LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT Synopsis of capstone project Financial performance of non banking finance companies.

Submitted to Lovely Professional University Mr. Abhishek

Submitted by: Paramveer Singh RAQ3703B41 Ramandeep kaur RAQ3703B43 Sandeep kaur RAQ3703B42 Vidhu gupta RAQ1709A09

DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY JALANDHAR NEW DELHI GT ROAD PHAGWARA PUNJAB

1| Page

TABLE OF CONTENTS Abstract..3 Introduction..........4 Review of Literature.5 Basic information of NBFCS.13 Need for the study...19 Scope of the study...19 Research Objective..22 Research Design..22 Research Methodology...22 Research Tool.22 Tentative Chapterization..23 Bibliography..24

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

2| Page

ABSTRACT
A financial sector is critical for facilitating higher economic growth. Financial intermediaries like NonBanking Financial Companies (NBFCs) constitute a significant element of the financial system organization. NBFCs, also known as Finance Companies, Loan Companies, Finance Corporations etc., in the business parlance, they have earned a respectable place by providing quick and tailor-made solution to the financial requirements of different segments of the borrowers. The industry is not tightly regulated as there are many regulatory bodies. Hence, there was an important need to study the NBFC as the industry plays an important role in the financial Services market of INDIA. There are almost 13000 registered NBFCs in India. The study is aimed to provide a holistic view of the NBFC Industry This research report is an attempt to analyze the financial positions of non financial banking companies.

3| Page

CHAPTER-1

INTRODUCTION

4| Page

INTRODUCTION
Non-banking financial companies (NBFCs) are fast emerging as an important segment of Indian financial system. Financial intermediaries like Non-Banking Financial Companies (NBFCs) constitute a significant element of the financial system organization. NBFCs, also known as Finance Companies, Loan Companies, Finance Corporations etc., in the business parlance, they have earned a respectable place by providing quick and tailor-made solution to the financial requirements of different segments of the borrowers. A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognised as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc.

5| Page

CHAPTER-2

LITERATURE REVIEW

6| Page

REVIEW OF LITERATURE
1.

An evaluation of NBFCs, suresh vadde: - NBFC

provide support to the capital market

through investment holding, share trading and merchant banking activities, to the credit market through short and medium-term loans and also help in acquiring long-term assets through lease and hire purchase activities. The article analyses the performance of non-government financial and investment companies during the year 2008-09. It was observed from the consolidated results of the select 1,211 non-Government financial and investment companies that growth in income, decelerated during the year 2008-09. Growth in total expenditure also decelerated which was higher than the income growth. The growth in expenditure was mainly driven by the growth in interest payments. As a result, operating profits of the select companies declined. Business of select nonbanking financial and investment companies expanded at a slower pace during 2008-09. A substantial portion of funds raised during the year was in the form of borrowings and raising fresh capital from the capital market. Major portion of the funds raised during the year was deployed as loans and advances in the credit market.
2. Financial performance of non banking financial institutions in India , Gursharan Singh

Kainth :-A robust banking and financial sector is critical for facilitating higher economic growth. Financial intermediaries like Non-Banking Financial Companies (NBFCs) constitute a significant element of the financial system and have penetrated into those areas where banks did not dare by taking both the operational and regulatory risks. Boom-Mushroom-Doom-Zoom, four words in a sequence tell the entire story of performance of NBFCs during the past one and a half decade. To give industry the much needed boost, service tax should be done away with. Special cells within the courts be set up to dispose cases because justice delayed is justice denied.

3. Financial performance of non banking finance companies in india ,amita s. Kantawala:-

The financial system comprises of financial institutions, financial instruments and financial markets that provide an effective payment and credit system and there by facilitate channelizing of funds from savers to the investors of the economy. They provide tailor made services to their clients. Comprehensive regulation of the banking system and absence or relatively lower degree of regulation over NBFCs has been some of the main reasons for the growth momentum of the latter. It has been revealed that economic development and growth of NBFCs are positively related. In this regard the World Development Report has observed that in the developing counties banks hold a major share of financial assets than they do in the industrially developed countries. As the demand for financial services grow, countries need to
7| Page

encourage the development NBFCs in order to broaden the range of services and stimulate competition and efficiency. The RBI came out with set of guidelines for NBFCs. According to Reserve Bank (Amendment act, 1997) A Non Banking Finance Company (NBFC) means- 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 other manner a lending in any manner; iii) such other non banking institution or class of such institutions as the bank may with the previous approval of the central government specify.
4.

Restructuring Rural Financial Institutions,Basu Shyamal (1999):- In his study identifies the

reason for need of restructuring the rural financial institutions(RFIs). The reasons are summed up in the following thw points (1)the inefficiencies of multi-agency approach, (2) dependency of RFIs, (3) autonomy of RFIs (in regard to reserve requirements, priority sector lending, loan appraisal, monitoring and recovery, and interest rates), and (4) explicit and implicit viability of RFIs. These are the basic problems faced by RFIs. But it has been suggested that neither the upward revision in lending rates nor these restructuring proposals are required for improving viability of RFIs. An alternative proposal of restructuring RFIs is suggested by BASU. This proposal discusses six strategic organizational principles of developing RFIs. These are (1) encouraging multiple institutions, (2) promoting appropriate forms of organization, (3) achieving vertically integrated organizational structure, (4) developing suitable density of field-offices, (5) enlarging reach or coverage of rural clients, and (6) accelerating diversified and multiple functions. The restructuring proposal in this paper emphasizes the mission of decentralized institutional development of RFIs. Its vision should be diversified, multiple and joint-products oriented rural banking which is autonomous but accountable. And it has a potential to be a more viable and agricultural and rural growth-oriented.

5. Structural Features of Indias Financial System, Rastogi A B; Ghose Amitabha:-concluded in

his paper by giving the concise description of the Indian Financial System from macro-economic perspective. Their study analyses the evolution and interrelations of the financial system using the flow of funds framework and other tools of financial planning. The Financial intermediation by the banking sector weaked a little as other private financial companies gained importance in the economy. However, new assets, deposits and credits outstripped the growth rate of the economy.

8| Page

6. Management of Financial Institutions: An Inquiry into the Extent of Professionalism in IDBI,

IFCI and ICICI,Author I M Pandey :-did this study to assess the degree of professionalism in three all-India level FIs -IDBI, IFCI and ICICI. He also conducted his study to derive implications for developing policies and procedures for managing the financial institutions effectively. On the basis of experiences of all-India FIs, the model that seems to facilitate professionalism is one in which sophisticated policies, procedures and systems exist for identification, appraisal, approval, disbursement and follow-up of projects, and in which financial and technical experts combine to form teams for performing appraisal and follow-up of projects is the key to success for Indians FIs.It is also indicated that projects should be meticulously examined with the active involvement of the applicants. With the age and size of all-India FIs, their functions have led their staff to grow, and they have created more specialized departmental structures. Thus, it may be concluded that over years FIs structure should be more departmentalized. Training must be an integral part of the development process. All-Indians FIs should have sophisticated systems for the training of their staff. Also, need for finances from FIs increases substantially due to growing economy. This necessitates development of skills to collect savings. All India FIs in this respect are quite behind. They have not been so far able to establish an organic link to the sources of finances and they too have to compete with their private counterparts.

7. Business & Economy Research Papers:- Non-Banking Financial Companies (NBFC) have

rapidly emerged as an important segment of the Indian financial system. Moreover, NBFCs assume significance in the small business segment as they primarily cater to the credit requirements of the un organized sector such as wholesale & retail traders, small-scale industries and small borrowers at the local level. NBFC is a heterogeneous group of financial institutions, performing a wide range of activities like hire-purchase finance, vehicle financing, equipment lease finance, personal loans, working capital loans, consumer loans, housing loans, loans against shares and investment, etc. NBFCs are broadly divided into three categories namely (i) NBFCs accepting deposits from banks (NBFC-D); (ii) NBFCs not accepting/holding public deposits (NBFC-ND); and (iii) core investment companies.

9| Page

8. Financial sector reform: institutional and technological imperatives,Samir K. Barua Jayanth

R. Varma This paper takes the view that financial sector reform is not only a matter of removing the old regulations nor even merely a matter of prudential regulation accompanying structural deregulation; it is intimately bound up with institutional and technological issues. On the basis of a detailed analysis of the banking system the paper demonstrates the need for major institutional and technological changes in the Indian financial sector in order to face the challenges posed by liberalization and rapid growth. Not only regulatory hindrances be removed, but there should be a positive bias in favour of change. We do believe that changes would take place even without regulatory support, but we also believe that regulatory intervention could hasten the process and make it less painful.

9. NBFCSformation regulation and remedies,Raghvendra Singh Raghuvanshi according to

this article endeavor to address the intricacies involved in the business of Non-Banking Financial Companies (hereinafter to be referred as NBFC). Starting from the basic introduction about NBFC and the laws governing the NBFCs, with detailed provisions of law and directions issued by different regulators, right from its formation and functions to the regulation of its operation in the market. It shall also deal in detail with the actions available against the NBFCs in noncompliance with the norms prescribed by different regulators and includes judicial approach towards NBFCs along with their functions and compares between NBFCs and Foreign Institutional Investor.

10. Performance Review of NBFCs The current performance of NBFCs is especially commendable

considering the turmoil of the 1990s, when the regulatory authority tightened its jaws around the sector and many companies had to shut shop. In fact, top NBFCs like HDFC, LIC Housing Finance, REC, PFC and Shriram Transport Finance have forged brands for themselves, which has helped them raise finance at low rates from the bond market. NBFCs have become wiser than before. For instance, many preferred to deliberately put a hold on disbursements in December 2008, waiting for the financial environment to cool down. As the economy begins to look up, NBFCs are ideally placed to take advantage of the opportunities it presents.

11. RBI permission must for NBFCs to open subsidiaries abroad With an aim to regulate the credit

system to the advantage of the country, the Reserve Bank today said NBFCs cannot open subsidiaries or enter into joint ventures abroad without its permission. No NBFC shall open
10 | P a g e

subsidiaries/joint ventures/ representative office abroad or shall make investment in any foreign entities without obtaining prior approval in writing from the Reserve Bank of India, the central bank said in a notification. It said investments will be permitted only in those entities having their core activity regulated by a financial sector regulator in the host jurisdiction or country. Besides, the aggregate overseas investment by non-banking financial companies (NBFCs) should not exceed 100% of their Net Owned Fund (NOF). The overseas investment in a single entity, including its step down subsidiaries, by way of equity or fund based commitment shall not be more than 15% of the NBFCs owned funds, RBI said.The central bank said the directions, which have come into effect from today, to NBFCs is necessary for the purpose of enabling it to regulate the credit system to the advantage of the country.
12. NBFCs cant be partners in partnership firms- RBI The Reserve Bank on Wednesday

prohibited Non-Banking Finance Companies (NBFCs) from contributing to the capital of a partnership firm or become a partner of such entities. The central bank also asked NBFCs, which have already contributed capital or are partner in such firms, to exit from such arrangements at the earliest. In view of the risks involved in NBFCs associating themselves with partnership firms, it has been decided to prohibit NBFCs from contributing capital to any partnership firm or to be partners in partnership firms, RBI said. In cases of existing partnerships, NBFCs may seek early retirement from such arrangements, it added. There are about 300 NBFCs registered with RBI and some of them have large investments in, and have contributed capital to, partnership firms.

13. RBI circular on All Deposit Taking NBFCs CRAR Fifteen percent w.e.f March 31, 2012 The

Reserve Bank of India (RBI) said on Thursday that all deposit taking non-banking financial companies (NBFCs) should maintain a minimum capital ratio consisting of Tier-I and Tier-II capital of 15% from March 31, 2012. Earlier such NBFCs had to maintain a minimum capital ratio of 12% of the aggregate risk weighted assets on the balance sheet and of risk adjusted value offbalance sheet items. Non Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, every deposit taking NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capital, which shall not be less than 12% of its aggregate risk weighted assets on balance sheet and of risk adjusted value of off-balance sheet items. However, in terms of paragraph 16 of Non Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms every systemically important non-deposit taking NBFC (NBFC-ND-SI) has to maintain a minimum capital ratio consisting of Tier I and Tier II capital,
11 | P a g e

which shall not be less than 15% of its aggregate risk weighted assets on balance sheet and of risk adjusted value of off-balance sheet items by March 31, 2011. It has been decided to align the minimum capital ratio of all deposit taking as well as systemically important non-deposit taking NBFCs to 15%. Accordingly, all deposit taking NBFCs shall maintain a minimum capital ratio consisting of Tier I and Tier II capital, which shall not be less than 15% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items w.e.f. March 31, 2012. 14.

12 | P a g e

CHAPTER 3

BASIC INFORMATION OF NBFCS

13 | P a g e

NBFCs

Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still exercised under bank regulation.

Services provided

NBFCs offer all sorts of banking services, such as loans and credit facilities, private education funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs and other obligations. These institutions also provide wealth management such as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice on merger and acquisition activities. However they are typically not allowed to take deposits from the general public and have to find other means of funding their operations such as issuing debt instruments.

Working and operations

The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI)within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act. As per the RBI Act, a 'non-banking financial company' is defined 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; (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. Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company. This registration authorises it to conduct its business as an NBFC. For the registration with the RBI, a company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution, should have a minimum net owned fund (NOF) of Rs 25
14 | P a g e

lakh. The term 'NOF' means, owned funds less, (i) investments in shares of subsidiaries/companies in the same group/ all other NBFCs; and (ii) the book value of debentures/bonds/ outstanding loans and advances, including hire-purchase and lease finance made to, and deposits with, subsidiaries/ companies in the same group, in excess of 10% of the owned funds. Registration

The registration process involves submission of an application by the company in the prescribed format along with the necessary documents for RBI's consideration. If the bank is satisfied that the conditions enumerated in the RBI Act, 1934 are fulfilled, it issues a 'Certificate of Registration' to the company. Only those NBFCs holding a valid Certificate of Registration can accept/hold public deposits. The NBFCs accepting public deposits should comply with the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998, as issued by the bank.

Some of the important regulations relating to acceptance of deposits by the NBFCs

They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. They cannot offer gifts/incentives or any other additional benefit to the depositors. They should have minimum investment grade credit rating. Their deposits are not insured The repayment of deposits by NBFCs is not guaranteed by RBI.

Classification: - Depending upon their nature of activities, non- banking finance companies can be classified into the following categories: Development institutions
15 | P a g e

finance

Leasing companies Investment companies

House finance companies

Venture capital companies Discount houses & guarantee

Corporate companies

development

16 | P a g e

The functions of NBFCS They are just like banks; there are few differences between both the institutions. (i) (ii) (iii) NBFC cannot accept demand deposits NBFC is not part of the payment and settlement system as well as it cannot issue Deposit insurance facility of Deposit Insurance & Credit Guarantee Corporation is

cheques drawn on itself not available for NBFC depositors unlike in the case of banks.

Industry structure:-

Types of NBFCs registered with the RBI

Equipment leasing company:- is any financial institution whose principal business is that of leasing equipments or financing of such an activity. Hire-purchase company:- is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions. Loan company:- means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity). Investment company:- is any financial intermediary whose principal business is that of buying and selling of securities.

CHAPTER-4

NEED AND SCOPE OF STUDY

NEED OF THE STUDY

According to the present crises facing by the banking industry there is a need to study whether The Non-Banking financial companies (NBFC) can serve the purpose for the banks. NonBanking Financial Companies (NBFC) have rapidly emerged as an important segment of the Indian financial system. Moreover, NBFCs assume significance in the small business segment as they primarily cater to the credit requirements of the unorganized sector such as wholesale & retail traders, small-scale industries and small borrowers at the local level. SCOPE OF THE STUDY
To analyze the growth of NBFC in Indian economy and their role in the Indian market.

To study for need of financial inclusions by mergers of NBFCs with banks. Highly skewed private financial sector of India.

SAMPLING DESIGN:
Targeted banks:, HDFC

DATA SOURCES:
Secondary Data: Internet, journals, books, magazines, etc.

CHAPTER-5

RESEARCH METHODOLOGY

RESEARCH OBJECTIVES:

To evaluate growth and performance of NBFCs To analyze the market for NBFCs

RESEARCH DESIGN:
Our research is Descriptive in nature as the NBFCS industry is well-developed in India and lot of research has already been done in this area. The study is going to be on the secondary data collected from various issues of Reserve Bank of India Bulletin and Report on Trend and Progress of Banks in India. Average, standard deviations and coefficient of variations will be computed. To examine the financial performance of NBFCs, ratio analyses will be carried out. Various ratios will be computed : gross income to total assets, fee income to total asset , operating expenditure to total assets, net profit to total assets, Profit After Tax (PAT) to net worth, dividend to paid up capital, dividend to net worth, tax provision to Profit Before Tax (PBT), dividend to PBT/PAT and profit retained to PAT.

RESEARCH METHODOLOGY:
1) AREA OF SURVEY: The survey will be done for four banks. The study environment will be the banking industry. 2) PLAN OF ANALYSIS: We will use financial statements of the bank in order to calculate different ratios required for ratio analysis and comaparative analysis considered to be the best available methods. 3) SAMPLING TECHNIQUE: Convenience sampling will be done for the selection of the NBFCS.

RESEARCH TOOL:
Ratio Analysis Comparative study.

TENTATIVE CHAPTERIZATION

CHAPTER-1 CHAPTER 2 CHAPTER CHAPTER 3 CHAPTER 4 CHAPTER 5 CHAPTER 6 CHAPTER 7 CHAPTER 8 CHAPTER 9 CHAPTER 10

INTRODUCTION

BASIC INFORMATION OF NBFCS

INDIAN NON BANKING FINANCIAL COMPANIES NBFSC PROFILE LITERATURE REVIEW NEED AND SCOPE OF STUDY RESEARCH METHODOLOGY DATA ANALYSIS & INTERPRETATION FINDINGS AND RECOMMENDATIONS CONCLUSION BIBLIOGRAPHY

CHAPTER-6

BIBLIOGRAPHY

REFERENCES
JOURNAL REFERENCES
1. Rastogi A.B. :Ghose Amitabh Structural Features of Indias Financial System 2. Pandey I.M. Management of Financial Institutions: An Inquiry into the Extent of

Professionalism in IDBI, IFCI and ICICI

3. Vadde Suresh(2009) Performance of non bankng financial companies in india-an

evaluation 4. Gursharan Singh Kainth Financial performance of non banking financial institutions in india
5. Basu shyamal (1999) Restructuring Rural Financial Institutions

6. Raghvendra Singh Raghuvanshi NBFCsFormation regulation and remedies 7. Reserve bank of india bulletin, august 2009 8. Seema saggar, financial performance of leasing companies,1990 9. Harihar T.S. Non Banking Finance companies, The Imminent squeeze, February 1999 10. Bhole L.M. Financial Institutions and markets, TATA MC Graw Hill Publishing CO.Ltd. 1992 11. http://taxguru.in/rbi/rbi-permission-nbfcs-open-subsidiaries.html
12. http://taxguru.in/partnership-act/nbfcs-partners-partnership-firms-rbi.html 13. http://taxguru.in/rbi/rbi-circular-on-all-deposit-taking-nbfcs-crar-fifteen-percent-w-e-f-

march-31-2012.html OTHERS LINKS

http://business.gov.in/business_financing/non_banking.php

BOOKS REFERRED
1. Kothari, C.R., (2010), Research Methodology: Methods and Techniques, Wishawa

Publication, Delhi. 2. Gupta, K. Shashi, Sharma, R.K., Gupta Neeti., (2010), Financial Management, Kalyani Publication. Financial management.