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A project report submitted by an MBA student on the financial performance and growth of non-banking financial companies. It includes an introduction to NBFCs, their registration requirements, types, current status, role, functions, and a comparison with commercial banks. It also covers the top NBFCs in India, theoretical background, literature review, and research methodology. The document defines NBFCs and financial institutions according to the Reserve Bank of India and categorizes NBFCs based on their size and activity.
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Declaration Acknowledgement Executive summary 1 1 INTRODUCTION 1.1 Introduction to Non Banking Financial Companies 3 1.2 Requirement for registration of NBFC with RBI 5 1.3 Type of NBFC 6 1.4 The current status of NBFCs on India 9 1.5 Role of NBFC 12 1.6 Functions of NBFCS 14 1.7 Commercial bank v/s NBFC 15 1.8 Top NBFCS of India 16 1.9 Theoretical background 26 2 LITERATURE REVIEW 29 3 RESEARCH METHODOLOGY 3.1 Meaning of research and methodology 34 3.1.1 Meaning of research 34 3.2 Objectives of study 34 3.3 Research problem 34 3.3.1 Research design 35 3.3.2 Sampling design 35 3.3.3 Data collection 35 3.3.4 Limitations of study 36
Executive summary Non- Banking Financial Companies are an important segment of the Indian Financial system in extending credit to the unbanked segments of the society particularly to micro, small and medium enterprises. They are classified into different categories based on their status and principal activities. In this paper, an attempt has been made to analyze the performance of the five different categories of NBFCs in India across 2015 to 2019. The performance is analyzed by examining key indicators like Liquidity ratio, Profitability Ratio and Debt to Equity Ratio. The findings indicate that the selected categories of NBFCs differ significantly in terms of Liquidity and Profitability ratios from one another. India is a developing country where large sections of the population are unbanked which give rise to several forms of financial intermediaries including non - banking financial companies. A Non- Banking Financial Company (NBFC) is a company registered under the Companies Act 1956 engaged in the business of loans and advances acquisition of stocks, equities, debt etc issued by government or any local authority or other marketable securities like leasing, hire purchase, insurance business , chit business. NBFC sector has evolved considerably in terms of size, operations, technological sophistication, and entered into newer areas of financial services and products. It is essential to analyze and measure the growth of NBFCs for better understanding about the transformation of financial intermediaries in the context of Indian banking system. Financial performance can be measured using solvency and profitability ratios and applying statistical tools to analyze the results. NBFCs are playing a crucial role in economic development of a country. They cater to needs of people in both rural and urban areas through various schemes which helps in bridging the credit gaps. NBFCs do enjoy flexibility in operations when compared to banks. Some of the top NBFCs in India are Power Finance Corporation Limited, Mahindra & Mahindra Financial Services Limited, Muthoot Finance Ltd. Etc. This project ss is mainly focused on the studying the growth of NBFCs and finding the reasons or factors behind their performance and non- performance. The financial performance is analyzed through ratio analysis technique and results are interpreted for 5-year period.
systematic way, it has explained each term in detailed i.e. what is financial institution? What is non-banking? An NBFC is a company registered under the Companies act, 1956 or Companies act, 2013 and is engaged in the Business of financial Institution. Section 45I(f) of the Reserve Bank of India act, 1934 defines “Non-Banking Financial Companies” as (i) A financial Institution which is a company; (ii) A non-banking financial institution which is company and which has its principal business the receiving of deposits, under any scheme or arrangement or in any order manner, or in lending in any manner; (iii) Such other non-banking financial institution or class of such institution, as the bank may, with the previous approval of the central government and by notification in the Official gazette, specify; Section 45I(c) of the Reserve Bank of India act, 1934 defines the term “Financial Institution” as Financial institution means any non-banking institution which carries on as it’s business or part of its business any of the following activities, namely: (i) The financing, whether by way of making loans or advances or otherwise, of any activities other than its own; (ii) The acquisition of shares, stocks, bonds, debentures or securities issued by government or local authority or other marketable securities of a like nature; (iii) Letting or delivering of any goods to a hirer under hire-purchase agreement as defined in clause (c) of section 2 of the hire purchase act, 1972; (iv) The carrying on of any class of business; (v) Managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kooris as defined as any law which is for the time being in force in any state, or in any business, which is similar thereto; (vi) Collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscription or by sale of units, or other instruments or other any manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from
whom monies are collected or to any other person, but does not include any other institution, which carries on as its personal business:
Section 45-IA of the RBI Act, 1934 states that- No Non-Banking Financial company shall commence or carry on the business of a Non- Banking Financial Institution without- ➢ Obtaining Certificate of Registration; and ➢ Having Net Owned Fund of Rs. 2 crores (Prior to the issuance of notification dated 21st April, 1999 the requirement of having minimum Net owned fund was revised from 25 lac to 2 crores) However, as per revised regulatory framework if a NBFC having NOF less than Rs. 2 crores then such companies need to increase the NOF in the following manner ➢ Rs. 1 crore before 1st April, 2016; ➢ and Rs. 2 crores before 1st^ April, 2017. An application for the registration needs to be submitted by the company in the prescribed format along with the necessary documents for the RBIs consideration. RBI has specified different indicative list of documentation/information to be submitted along with for the application for NBFC-CIC (Core Investment Companies), NBFC-Factors, NBFC-MFI (Micro Finance Company), and other NBFCs. However, in order to avert dual registration, RBI has exempted certain class of companies from the requirement of registration with the RBI.
(v) Money got in normal course of business, by method for – Security Deposits, Dealership Deposits, sincere cash, and advance against request of merchandise, properties or administrations. (vi) Any sum got from an individual or a firm or a relationship of a people not being a body corporate, enlisted under any institution identifying with cash loaning which is for now in power in any state;
NBFCs are categorized into two different categories viz. Deposit accepting and non-Deposit accepting. The non-depositing NBFCs further bifurcated into:
ASSET FINANCING COMPANY
Bank of India Act. While in the case of NBFCs – D, their borrowing capacity is limited to a certain extent by the CRAR norm, there are no restrictions on the extent to which NBFCs – ND may leverage, even though they are in the financial services sector.
Banks and NBFCs compete for some similar kinds of business on the asset side. NBFCs offer products/services which include leasing and hire-purchase, corporate loans, investment in non-convertible debentures, IPO funding, margin funding, small ticket loans, venture capital, etc. However, NBFCs do not provide operating account facilities like savings and current deposits, cash credits, overdrafts etc. NBFCs avail of bank finance for their operations as advances or by way of banks’ subscription to debentures and commercial paper issued by them. Since both the banks and NBFCs are seen to be competing for increasingly similar types of some business, especially on the assets side, and since their regulatory and cost-incentive structures are not identical it is necessary to establish certain checks and balances to ensure that the banks’ depositors are not indirectly exposed to the risks of a different cost-incentive structure. Hence, following restrictions have been placed on the activities of NBFCs which banks may finance:
NBFCs arising from the sale of – a) Commercial vehicles (including light commercial vehicles); and b) Two-wheeler and three-wheeler vehicles, subject to certain conditions; c) Investments of NBFCs both of current and long term nature, in any company/entity by way of shares, debentures, etc. with certain exemptions;
Offerings (IPOs).
in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of Non-Banking Financial Companies, i.e. equipment leasing and hire-purchase finance companies, loan and investment companies, Residuary Non-Banking Companies (RNBCs). Should not enter into lease agreements departmentally with equipment leasing companies
Banks and NBFCs operating in the country are owned and established by entities in the private sector (both domestic and foreign), and the public sector. Some of the NBFCs are subsidiaries/ associates/ joint ventures of banks – including foreign banks, which may or may not have a physical operational presence in the country. There has been increasing interest in the recent past in setting up NBFCs in general and by banks, in particular. Investment by a bank in a financial services company should not exceed 10 per cent of the bank’s paid-up share capital and reserves and the investments in all such companies, financial institutions, stock and other exchanges put together should not exceed 20 per cent of the bank’s paid-up share capital and reserves. Banks in India are required to obtain the prior approval of the concerned regulatory department of the Reserve Bank before being granted Certificate of Registration for establishing an NBFC and for making a strategic investment in an NBFC in India. However, foreign entities, including the head offices of foreign banks having branches in India may, under the automatic route for FDI, commence the business of NBFI after obtaining a Certificate of Registration from the Reserve Bank. NBFCs can undertake activities that are not permitted to be undertaken by banks or which the banks are permitted to undertake in a restricted manner, for example, financing of acquisitions and mergers, capital market activities, etc. The differences in the level of regulation of the banks and NBFCs, which are undertaking some similar activities, gives rise to considerable scope for regulatory arbitrage. Hence, routing of transactions through NBFCs would tantamount to undermining banking regulation. This is partially addressed in the case of NBFCs that are a part of banking group on account of prudential norms applicable for banking groups
earn good amount of profit.
5. Provide Housing Finance: NBFC’s, mainly the Housing Finance companies provide housing finance on easy term and conditions. They play an important role in fulfilling the basic human need of housing finance. Housing Finance is generally needed by middle class and lower middle-class people. Hence, NBFC’s are blessing for them. 6. Provide Investment Advice: NBFC’s, mainly investment companies provide advice relating to wise investment of funds as well as how to spread the risk by investing in different securities. They protect the small investors by investing their funds in different securities. They provide valuable services to investors by choosing the right kind of securities which will help them in gaining maximum rate of returns. Hence, NBFC’s plays an important role by providing sound and wise investment advice. 7. Increase the Standard of living: NBFC’s play an important role in increasing the standard of living in India. People with lesser means are not able to take the benefit of various goods which were once considered as luxury but now necessity, such as consumer durables like Television, Refrigerators, Air Conditioners, Kitchen equipment, etc. NBFC’s increase the Standard of living by providing consumer goods on easy installment basis. NBFC’s also facilitate the improvement in transport facilities through hire- purchase finance, etc. Improved and increased transport facilities help in movement of goods from one place to another and availability of goods increase the standard of living of the society. 8. Accept Deposits in Various Forms: NBFC’s accept deposits forms convenient to public. Generally, they receive deposits from public by way of depositor a loaner in any form. In turn the NBFC’s issue debentures, units’ certificates, savings certificates, units, etc. to the public.
9. Promote Economic Growth: NBFC’s play a very important role in the economic growth of the country. They increase the rate of growth of the financial market and provide a wide variety of investors. They work on the principle of providing a good rate of return on saving, while reducing the risk to the maximum possible extent. Hence, they help in the survival of business in the economy by keeping the capital market active and busy. They also encourage the growth of well- organized business enterprises by investing their funds in efficient and financially sound business enterprises only. One major benefit of NBFC’s speculative business means investing in risky activities. The investing companies are interested in price stability and hence NBFC’s, have a good influence on the stock- market. NBFC’s play a very positive and
1. Receiving benefits: The primary function of NBFC is receive deposits from the public in various ways such as issue of debentures, savings certificates, subscription, unit certification, etc. thus, the deposits of NBFC are made up of money received from public by way of deposit or loan or investment or any other form.
loans as compared to NBFC’s. Commercial banks.
interest on deposits and charge higher rate of interest on loans as compared to Commercial banks.
Commercial banks are regulated by Banking Regulation Act 1949 and RBI. NBFC’s are regulated by different regulation such as SEBI, Companies Act, National Housing Bank, Unit Fund Act and RBI.
commercial banks hold a variety of assets in the form of loans, cash credit, bill of exchange, overdraft etc. NBFC’s specialize in one types of asset. For e.g.: Hire purchase companies specialize in consumer loans while Housing Finance Companies specialize in housing finance only.
1. Power finance corporation ltd. Power Finance Corporation Ltd is a leading power sector public financial institution and a non-banking financial company providing fund and non-fund based support for the development of the Indian power sector. The company is engaged in power sector financing and the integrated development of the power and associated sectors. They provide large range of Financial Products and Services like Project Term Loan Lease Financing Direct Discounting of Bills Short Term Loan and Consultancy Services etc for various Power projects in Generation Transmission and Distribution sector as well as for Renovation & Modernization of existing power projects.
Revenue Rs. 33,362.90 crores Operating Income Rs. 30045.7 crores Total assets 361787.26 crores Total equity 45,164.
2. Rural Electrification Corporation Rural Electrification Corporation Ltd is a Navratna Central Public Sector Enterprise under the Ministry of Power. The company is engaged in the financing and promotion of transmission distribution and generation projects throughout India. Their main objective is to finance and promote rural electrification projects all over the country. They provide financial assistance to State Electricity Boards State Government Departments and Rural Electric Cooperatives for rural electrification projects sponsored by them. The company provides loan assistance to SEBs/State Power Utilities for investments in rural electrification schemes through its extensive network of 23 offices across the country Revenue ₹ 30007.50 crore Operating income ₹ 26021.28 crore Total assets ₹ 347030.08 crore total equity ₹35396.43 crore Net income (^) ₹4972.27 crore
