NBFCs: ENVIRONMENTAL ANALYSIS

What is NBFC?
A Non Banking Financial Company (NBFC) is ]a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds,Hire-purchase, insurance business, or chit business: but does not include any institution whose principal business is that includes agriculture or industrial activity; or the sale, purchase or construction of immovable property.[

Significance of NBFCs in India

According to the Economic Survey 2010-11, it has been reported that NBFCs as a whole account for 11.2 per cent of assets of the total financial system Since the 90s crisis the market has seen explosive growth, as per a Fitch Report1 the compounded annual growth rate of NBFCs was 40% in comparison to the CAGR of banks being 22% only

Meaning and Types of NBFCs:

Section 45I of the Reserve Bank of India Act, 1934 defines non-banking financial company as (i) a financial institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; 1(iii) 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;

NBFCs vs. Conventional Banks

An NBFC cannot accept demand deposits, and therefore, cannot write a checking

facility. It is not a part of payment and settlement system which is precisely the reason why it cannot issue cheques to its customers. Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks. SARFAESI Act provisions have not currently been extended to NBFCs. Besides the above, NBFCs pretty much do everything that banks do.

Classification of NBFCs based on the Nature of its Business

The NBFCs that are registered with RBI are basically divided into 4 categories depending upon its nature of business: equipment leasing company hire-purchase company; loan company; investment company; Infrastructure finance company.

NBFCs are typically into funding of:

Construction equipment

Commercial vehicles and cars Gold loans Microfinance Consumer durables and two wheelers Loan against shares, etc.

List of major products offered by NBFCs in India

Funding of commercial vehicles Funding of infrastructure assets Retail financing Loan against shares Funding of plant and machinery Small and Medium Enterprises Financing Financing of specialized equipment Operating leases of cars, etc

Types of instrument generally executed:

Loans

Hire purchase Financial lease Operating lease SWOT ANALYSIS OF NBFC STRENGTHS The core strengths of NBFCS lie in their strong customer relationships, good understanding of regional dynamics, service orientation, and ability to reach out to customers who would otherwise have been ignored by banks. Because of their niche strengths, local knowledge, and presence in remote topographies, these NBFCS are able to appraise and service non-bankable customer profiles and ticket sizes. They are thus able to service segments of the population whose only other source of funding would be moneylenders, often charging usurious rates of interest. WEAKNESS With the onset of retail financing, NBFCS are loosing ground to banks. Also the profitability of NBFCS has also come under pressure due to the competitive dynamics in the Indian financial system. Under these circumstances, NBFCS have begun to look at high-yield segments such as personal loans of small ticket sizes, home equity, loans against shares, and public issue (IPO) financing, to boost profitability.

To benefit from access to funding at lower costs, among other reasons, some leading NBFCS have also metamorphosed into banks: Ashok Leyland Finance Ltd, for instance, merged into IndusInd Bank Ltd, and Kotak Mahindra Finance Ltd converted into Kotak MahindraBank Ltd. OPPORTUNITIES Virgin business segments are likely to have NBFCS as innovators. The NBFCS will leverage their first mover advantage to make reasonable profits in these segments. NBFCS will play the role of innovators, going forward, with some doubling up as partners to banks. As innovators, they will help identify new businesses, or new ways of doing traditional businesses; they will build business models that will attain a measure of stability over time, before the banks step in. When that happens, it will be difficult for some NBFCS to hold their own against the competition, and some will move out; others will enter into partnerships with banks, resulting in a win-win relationship for both. Partnerships with banks can take a variety of forms. Some NBFCS will become originating agents working for a fee, like DSAS ,but others are likely to have more substantial partnerships with banks. Such a partnership could, for instance, involve the NBFC performing credit appraisals, and sharing credit risk on assets that it has originated and sold to its partner bank. The success of this business model will depend critically on the NBFCS ability to assess the risks involved in the exposures it originates. THREATS Factors such as ability to sustain good asset quality, provide prompt and customized services, enter into franchises or tie up arrangements with manufacturers and dealers, and build large networks to reach out to customers, are vital for success on the business front; so are strong collection and recovery capabilities. NBFC lack such facilities.

On the financial side, competitive cost of funds and the ability to capitalize at regular intervals, in line with growth requirements, are key requirements for maintaining competitive positions. Slowly and steadily NBFC is loosing ground to banks and it only way out is go for partnership with banks ENVIRONMEN T ANALYSI S : PORTER' S

MODE L

Threat of Substitutes: Medium to High

As a financial intermediary , NBFCs face competition from scheduled commercial banks (SCBs) and capital markets. Non -Banking Financial Companies (NBFCs) offer a wide variety of financial services and play an important role in providing credit. As compared with many SCBs, they have an ability to take quicker decisions, but face the disadvantage of higher cost of funds.

Bargaining Power of Suppliers: Medium

Reduced dependence on deposits and increased borrowings from banks/f inancial institutions. Better rated NBFCs face little constraint in borrowings.

Inter-Firm Rivalry: Medium

Although the number of players is high, firms have different clientele based on their borrowing costs, and size of business

Net owned funds for registration Rs 20 million for new NBFCs.

Barriers to entry:medium Certificate of registration from RBI necessary.

stringent regulatory provision of RBI.Bargaining Power

of Buyers: Medium

The major portion of the assets of NBFCs continue to be in Hire Purchase (HP)/Equipment Leasing (EL).

Asset quality deteriorated in the late -1990s, before recovering years in recent