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1.1. Introduction
1.2. Non Banking Financial Company Meaning and Definitions
1.3. Structure of NBFCs
1.4. Different Types of NBFCs
1.5. Some of the Differences between NBFCS and Banks
1.6. Importance of the Study
1.7. Statement of Problems
1.8. Objectives of the Study
1.9. Hypotheses
1.10. Methodology
1.11. Limitations of the Study
1.12. Chapter Scheme

The Indian economy has been witnessing high rates of growth in the last
few years. Financial 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. 1 They
help fill the gaps in the accessibility of financial services that otherwise occur in
bank-dominated financial systems. The openings are in regards the product as well
as customer and geographical segments.
NBFCs over the years have played a very critical part in the economic
system. They have been at the forefront of catering to the financial needs and
creating livelihood sources for the so-called un-bankable masses in the rural and
semi-urban regions. Through strong linkage at the grassroots level, they have
created a medium of reach and communication and are very effectively serving this
segment. Thus, NBFCs have all the key characteristics like other lending agencies
to accomplish the mission of financial inclusion in the rural and urban area.
A Non-Banking Finance Company (NBFC) means a financial institution
which is a company; A non-banking institution which is a company and which has
as its principal business the receiving of deposits under any scheme or arrangement
or in any other manner or lending in any manner; such other non-banking
institution or class of such institutions as the Bank may with the previous approval
of the Central Government specify.

Finance Industry Development Council Reports, a body incorporated as a self regulatory

organisation, for registered NBFCs, p -1

Non-banking finance companies consists mainly of finance companies

which carry on hire purchase finance, housing finance, investment, loan,
equipment leasing or mutual benefit financial companies but do not include
insurance companies or stock exchanges or stock-broking companies.
A study of NBFCs faces serious definitional and data difficulties. The
number of such companies at work is very large, and it runs into thousands. But
only a small proportion of them reports to/files return with the RBI.2 There has also
been a blurring of categories due to the emergence of many multi-service
companies. The RBI (Amendment) Act 1997 defined NBFC as an institution or
company whose principal business is to accept deposits under any scheme or
arrangement or in any other manner, and to lend in any manner. As a result of this
new definition, a number of loan and investment companies registered under the
Companies Act by business houses for the purpose of making investment in group
companies are now included as NBFCs. In the past, the definition of NBFC was
not so extensive and the categorization of such institutions used to be somewhat
different from the one officially followed at present.
A residuary non-banking company is a company which receives any
deposit under any scheme of arrangement, by whatever name called, in one lump
sum or in installments or in any other manner and which is not an equipment
leasing company, hire purchase company, a housing finance company, an
insurance company, an investment company, a loan company, mutual benefits
financial company or a miscellaneous non-banking company.

Govt. of India, Report of Banking Commission, 1970, pp.413-35


Non-banking financial companies (NBFCs) engaged in varied financial
activities are part of the Indian financial system providing a range of financial
services. NBFCs do offer all sorts of banking services, such as loans and credit
facilities, retirement planning, money markets, underwriting, and merger activities.
The number of non-banking financial companies has expanded greatly in the last
several years as venture capital companies, retail and industrial companies have
entered the lending business.
NBFC, is defined under sec. 45-I(f) of the Act, as under "non-banking
financial company" meansi.

a financial institution which is a company;


a non banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in
any other manner, or lending in any manner;


such other non-banking institution or class of such institutions, as the bank

may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.
For this purpose, the definition of Principal Business given, vides Press

Release 1998-99/1269 dated April 8, 1999 may be followed:

The company will be treated as a non-banking financial company (NBFC)
if its financial assets are more than 50 per cent of its total assets (netted off by
intangible assets) and income from financial assets is more than 50 per cent of the

gross income. Both these tests are required to be satisfied as the determinant factor
for principal business of a company.
Definitions of NBFC
Whereas the 'Reserve bank of India Act 1934' itself defines the term NBFC,
there is a different definition of the same term viz. NBFC in the 'Non-Banking
Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,
1988' that the RBI itself has issued under the aforesaid Act of 1934.
According to the Reserve Bank (Amendment Act) 1997, A Non-banking
finance company (NBFC) means a financial institution which is a company; A
non-banking institution which is a company and which has as its principal business
the receiving of deposits under any scheme or arrangement or in any other manner
or lending in any manner; such other non-banking institution or class of such
institutions as the Bank may with the previous approval of the Central Government
specify.3 The definition excludes financial institutions besides institutions which
carry on agricultural operations as their principal business.

Machiraju, Indian Financial System, 1998, p.7.1



Based on their Liability Structure, NBFCs have been divided into two
1. Category A companies (NBFCs accepting public deposits or NBFCs-D)
2. Category B companies (NBFCs not raising public deposits or NBFCs-ND).
NBFCs-D are subject to requirements of Capital adequacy, Liquid assets
maintenance, Exposure norms (including restrictions on exposure to investments in
land, building and unquoted shares), ALM discipline and reporting requirements;
In contrast, until 2006 NBFCs-ND were subject to minimal regulation. Since April
1, 2007, non-deposit taking NBFCs with assets of 1 billion and above are being
classified as Systemically Important Non-Deposit taking NBFCs (NBFCs-ND-SI),
and prudential regulations, such as capital adequacy requirements and exposure
norms along with reporting requirements, have been made applicable to them. The
Asset Liability Management (ALM) reporting and disclosure norms have also been
made applicable to them at different points of time.
Depending upon their nature of activities, non- banking finance companies
can be classified into the following categories:
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.
Investment Company (IC): IC means any company which is a financial
institution carrying on as its principal business the acquisition of securities.
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.
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%.
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 :
! 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
! 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
! 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
! 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.
! Its asset size is Rs 100 crore or above and
! 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 minimum 5 year maturity. Only Infrastructure
Finanace Companies (IFC) can sponsor IDF-NBFCs.
Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)
NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in
the nature of qualifying assets which satisfy the following criteria:
! 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
! loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in
subsequent cycles
! total indebtedness of the borrower does not exceed Rs. 50,000
! tenure of the loan not to be less than 24 months for loan amount in excess of Rs.
15,000 with prepayment without penalty
! loan to be extended without collateral
! aggregate amount of loans, given for income generation, is not less than 75 per
cent of the total loans given by the MFIs

! loan is repayable on weekly, fortnightly or monthly instalments at the choice of the

Non-Banking Financial Company Factors (NBFC-Factors) : NBFC-Factor is
a non-deposit taking NBFC engaged in the principal business of factoring. The
financial assets in the factoring business should constitute at least 75 percent of its
total assets and its income derived from factoring business should not be less than
75 percent of its gross income.


! An NBFC cannot accept demand deposits (they are not allowed to take
deposits from public)
! An NBFC is not a part of the payment and settlement system and as such an
NBFC cannot issue cheques drawn on itself
! Deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available for NBFC depositors unlike in case of banks.
Earlier NBFC were having lesser control by the Reserve Bank of India and
this lead to threatening and huge losses for millions of clients.
required some form of study in financial activities.


The RBI announced

liberalization measures for NBFCs on July 24, 1996. Over the last decade or so,
the Reserve Bank of India has been blowing hot and cold over non-banking finance
companies (NBFCs). The RBI reacted to a series of defaults and misdemeanors by
a few NBFCs restricting their ability to hold public deposits. This unfortunately
led to a collapse of many NBFCs which depended on a continuous inflow of


deposits to meet redemption obligations. Later on there seems to have been a

better realization of the role of NBFCs in financing the small scale industry, trade
loan, unsecured personal loan and so on.
The present work deals with the execution of select non-banking financial
companies in Tamil Nadu and the study is conducted for analyzing the trends and
future of similar NBFCs in Tamil Nadu. The researcher has chosen two NBFCs
named as Manappuram Finance and Muthoot Finance.


In India, the NBFCs have witnessed substantial growth over the years;
there are few areas of concern which need to be addressed. The NBFCs have
enjoyed an edge over banks in semi-urban & rural markets where banking network
is not yet strong; they have limited spread in urban markets. Nonetheless, in recent
years, NBFCs have begun to create niches for themselves that are often neglected
by banks. These primarily include providing finance to non-salaried individuals,
traders, transporters, stock brokers, etc. in that extent it has developed and
overcome the services of commercial banks functioning in the same area.
In the past few years, the increased competition from banks in the retail
finance segment has led to excess diversification by NBFCS from their core
business activities. The sector has witnessed introduction of various innovative
products such as used vehicles financing, small personal loans, three-wheeler
financing, IPO financing, finance for tyres & fuel, asset management, mutual fund
distribution and insurance advisory, gold loans, etc. Besides, NBFCs are aspiring
to emerge as a one-stop shop for all financial services.


NBFCs have also ventured into riskier segments such as unsecured loans,
purchase finance for used commercial vehicles, capital market lending, etc. The
earlier mentioned factors increase their risk profile which could have adverse
impact on the financial health of NBFCs. Although some improvement has been
witnessed in auto sales in last few months, the demand for vehicle finance is likely
to remain subdued. Besides, given the significant slowdown in the Indian
economy, NBFCs are encountering structural challenges such as increased
refinancing risk, short-term asset-liability mismatch leading to decelerating growth
and declining margins. This is expected to have a bearing on the profitability of
NBFCs in the medium term. The growth in vehicle finance remaining low in the
medium term, NBFCs are expected to focus on rural and semi-urban markets.
Credit requirements of rural population are primarily met by banks from organised
sector or local money lenders. Though, in recent years there has been some
penetration of NBFCs in this segment, the market still remains largely untapped.
There is a large section of rural population which does not have access to credit
either because of their inability to meet the lending covenants of banks or due to
high interest rates of local money lenders. This provides a huge opportunity for
NBFC sector to spread their business in the rural & semi-urban markets. 4
In the above juncture, the present study deals with the performance of the
select NBFCs such as Manappuram finance and Muthoot finance. The study deals
with the analysis of balance sheets and income statements of the select companies.

BFSI Sector in India under the D&B Sectoral Round Table Conferences series, RBI,


Hence, the study on financial performance of these NBFCs helps to identify

the important problems faced by NBFCs and the remedial measures to overcome
the problems which lead to the better performance of the NBFCs as a whole.


1. To study the growth and development of Non-Banking Financial
Companies in India and its micro issue activities in gold loan.
2. To evaluate the financial performance of Manappuram finance and
Muthoot finance.
3. To analyse the profitability and solvency positions of the select NBFCs.
4. To analyse the liquidity and efficiency status of Manappuram finance and
Muthoot finance.
5. To offer suitable suggestions to improve the performance of NBFCs with
regard to Manappuram finance and Muthoot finance.
The following hypotheses are framed and tested in the study:
1. There is no significant difference between profitability and solvency
positions of the select NBFCs.
2. There is no significant difference between liquidity and efficiency status of
Manappuram finance and Muthoot finance.
3. There is no significant difference in the mean percentage of profitability
ratios between years and between the select NBFCs.


The present study pertains to A Study on NBFCs in Tamilnadu only.
Among the NBFCs registered with the Registrar of Companies in Tamilnadu, the
NBFCs such as Manappuram finance and Muthoot finance are spread wide over in
the State of Tamilnadu with more number of branches and wide and strong
customer base are selected. And also, they are the largest gold loan providers in
The research design of the study is analytical and conclusive.

The study

confined with only secondary data. The secondary information pertaining to the
study are gathered from journals related to non banking financial companies,
magazines, survey of Indian Industry 2012, academic literatures, RBI bulletin, and
the select NBFCs websites.
The performance of Manappuram Finance and Muthoot Finance has been
examined with the help of financial highlights and balance sheets over ten years of
the companies. The ratio analysis, CAGR, t value, mean, standard deviation,
simple percentage, Altman Z-Score and Du Pont analysis have been adopted for
the present study.
The present study covers a period of ten years of secondary data from the
two non-banking financial agencies collected from the year 2003-04 to the year



However, there are some limitations of the study, which are generally
inherent in all such studies conducted at human level. The most important among
them are:
1. The study is based on secondary data obtained from the published annual reports
of Manappuram finance and Muthoot finance and as such its finding depends
entirely on the accuracy of such data.

The present study is largely based on ratio analysis which has its own

3. Statistical test used in the study to interpret the analyzed data to generalize the
findings of the study for the Manappuram finance and Muthoot finance has got
their own limitations and result of the analysis is subject to same constraints as are
applicable to statistical tools.
4. The analysis of financial statement of business enterprise gives diagnostic
indicators. The researcher, being an outside, external analyst, obviously has no
access to internal data. Therefore, inside view of the organization cannot be
characterized in the study.
The study is designed with seven chapters.
The first chapter entitled Introduction and Design of the Study deals with
a brief introduction of non-banking financial companies, meaning and definitions,
Structure of NBFCs, Different types of NBFCs, and their importance, statement of


problem, objectives of the study, methodology, hypotheses, limitation of the study

and chapter scheme.
The second chapter entitled Review of Literature describes the earlier
studies on the finance and banking. Even though many related studies have been
conducted, this study is unique, since the study of these two non banking finance
companies has not been previously attempted.
The third chapter captioned Growth and Development of Non-Banking
Financial Companies in India and Its Gold Loan Activities is designed to throw
light on the concept, Supervision of NBFCs by reserve bank, Pre-requisites for
carrying on business of NBFC, Regulatory framework for NBFCs in India, Salient
features of the RBI regulatory framework, Acceptance of public deposits, Default
in repayment of deposit, Gold loan market in India, Recent trends in gold loans and
influence of gold imports, Recent trends in gold loans and impact on gold prices
and Liability management.
The fourth chapter deals with Performance analysis of Manappuram
finance and Muthoot finance over a period of 10 years from the year 2003-04 to
the year 2012-13.
The final fifth chapter headed as Findings, Suggestions and Conclusion
summarizes the findings of the study and also offers suggestions for
implementation by the non-banking finance companies.