscal. (Annual report)

5.3 Retail Finance

According to segregation done in this report this includes financing consumer durables primarily electronic items, two wheelers, Small and Medium Enterprise finance Scope and Nature: Consumer Durable These including financing electronic goods like LED ,LCD TVs, Washing Machine, Laptops, furniture and such as panel TVs, split air-conditioners, frost-free refrigerators, fully automatic washing machines and other consumer goods. Consumer electronic finance market size is estimated to be 36000 Crore on March 2013(Bajaj Finance IP). Rise in income levels, growing consumer aspirations and easy availability of credit has triggered strong growth in the sales of high-value consumer durables such as panel TVs, split airconditioners, frost-free refrigerators, and fully automatic washing machines in recent years.

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Of the many schemes that have evolved to finance these purchases, interest-free schemes are the most popular: they currently account for about three-fourths of total consumer durable financing. In India, currently only a tenth of consumer durable purchases are financed by lenders. The average ticket size in this industry is comparatively less than other segments. It depends on the ticket size of the purchase made. Due to the larger ticket size of high-value products, finance penetration is higher for this category of goods. For instance, with an average ticket size of Rs. 24,000, finance penetration for panel TVs is at 22 per cent. By contrast, finance penetration for cathode ray tube (CRT) TVs and semi-automatic washing machines, which typically cost less than Rs. 8,000, is miniscule at 0.8-1.0 per cent10. Rise in income levels, growing consumer aspirations and easy availability of credit has triggered strong growth in the sales of high-value consumer durables. Of the many schemes that have evolved to finance these purchases, interest-free schemes are the most popular: they currently account for about three-fourths of total consumer durable financing. In India, currently only a tenth of consumer durable purchases are financed by lenders. Crisil projects the share of high-value consumer durables in total sales (in volume terms) to surge from 33 per cent in 2011-12 to 52 per cent by 2016-17. High-value consumer durables are more likely to be purchased on credit; consequently, finance penetration for consumer durables is likely to improve over the same period from 10 per cent currently to 15 per cent over this timeframe. This robust trend will be reflected in overall consumer durable loans, which are likely to more than double, growing at 23 per cent CAGR over next 5 years. Scope and Nature: Two Wheeler The market size is around 17000 crore. From the distribution point of view this is highly fragmented market. The loans are to be generated through the network of two wheeler dealers. The two wheeler business is relatively more complex, as the ticket size is of loans is small and the tenor is short (approx 1 year) and also requires relationship with hundreds of dealerships across rural geographies leading to high operating and distribution costs. Scope and Nature: Mortgage Loans to SMEs Mortgages to SMEs, also commonly referred to as Loan against Property in India provides long term secured loans to SMEs, self-employed individuals and professionals against collateral of Residential or Commercial property. SME Financing is a large and growing opportunity in Indias growing economy. The SME segment is largely underserved in India, and hence shortfall of financing presents a significant business potential. Estimated market size is this segment is 18000 Crore. Loan against Property (LAP) is a wellestablished product in the Indian Financial Market for over 25 years, and largely catered to by Private Sector Banks and Foreign Banks. Typically, the Loan to Value (LTV) offered to customers by the market is in the range of 60%-65%. The credit behaviour of this portfolio is similar to home loans. Annualised credit losses for a matured portfolio in this business have historically been about 25bps, against about 10-15bps for home loans. Estimated market size for LAP is 2.7 thousand Crore. (BF,IP)

http://www.thehindu.com/business/consumer-durable-financing-interestfree-schemes-gain-popularity/article4253297.ece
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Major Players Bajaj Finance

It is a 26 year old NBFC, focussing on Consumer, SME and commercial lines of business spread across eleven product lines. Bajaj Finance is a largest two wheeler lender and largest consumer electronic lender in India enjoying 20% and 14% market shares respectively. For two wheelers it is focussed on rural and semi urban markets and for consumer electronics affluent class of society. Its strategy is to focus on cross sale and product & process innovation to develop a profitable business model. As at 31 st March 2013, the company had 17517 crore of AUM with a net NPA of .19% and a capital adequacy of 21.95%.PAT was 591 crore and ROE 24.3%

Shriram City Union

It has been experiencing consistent growth of 40% in AUMs for the last 4 years which is driven by small enterprises and under banked semi urban customers. It is the leader in the small enterprises segment, which sees very low level of competition. It has 80% of its branch network in underpenetrated segment across semi urban India which huge potential for growth. Its success lies in its ability to provide tailor made solutions to small enterprises. Reaches out to over 927 locations, through 575 owned branches and 352 shared locations. Total AUM as on 31st December 2012 were Rs164010 Mn with ROE of 22.71%

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OPEX to AUM
14000 12000 10000 8000 6000 4000 2000 0 2010 2011 2012

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5.4 Vehicle Finance

5.4.i Scope and Nature Although large NBFCs have attempted to diversify their business in recent years, bulk of their business is still vehicle finance, and the diversification has been largely within different types of vehicles. Exposure to non-automobile business lines - small business loans, property loans, gold loans, personal loans, remains small at most NBFCs and is unlikely to change substantially in the near-to-medium term. Such is the importance of Vehicle financing for NBFCs. (RaoCommitteeReport, 2013) Vehicle financing can be for both old and new purchase. For our study we have considered commercial vehicle, cars or utility vehicles to fall under this category. Indias auto finance industry was estimated at Rs 60,200 crore for FY201111.. The Vehicle finance market is expected to grow at 19% to 21% in next 5 years. (MMFSL). Addressable market is expected to
grow at a CAGR of 16% to reach 139 Mn households in 2017-18 from 67Mn in 2012-13. UV sales expected to grow at 15-17%.

By the fiscal year 2017, penetration levels are expected to increase to 74% for cars and 66% for utility vehicles from 68% and 62% respectively in 2013, as a result of a moderation in interest rates and alleviation of credit risk. Loan-to value (LTVs) expected to increase marginally to 75% for cars and 71% for UVs from 74% and 70% respectively over the next 5years. Nature The major growth drivers of vehicle finance industry are increase in affordability, increase in dealership and access to finance (around 70% of vehicles are financed) and reduction in holding period which increases the demand for second hand vehicles. Major auto finance companies are eyeing rural and semi urban markets, thereby increasing their reach by branch expansion. An efficient collection mechanism is one of the important competencies to be developed by Vehicle financier. Especially in Commercial vehicle majority of the truck owners (in particular second hand and 1 or two truck owners) have underdeveloped banking habits, therefore the business model must provide for efficient cash collection from its customers. This will keep NPA levels for company at low levels.

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http://www.livemint.com/Opinion/DehbiWbEhRx43IjKFzJMbP/Auto-financing-to-grow-in-india.html

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Commercial vehicles are further divided into Heavy commercial vehicle, medium commercial vehicles and Light commercial vehicles on the basis to their weight carrying capacity. Structural changes in the CV industry from an expansion of the hub-and-spoke model in India are leading to increasing demand for large tonnage and low tonnage CVs, while medium tonnage CVs are being squeezed. This also reflects in the vehicle financing portfolio of NBFCs - LCV financing has been growing sharply while HMCV financing is shrinking. The trend is likely to continue for the medium term.

Major Players
The auto finance Industry has both organised and unorganised players. The organised Players comprise of Banks: Private, foreign, public and co-operative NBFCs can be further categorised as standalone NBFCs and captive NBFCs. Captive NBFCs are financing arms of auto manufacturers set up with the objective of primarily financing the products of their parent manufacturer. The unorganised players include local moneylenders, dealers etc. Auto finance industry was once dominated by the NBFCs. While banks dominated the low risk car-financing business, NBFCs dominated the commercial vehicle segment as it was as perceived to be risky. Also, the banks enjoyed an edge over NBFC-funding due to an easy access to low cost CASA funds (Current and savings account funds). The CASA advantage facilitated the banks to eat into the market share of NBFCs. While the auto finance companies are disadvantaged on the cost of funds, they score better in terms of credit assessment skills, better operational efficiency, higher loan yields and lower regulatory requirements. This result in better return on assets for the auto finance companies compared to banks. Considering the growth expected in auto industry particularly in the non-urban areas and the need for finance the auto finance companies might be up for better growth. In spite of the growing competition from banks, NBFCs like Mahindra Finance and Shriram Transport Finance continue to register robust growth due to their high penetration in unbanked areas, their competence in understanding the local customer and their recovery capabilities.

Shriram Transport Finance

It is a flagship company of the Shriram Group was established in 1979 and provides commercial vehicle finance to customers in excess of 0.95 million across India. The company has niche presence in financing pre owned trucks and small truck owners (STOs). On March 31, 2013 the company had a network of 539 branches and 350 service centres across the country. Its main products include financing of pre owned, commercial and passenger vehicles, along with three wheeler, tractor, construction and multi utility vehicles.
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It has around a 25% market share in pre-owned commercial vehicle (CV) financing and approximately 5% - 6% in new CV financing market. The Company has developed strong competencies in the areas of loan origination, valuation of pre-owned trucks and collection. In the used CV finance market the key success factors for the financiers would depend on their knowledge about the asset class and the customer profile. STFCL has evolved a efficient system of cash collection mechanism whereby 50% of the salary of its field officer is variable in nature and linked to timely collection of receivables. This not only enabled the company to maintain direct contact with customers but also enabled help reduce the maintain NPA at very low levels.

Mahindra and Mahindra Finance Services Ltd

It is subsidiary of Mahindra &Mahindra (M&M) is one of Indias leading non -banking finance companies focused on providing finance for utility vehicles, tractors and cars in the rural and semi-urban sector. Mahindra & Mahindra is a leading tractor and utility vehicle manufacturer. MMFSL has a network of 657 branches spread across India. The company has assets under management (AUM) worth INR 279 billion as on March 2013. MMFSL has positioned itself between the organized banking sector and local moneylenders, offering customers competitive, flexible and speedy lending services. MMFSL adopted procedure, which were not as stringent as banks. Also the rates of interest were fixed between those charged by banks and moneylenders. The company follows a subjective assessment for determining the repayment capability of the borrower on the basis of his occupation, ownership of land, type of crops sold etc, for disbursing the loans. A great deal of emphasis is placed on customizing the product for the customers keeping in mind his expected cash flows and other consideration. The objective is to minimize the time take for approval without compromising on the quality. The loans are processed within two days of application. MMFSL maintains a policy of financing only 40% of the M&M sales. This has helped MMFSL in capping its risk in case of a slowdown in M&M sales.

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5.5 Infrastructure Finance

Scope and Nature
The Government of India realizes the importance of accelerating the investments in infrastructure to boost the countrys slowing economy. Therefore, it has set a massive target for doubling investment in infrastructure from Rs. 27 lakh crores (eleventh plan 2011/12 prices) to Rs 51 lakh crores during the twelfth plan period, i.e., 2012 2017.The share of infrastructure investment in GDP is planned to be increased to more than 10% by the end of the twelfth plan. This investment, if it materializes, can prop el Indias economic growth to a higher trajectory. It was not so long ago that infrastructure investment in India was financed almost entirely by the public sector from government budgetary allocations and internal resources of public sector infrastructure companies. However lately, the private sector has emerged as a significant player in bringing in investment and building and operating infrastructure assets from roads to ports and airports and to network industries such as telecom and power. Private investment now constitutes almost 40% per cent of infrastructure investment. In these times of tight fiscal environment, private sector will need to play a greater role without which infrastructure development will not meet the growing demand and could fall far behind the requirements. The pace of growth envisaged at 9 percent by planning commission can be achieved only if the infrastructure deficit is overcome and adequate investments are made. It is critical to bridge the gap between planned infrastructure spend and delivery12. Coming on to nature, Financing for infrastructure needs to have enough maturities ranging from 5 to 40 years. Such ranging can essentially reflect the accessing options and estimating the life of created infrastructure in actual context. Infrastructure finance is included with different set of initiatives which essentially measure the range of amount needed in order to complete the projects in the local rationalities. When large range of amounts are invested for long duration of time a risk may be elevated which can cause immense uncertainty in its course. The financing for infrastructures is mostly linked with the scale of economies and annual returns of the projects under maintenance. Infrastructure finance is generally executed through individual finance companies called SPVs (Special Purpose Vehicles). The main reason for this is to better protect the parent company from possible adverse impact in the concession business.

Major Players
In first 3 years of eleventh plan, budgetary support constituted ~45 per cent of the total infrastructure spending. The debt from Commercial banks, NBFCs, Insurance Companies and the external sources constituted ~41 per cent of the funding while the balance 14 per cent was funded through Equity and FDI (Delloite, 2013).
12

http://www.deloitte.com/assets/DcomIndia/Local%20Assets/Documents/Thoughtware/Funding_the_InfrastructureInvestment_Gap.pdf

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The major players being Banks NBFCs Life Insurance Corporation Equity External Commercial Borrowings Banks There has been a rapid growth in bank credit to infrastructure projects with banks contributing to the tune of 21% of the total investment during first 3 years of 11th five year plan.1 Most of this funding has been provided by Public Sector banks and in some cases the sect oral prudential caps have almost been reached (especially for power sector) thus constraining any further lending to these sectors. Banks have prudential exposure caps for infrastructure sector lending as a whole as well as for individual sectors. NBFC Over the eleventh plan period, NBFCs lending increased sharply primarily due to higher demand from power, telecom and roads sectors. Two major NBFCs, PFC and REC together constituted ~ 80 per cent of the lending by NBFCs. NBFCs infrastructure investment growth is limited by their access to bank finance. Tighter prudential limits on bank lending to NBFCs have capped their access to commercial bank funds.

6. Regulatory Framework Proposed Regulatory Changes

The RBI proposed new draft regulatory guidelines on NBFCs based on the recommendations of the Usha Thorat Committee on 12 December 2012. The key proposals are listed below: 1. The Tier 1 ratio of registered NBFCs should be increased to 10% (12% for captive finance companies - financing 90% of parents products), and three years be given to achieve the required ratio (currently the minimum Tier 1 ratio for retail finance NBFCs is 7.5%). 2. Asset classification and provisioning norms similar to those for banks are to be introduced in a phased manner. This includes standard asset provision at 0.40% (current 0.25%), the 90 days overdue norm for classifying NPLs from Q1FY16, to be transited through a 120- day NPL from Q1FY15, and a one-time restructuring to be allowed for borrowers, which will not be treated as default. 3. Liquidity ratio requirement for all registered NBFCs, such that cash, bank balances and government securities fully cover the gaps, if any, between cumulative outflows and cumulative inflows for the first 30 days (currently only deposit-taking NBFCs are required to hold 15% of their public deposits in the RBI-defined liquid assets). 4. Strict corporate governance standards to be followed by large NBFCs. RBI permission necessary for change in control, or sale of 25% stake, and appointment of CEOs for 5. NBFCs with asset size of over INR10bn.
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6. Higher disclosures have been suggested by the RBI. These cover provision coverage ratios, liquidity ratios, asset liability profiles, the extent of financing of a parent company's products and the movement of non-performing assets. 7. Capital market and real estate exposures. Risk weights will be increased to 125% for capital market exposures and 150% for commercial real estate exposures (from the current 100% for both these categories). 8. NBFCs with asset size below INR250m will be exempted from registration with the RBI; existing non-deposit taking NBFCs (asset size below INR250m) with have to provide a roadmap to the RBI, for increasing their asset size to this level or above within two years. (RaoCommitteeReport, 2013) Though some of the clauses above might impact the short term profitability of the industry but overall the regulatory changes will have a positive impact on the industry. However, the proposed increase in standard asset provision to 0.40% (from 0.25%) from Q1FY14 will marginally impact NBFCs profitability in 2013. On the basis of FY12 figures, the incremental provision on 90-day NPLs and general provisions on standard assets at 0.40% (current 0.25%) will lead to a reduction in RoA by 540bp at various NBFCs. That being said, we can very well expect NBFCs collection and monitoring systems and borrower behaviour to largely adjust in the interim period (by Q1FY16) and 90-day delinquencies should drop. The requirements of higher Tier 1 ratio and liquid asset coverage (for cumulative mismatches in 1-30 day buckets), will not have major impact because major NBFCs maintain high capital ratios and well-matched asset-liability tenors. If the proposed requirement of registration of NBFCs at an asset size of INR250m is implemented, small and mid-sized NBFCs might consolidate further. This is because a huge majority of NBFCs are small, non-deposit-taking. On the basis of the RBI data, as at 30 June 2012, there were 12,385 registered NBFCs. At end-March 2012, there were 297 deposittaking NBFCs and 365 systematically important non-deposit-taking NBFCs, which would be largely unchanged at end-June 2012.

7. Case Study: Gold Loan

Indian Gold Loan Market
According to an estimate of World Gold Council, about 10 per cent of worlds gold is in Indias possession. Accumulated Gold stock in India is around 18,000 to 19,000 tonnes as per independent estimates. During 2002-2012, annual gold demand has remained relatively stable at around between 700 to 900 tonnes despite the rise in prices from Rs. 13,333 to Rs. 86,958 per troy ounce (as on May 25, 2012). Some independent estimates indicate that rural India accounts for about 65 per cent of total gold stock in the country.

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Nature of Market
There three major category of players in the market i.e. Banks, NBFCs and unorganized sector. Though no official stats are available approximately 75% of the market is captured by unorganized sector. This consists of numerous pawnbrokers, moneylenders and land lords operating at a local level. These players are quite active in rural areas of India and provide loans against jewellery to families in need at interest rates in excess of 30 percent. These operators have a strong understanding of the local customer base and offer an advantage of immediate liquidity to customers in need, with extreme flexible hours of accessibility, without requirements of any elaborate formalities and documentation. But organized sector is fast catching up with CAGR between 2008 and 2012 being as follows: Bank Gold Loans: 57.5%; NBFC Gold Loans: 98.5% ; Total Gold Loans: 64.9%

Geographical Segmentation
The demand for gold has followed a regional trend; Southern India accounting for 40%; West (25%); North (20-25%); East (10-15%) of annual demand, South India also accounts for 80-85 per cent of the gold loans market in India. Despite attempts by banks to expand in certain pockets of Northern and Western India, historically, the market has remained concentrated in Southern India. However this trend is changing gradually, as witnessed in the strong expansion of branches of the leading gold loans providing NBFCs in Northern and Western India. (RBI, 2013)13

North 20-25%

West 25%

ANNUAL DEMAND (700 to 900 tonnes)

East 10-15%

South 40%, Gold Loan Market 8085%

13

Working Group Report RBI, RBI Report (Pg 107: Para 6.3) , (Pg 109:Para 6.8)

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Total Market Potential ~18000 tonnes to 20000 tonnes (48.6 trillion)

Tapped ~3% (Rs 1.6 Trillion)

UNTAPPED +UNORGANIZED 97% (82%+15%)

Organized (GAUM ~ Rs 1,500,000 Mn)

NBFC (GAUM 27.7% ~ Rs 415,500 Mn)

Banks (GAUM 72.3%~Rs 10,84,500 Mn) Industry Overview

(RBI, 2013)

(Source RBI Feb 2013 Report , Pg 110)

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Regulatory Frame work

1. Review of Loan to Value Ratio and Standardization of the Value concept: RBI had on March 22, 2012, issued regulations stipulating that Loan to Value (LTV) ratios should not exceed 60 percent for loans granted by NBFCs against the collateral of gold jewellery. The KUB Rao committee report on gold loan companies (GLCs), released by the Reserve Bank of India (RBI) on January 2, 2013, has recommended that the LTV cap for NBFC be increased to 75%. At the same time the report highlights a requirement to standardize the methodology adopted by NBFCs to establish their LTV ratios, given that NBFC had shifted their valuation methodology after the March 22, 2012 regulations from gold value to replacement cost basis. The following are the key recommendations: - Increasing the LTV cap from the current 60% to 75% - Exclude making charges and service tax from the LTV computation. LTV computation based only on gold value - Standardization of the price of gold used by NBFCs in calculating their LTVs to a 30 day average of Mumbai 22carat bullion rate; Impact on NBFCs The proposed increase in LTV cap to 75% (from 60%) along with the requirement to lend only against gold value is not expected to have a material impact on the incremental lending undertaken by NBFC. However, if standardization on valuation methodology is implemented without increasing the LTV cap then business volumes for gold loan companies could get severely impacted. Standardization of the methodology applied in calculation of LTVs takes away scope for NBFCs to inflate their lending by building in aggressive gold price and making charges. 2. Interest rate cap on gold loan lending by NBFCs The report suggests linking of lending interest rates of gold loans NBFCs to a bench mark rate such as State Bank of India maximum advance rate or alternatively RBI can consider imposing a cap on interest rates. Impact on NBFCs: Incremental lending rate for NBFCs currently is in the range of 21-24%, while their incremental borrowing costs at 13-13.5%. At this level of lending spread NBFCs are expected to maintain a Return on Equity2 of around ~25-30%. Capping of interest rate without reference to the borrowing costs of the underlying NBFC would be a negative given the dynamic nature of funding costs. (RaoCommitteeReport, 2013)

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Competitive analysis and relative market shares

Gold Loan Outstanding (Rs Millions) Muthoot 2,44,173 Manappuram 1,15,327 Sriram City 4,701 Others 51,299 Total 4,15,500 Percentage 59% 28% 1% 12% 100%

GAUM
CFL 51,299 Mn. 1% Sriram City 1% Muthoot 59%
2,44,173 Mn.

Others 11%

4,701 Mn.

1,15,327 Mn.

Manappuram 28%

(QuarterlyInvestorPresentations)(RBI Report Pg 111)

Major Players
Muthoot Finance Muthoot Finance has 3780 branches across India with YoY growth rate of 32% , 70% of its branches are in rural and semi urban areas. Its rural and semi urban branches are given customized localized decor. Recruitments are made from within the territory enhancing local expertise. It entered district headquarters and fanned out to peripheral districts, enhancing visibility. It is expanding its branch base in north & west India. From only 13% in March 2007 it went to 30% in December 2012 (665 North and 509 West out of total 3914). Therefore being first mover in under penetrated market. They constantly work on increasing visibility of the brand by sponsoring events ( Sponsors Delhi Daredevils). Thereby making it easy for people to associate and trust a familiar name. The result: Of the 6 million loan proposals that Muthoot Finance catered as on March 31, 2012, a majority were drawn from areas with a population of less than 50,000.
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Manappuram Finance

Manappuram finance has 2908 branches with YoY growth rate of 34%. It has 21% of their branches in North and West (321 North and 351 West out of 3150 branches) as on 31 March 2013. Capital First Ltd

Market Share 1 %, almost 10 % of its AUM No. Of Branches 96 All branches in Tier1 & Tier 2 cities. Upper limit on loan value 10 lacs Targeted average loan size 1 lacs to 1.5 lacs

In an atmosphere where 97% of the market is untapped or unorganized and which is growing at more than 65% annum for the 4 years it is very important to have a strong presence. Possible strategies Expanding Branch Network In the light of the fact that CFL has presence only in tier 1 and tier 2 cities, a possible growth strategy could be to expand its branch network and make a move to capture rural masses. The major downside of this policy being the cost involved in the process. It will need strategy revamp on the part of CFL, would involve huge infrastructural and operational costs. Expanding Gold Product Portfolio Current average disbursement loan value is between 1 lakh to 1.5 lakh. Whereas for Muthoot it is only Rs 40,000. Though this difference primarily stems from the different priority markets these companies operate in. Still some innovative products can be introduced with aim of tapping new customers who want to take loans of smaller amounts. Enhancing Visibility by Leveraging FUTURE brand CFL should focus on increasing the visibility and gaining consumer confidence. Gold Loan by nature requires a lot of faith on the side of consumers on lenders. CFL can leverage on the strong FUTURE brand associated with it to enhance trust. This strategy shouldnt be heavy on the pocket because of existing economies. Thus will help increase loan book at substantially lower increase in costs.

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Recommendations In short run: Company should look to strengthen its position in tier1 and tier 2 cities by leveraging its brand name, marketing efforts, adding to product portfolio and enhancing operational efficiency.

In the Long Run: Considering the huge scope of the market, it would make sense to strategies on the lines of entering untapped markets of north and west India. Thus branch expansion should be considered.

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Works Cited
Crisil. (2011). Crisil NBFC Compodium March 2011. Delloite. (2013). Funding the Infrastructure Financial Gap. Muthoot. (2013). Investor Presentation. NHB. (2012). Trend and Progress of Housing in India. QuarterlyInvestorPresentations. Investor Presentations and Annual Reports. RaoCommitteeReport. (2013). ICRA Research Services. RBI, W. G. (2013). Report of RBI to study issues related to Gold imports and Gold Loans NBFCs in India.

Investor Presentations : Muthoot Finance, Manappuram Finance, HDFC, CFL.

Bajaj Finance,

M&MFSL , Sriram City Union,

http://www.livemint.com/Opinion/DehbiWbEhRx43IjKFzJMbP/Auto-financing-to-grow-in-india.html http://www.rbi.org.in/scripts/FAQView.aspx?Id=71 http://www.commodityonline.com/news/indian-gold-loan-market-to-grow-in-coming-years-48700-3-48701.html http://www.thehindu.com/business/consumer-durable-financing-interestfree-schemes-gain-popularity/article4253297.ece http://www.livemint.com/Opinion/DehbiWbEhRx43IjKFzJMbP/Auto-financing-to-grow-in-india.html

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