3.

1 Global Scenario of Industry

The role of the NBFC is defined as the financial intermediary and the particular task has been
well recognized by the finance sector as well as the customers. The key drivers of this sector are
the quick decision making abilities, risk management and the intricate understanding of the
customer needs. The way the NBFC players have managed to spread their operations in urban as
well as semi-urban areas in the span of a few years, is simply commendable. Today, the role of
NBFC has become important from the macro as well as the Indian economic point of view.
The NBFC sector is dominated by the construction, equipment and the commercial vehicle
market and the other assets included under this. This industry has been growing consistently at a
rate of 20-25% barring the negative fall in the year 2008, which was due to the global scenario.
However, the industry has revived very quickly and has crossed volumes of more than that of
2007. The expected growth of return from this sector in the near future looks to be about 3035%.There is more than three and half lakh crore non-deposits taking place in the NBFC sector
and around 85,000 crore deposits taking place."
The most drastic change that has been seen recently in the NBFC segment is that of the big
international companies setting shop in the NBFC sector. Till sometime back, no big company
would have even thought about investing and trading in this sector.

Sustainable growth is possible only with the right dynamics which suit the market demand and
requirement. Many experts feel that the bad economic phase which shadowed the world, has
taught a few valuable lessons to the players in the NBFC sector. As in the case of any sector, the
recession made it apparent that it is difficult to maintain a consistent growth pattern if the growth
is not planned.
International players are trying to set foot in the Indian market, but I am not sure if they will get
the Indian environing right. We have had a similar situation where MNC's have tried their best to
set foot in the Indian NBFC market and place them in the urban sector. But, surprisingly, the
NBFC sector has now occupied the semi-urban and rural markets and the dynamics involved in
both the markets are very different.
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In the NBFC sector commercial and private vehicle market is going to grow but the tractor
market is going to be one of the fastest growing components, as it is no longer an agro project
but also an infrastructure investment.
NBFCs have traditionally been the secondary borrowing institutes and their main source of
borrowing has been the banks, mainly the public sector banks. This is the main reason why the
borrowing rate in the NBFC sector is a few percent higher than the public sector banks. In terms
of business establishment and rate on return (RoI), NBFC have a neat 2% RoI as compared to the
1.2 - 1.4% of a public sector bank.

http://articles.economictimes.indiatimes.com/2010-12-22/news/27600737_1_nbfc-sector-nbfcindustry-finance-sector

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3.2 Characteristics of Global Industry

Global credit crisis followed by increase in interest rates in October and November 2008 resulted
in widespread crisis of confidence. Chain of events after the collapse of Lehman Brothers is still
fresh in the minds of investors. Non-Banking Finance Companies (NBFCs) in India were
severely impacted due to economic slowdown coupled with fall in demand for financing as
several businesses deferred their expansion plan. Stock prices of NBFCs crashed on the back of
rising non-performing assets and several companies closed their operations. International
NBFCs still continue to close down or sell their back end operations in India.
The positive news however is that, this crisis has forced NBFCs to improve their operations and
strategies. Industry experts opine that they are much more mature today than they were during
the last decade. Timely intervention of RBI helped reduce the negative effect of credit crunch on
banks and NBFCs. In fact, aggressive strategies helped LIC Housing Finance to grab new
customers (including customers of other banks) and increase its market share in national
mortgage market. Surprisingly it was able to maintain its profitability in 2009 (around 37%).
HDFC, the largest NBFC in India, however experienced a slowdown in customer growth due to
stiff competition, especially from LIC Housing Finance and tight monetary conditions.
Other NBFCs that were stable during this period of credit crunch are Infrastructure Development
Finance Company (IDFC) Power Finance Corporation (PFC) and Rural Electrification
Corporation (REC). Growth prospects are strong for these companies given the acute shortage of
power in the country and expected increase in demand for infrastructure projects.
The segment which was hit hardest was Vehicle Financing. Companies financing new vehicle
purchases experienced a drastic reduction in new customer numbers. Fortunately, since vehicle
finance is asset-based business, their asset quality did not suffer as against other consumer
financing businesses. Contrary to this, Shriram Transport Finance, the only NBFC which deals in
second-hand vehicle financing was able to maintain its growth primarily due to its business
model which does not entirely depends on health of the auto industry.

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3.3 PEST Analysis of Industry in world Market

The radical and ongoing changes occurring in society create an uncertain environment and have
an impact on the function of the whole organization. A PEST analysis is merely a framework
that categorizes environmental influences as political, economic, social and technological forces.
The analysis examines the impact of each of these factors (and their interplay with each other) on
the business. The results can then be used to take advantage of opportunities and to make
contingency plans for threats when preparing business and strategic plans.

PEST analysis is a useful strategic tool for understanding market growth or decline, business
position, potential and direction for operations. The use of PEST analysis can be seen effective
for business and strategic planning, marketing planning, business and product development and
research reports. PEST also ensures that companys performance is aligned positively with the
powerful forces of change that are affecting business environment. PEST is useful when a
company decides to enter its business operations into new markets and new countries. The use
of PEST, in this case, helps to break free of unconscious assumptions, and help to effectively
adapt to the realities of the new environment.
1

[1] POLITICAL FACTORS

Political forces can have a great bearing on financial services. This influence could take the form
of a command-type economy, with a large proportion of financing occurring via government or
government-controlled institutions. This would include the overriding of market mechanisms by
state planning and bureaucracy. It could determine political structure.

Factors

Influence

Quota

Positive Influence

NBFCs Guidelines

Positive Influence

Tax Benefits

Positive Influence

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i.

QUOTA

The Reserve Bank of India (RBI) has tabled reforms to the funding practices of NBFCs
(non-bank lenders) in a move that some observers believe underlines its determination to
limit the growth of a shadow-financial system.

The Reserve Bank of India on June 27, 2013 said it would introduce a "minimum set of
guidelines" for all private placements from financial companies, previously a popular
source of funding for the sector.

Financial companies rely heavily on the institutional market to fund their loans, since
most are not allowed to accept retail deposits. That means any action to restrict their
access to the debt markets could have a big impact on the sector's expansion.

The backlash to the proposed rule change triggered an unusual climb-down, and the RBI
withdrew the restriction on the frequency of private placements in a July 2, 2013 notice,
promising a revision "in due course".

Some local market participants, however, see the RBI's recent interest in this alternative
financial system as part of an on-going effort to clean up the country's financial sector
and prevent the growth of a less-regulated shadow banking system. That fits with recent
regulatory actions against financial companies such as financial companies.
NBFCS GUIDELINES2

ii.

Profit - Because of the changes in the norms of NPAs the profit will be affected
adversely in the short run to non-banking financial companies. But complementing to this
fact is that the increase in the capital will be a positive factor as it will increase liquidity
and thus the profit.

Margin Funding Because of the risk weightage going up and the disclosure of every
day transactions, it will be difficult for the NBFCs and hence margin lending will be
affected.

http://www.fundasinfinance.com/1/post/2013/08/the-impact-of-new-nbfc-guidelines.html

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ROA As the days to recognize if an asset is an NPA or not is decreased, it will decrease
the ROA and also there will be loss of assets. The average return on ROAs will drop by
25 basis points and affected to non-banking financial companies.

Transparency and Valuation of NBFC As the norm suggests more disclosure of the
transactions there will be transparency in the system and this will help in the proper
valuation of NBFCs. This will play a huge role in this sector as they will have to
strengthen its internal system of reporting.

Size of NBFC The small NBFCs will be impacted severely as they rely on first time
borrowers and small NBFC will be tem moving out of this sector owing to the above
issues of profitability and margin funding.

Quality and Risks The overall quality of NBFCs will improve as they will be little
more risk free owing to the increase in their capital which will provide liquidity in the
issues of mismatch.

Overall, the guidelines seem to converge further towards financial services regulation on
the important parameters of capital and liquidity. Real estate and capital markets attract
higher risk, weight and disclosures. However, this creates some significant issues for the
sector to deal with.

Two scenarios are possible: better regulation will create better opportunities and better
NBFCs will adapt as they have done in the past and deliver. On the other hand, many of
them may not find the business viable in the absence of the opportunity space between
financial companies and borrowers.

[2] ECONOMIC FACTORS

Factors

Influence

Exchange rate

Positive Influence

Inflation

Negative Influence

GDP

Positive Influence

Consumer Price Index

Negative Influence

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Foreign Direct Investment

i.

Positive Influence

EXCHANGE RATE3
Years
2008-09

Exchange rate
46.80

2009-10

45.03

19

2010-11

48.74

32

2011-12

54.86

20

2012-13

63.30

19

Exchange Rate

Growth of NBFCs (%)

17

NBFCs Growth Rate

75
65
55
45
35
25
15
2008-09

2009-10

2010-11

2011-12

2012-13

The currency rate of India is ranging from 40 Rs per dollar to 50 Rs per dollar. The currency rate
will going to effect to the exporter as the government is helping to the NBFC industry but the
final money earned by exporter will depend on exchange rate. The overall impact of this
exchange rate will mix, as the rate of exchange will high then the exporter will earn high and
vice-versa. The overall impact of exchange rate in current scenario is favourable and affected to
non-banking financial companies.
3

http://www.exchangerates.org.uk/USD-INR-exchange-rate-history.html

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ii.

INFLATION
Average Inflation India (CPI) - by year4
Growth of NBFCs

Average Inflation

Inflation

CPI India 2013

11.04%

17%

CPI India 2012

9.30%

19%

CPI India 2011

8.87%

32%

CPI India 2010

12.11%

20%

CPI India 2009

10.83%

19%

Inflation

Growth of NBFCs

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2008-09

2009-10

2010-11

2011-12

2012-13

Indian banks lending to non-banking finance companies (NBFCs), perceived as a highrisk sector, has virtually come to a halt due to the combined impact of regulatory
tightening by the Reserve Bank of India (RBI) and slowing business.

Growth in bank lending to NBFCs dropped to 1.9% in the 12 months ended June 2013
compared with 44% in the same period last year, according to RBI data. In absolute

http://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india.aspx

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terms, bank loan outstanding to NBFCs stood at Rs.2.58 trillion, marginally higher
than Rs.2.54 trillion in the year-ago period.

The decline in bank lending is more evident in the three months ended June, when banks
lent just Rs.20 crore to NBFCs, registering a growth of 0.8%, against a 11.4% growth in
the year-ago period.

RBI first began choking bank funding to NBFCs in May 2011 by removing the so-called
priority sector tag for bank loans to NBFCs, except for those loans given to companies
operating in specific segments such as microfinance. This substantially raised the cost of
funds to NBFCs.

Banks have been highly cautious due to the heightened concentration risks, as
suggested by the high growth, in the NBFC sector. Concentration risk to low-rated
NBFCs or weak NBFCs created concern, said Prakash Agarwal, associate director,
banks, India Ratings, formerly known as Fitch Ratings India.

iii.

GDP5

GDP Growth Rate6

Years

Growth of NBFCs (%)

2008-09

7.5

17

2009-10

9.3

19

2010-11

7.7

32

2011-12

5.5

20

2012-13

4.7

19

http://economictimes.indiatimes.com/topic/NBFC

http://www.tradingeconomics.com/india/gdp-growth

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GDP Growth Rate

Growth of NBFCs

35
30
25
20
15
10
5
0
2008-09

2009-10

2010-11

2011-12

2012-13

GDP is considered the broadest measure of a country's economy, and it represents the
total market value of all goods and services produced in a country during a given year.
Since the GDP figure itself is often considered a lagging indicator, most traders focus on
the two reports that are issued in the months before the final GDP figures: the advance
report and the preliminary report. Significant revisions between these reports can cause
considerable volatility. The GDP is somewhat analogous to the gross profit margin of a
publicly traded company in that they are both measures of internal growth.

According to Crisil feels RBI's new guidelines on lending against gold will weaken the
competitive positions, growth prospects, profitability, and asset quality of gold loan nonbanking financial companies (NBFCs). It expects the profitability of these NBFCs to
decline by nearly 75 basis points and their loan books to decline in the near term.
However, the new guidelines, issued on September 16, 2013, will promote orderly,
sustainable growth in the sector over the long term.

A FICCI survey on new bank licenses states: RBI's decision to allow new players in
the non-banking financial sector has received big thumbs up from Indian industry.
The move will induct new processes and technology, improve efficiency, enlarge the
capital base to meet the credit needs of the economy and generate huge employment
opportunities. The survey which drew responses from existing financial services, NBFCs,
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corporate and industrial houses and other stakeholders reveals that a majority (88%) of
the respondents feel that RBI condition for an applicant applying for a banking license to
set up at least 25% of its branches in unbanked rural centres with a population of less
than 9,999 will play a significant role in expansion of non-banking services to mid cities
and rural India and hence help in increasing financial inclusion in India.

iv.

Consumer Price Index

The CPI is a measure of the change in the prices of consumer goods across over 200
different categories and affected to NBFC. When compared to a nation's exports, can be
used to see if a country is making or losing money on its products and services. Be
careful, however, to monitor the exports - it is a focus that is popular with many traders
because the prices of exports often change relative to a currency's strength or weakness of
NBFC.

Some of the other major indicators include the purchasing managers index (PMI),
producer price index (PPI), durable goods report, employment cost index (ECI), and
housing starts affected to non-banking financial companies. All of these provide a
valuable resource to traders, if used properly.

v.

FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) in non-banking finance companies (NBFCs) has been
subject to minimum capitalisation norms. For example, any foreign investment of more
than 75% in an NBFC requires a minimum capitalisation of US$ 50 million through
foreign inward remittances.

As far as downstream investments are concerned, the Consolidated FDI Policy

Circular provides that the relevant caps and conditionalitys shall apply to downstream
investments as well. However, there is a specific exception for 100% foreign-owned
NBFCs where there is no restriction on establishing downstream subsidiaries without
further capitalising each subsidiary with the minimum required foreign investment.
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However, this specific dispensation was not available to NBFCs where foreign
investment is between 75% and 100%. By way of a Press Note No. 9 (2012) Series, the
Government has now brought such NBFCs on par with 100% foreign-owned NBFCs,
whereby they can also set up downstream subsidiaries without further capitalising each
one of them with the requirement minimum amount.
A report in the Business Standard sets out some of the advantages of this change:

The rule has made the business very capital intensive for companies that have FDI, as
most of them prefer a subsidiary structure to carry out different types of businesses.

This was not the only problem. Norms say that a NBFC has to set up separate arm for
different set of activity. It means a NBFC who is in the business of custodian service and
then it decides to go into leasing and finance, it needs to set up a different arm.

Previous regulation meant such a NBFC, if having more than 75 per cent FDI but less
than 100 per cent and a capital base of $50 million, it would need to bring another $50
million. Now this will not be required.

[3] SOCIAL FACTORS

Factors

Influence

Literacy

Positive-Negative Influence

Household Saving

Positive Influence

LITERACY7
One of the major hindrances in the growth of the NBFC industry is the financial illiteracy of the
people. This makes it difficult in creating awareness of microfinance and even more difficult to
serve them as microfinance clients. Though most of the financial services claim to have
educational trainings and programmes for the benefit of the people, according to some of the

http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475

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experts the first thing these SHG and JLG members are taught is to do their own signature. The
worst part is that many MFIs think that this is what financial literacy means.

HOUSEHOLDS SAVING8
Households have been putting less money in financial savings recently. Two recent reports on
the macro economy have drawn attention to this development, which has deep implications for
the non-banking financial companies.
According to the Economic Outlook, gross financial savings (measured as increase in gross
financial assets), which was at 15.4 per cent of gross domestic product (GDP) in 2007-08, fell to
13.6 per cent in 2010-11, and could have possibly fallen to below 12 per cent in the next year
(2011-12). Even more relevantly, net financial savings of households available for use by the rest
of the economy fell below 11.6 per cent of GDP in 2007-08, to 10 per cent in 2010-11 and likely
to go below 9 per cent in 2011-12.
The RBIs estimate is even less upbeat: household financial savings fell to 7.8 per cent (of GDP)
in 2011-12, the lowest since 1989-90. During the preceding three years, it averaged 11 per cent.
When the economy is faring well, households tend to put more money in non-banking financial
companies. In a buoyant economic environment, it is very likely that the stock markets will be
bullish and financial companies will also look attractive.

[4] TECHNOLOGICAL FACTORS9

Technology has both direct and indirect effects on the restructuring of non-banking financial
companies.

http://www.thehindu.com/opinion/columns/C_R_L__Narasimhan/when-household-savings-

evaporate/article3878073.ece
9

http://www.fundasinfinance.com/1/post/2013/08/the-impact-of-new-nbfc-guidelines.html

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increases in the feasible scale of production of certain products and services (e.g. credit
Cards and asset management);

Scale advantages in the production of risk management instruments such as derivative

Contracts and other off-balance sheet guarantees.

Economies of scale in the provision of services such as custody, cash management, Back
office operations and research.

With the governments help and the technology up gradation this sector has many growth
opportunities.

[5] LEGAL FACTORS

Factors

Influence

Tax Benefits

Positive Influence

iii.

TAX BENEFITS10

The finance ministry is likely to extend the favorable tax treatment currently given to
financial services, public financial institutions and state finance corporations on their
income from non-performing assets (NPAs) to non-banking financial companies
(NBFCs) as well, making them taxable only in the year of receipt.

At present, NBFCs are taxed on such income in the year of accrual, while banks, PFIs,
state finance corporations, housing finance companies and state industrial investment
corporations are taxed only when it is received or credited to the profit and loss account,
whichever is earlier.

Department of financial services and the banking regulator have favored the extension of
the accounting benefit under Section 43D of the Income Tax Act to NBFCs too at prebudget consultations within the finance ministry. NBFCs are bank-like institutions with
the exception that these do not offer savings accounts.

10

http://www.indianexpress.com/news/nbfcs-likely-to-get-tax-treatment-parity-with-banks/1077380/

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Like other lenders, NBFCs too follow the Reserve Bank of India's (RBI's) prudential
norms and defer income regarding their NPAs and make provisions for the same.
However, income tax authorities do not recognize these norms and tax NBFCs on such
deferment of income on accrual basis resulting in tax on unrealized income.

Sources in the department of financial services said the government is "positively

inclined" to offer tax parity to NBFCs and the other lenders describing it a "reasonable
demand" and hinted that the Budget could announce this change. The issue came up for
discussion during a meeting in Mumbai on February 9 between industry representatives
and officials including finance minister P Chidambaram, and senior officials from the
department of financial services and the RBI.

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