Debt Finance Study

A COMPARATIVE STUDY OF NBFC IN INDIA 2011
EXECUTIVE SUMMARY
CHAPTER -1 INTRODUCTION
1.1 Type of NBFCs
1.2 Regulations of NBFCs
1.3 Guideline for new deposits
1.4 Responsibilities
1.5Current Scenario
CHAPTER-2 Literature review
2.1 Importance of NBFCs
2.2 Role of NBFCs
2.3 On Global Crisis
CHAPTER-3 RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN
3.2 Objective
3.3 Scope of the study
3.4 Data collection
3.4.1 PRIMARY DATA
3.4.2 SECONDARY DATA
3.5 Field Work Plan
Chapter-4 MAJOR PLAYER AND SELECTED COMPANY OF STUDY
4.1 SHRIRAM TRANSPORT FINANCE COMPANY LTD
4.1.1 Economic Review & commercial vehicle industry overview
4.1.2 STFC Introduction
4.1.3 Financial performance
4.1.4 Recent NCD
4.1.5 Issue Objective
4.1.6 SWOT
4.2 L&T FINANCE HOLDING
4.2.1 Indian Economy
4.2.2 L&T Finance holding structure
4.2.4 IPO Issue & Utilization of Fund
4.3 India Infoline investment services Limited.
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4.3.1 Indian Consumer Lending market

4.3.3 IIISL NCD issue & Fund utilization
4.4. LIC Housing Finance
4.4.1 Indian Housing Finance scenario
4.4.2 Financial Performance
4.4.3 Macro Economic Analysis
4.4.4 Opportunities & Threats
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Chapter-5 Indian Bank Vs NBFCs

5.1 Top 5 banks and NBFCs with highest profitability
5.2 Banking versus NBFCs regulatory arbitrages in India
Chapter -6 Porters five forces
Chapter-7 FINDING AND MANAGERIAL IMPLICATIONS
7.1 Findings
7.1.1 Disbursements-Sharp fall during the crisis
7.1.2 Cost of funding
7.2.3 Assets Quality
CHAPTER-8 RECOMMENDATION AND CONCLUSION
8.1 Recommendation
8.2 Conclusion
REFERENCES
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Executive Summary
The study presents a comparative study of NBFCs in India. There are almost 13000 registered NBFCs
in India. The study is aimed to provide an holistic view of the NBFC industry. NBFC fulfills the financial
gab by providing loan at a lower rate of interest. The major player of each field.
1. Shriram Transport Corporation Ltd
2. L&T Finance holding Ltd
3. India infoline investment services limited
4. Housing Finance Industry: LIC Housing Finance
The study also compare the Indian Banks V/s NBFC. It was found that even at the time of the economic
slowdown NBFC was more profitable. Porters five forces was also used to analyze the industry and to
find the competitiveness in the industry. 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 service market of INDIA.
It is encouraging that the NBFC sectors importance is finally being acknowledged across FS market
constituents as well as the regulators. However, the importance attached to the scoter is often
transcending into misplaced exuberance. Over simplified and vague drivers for NBFC valuation such as
strategic fit and customer base, can never substitute dispassionate business analytics. A rational
assessment of the intrinsic value of NBFCs factoring issue such as past performance, structural
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weaknesses of the sector (for instant funding disadvantages), along with the identification of real
capabilities are essential to insure that the equilibrium between price paid and value realized is reached
to the extent possible. In the absence of this, India is sure to witness the reopening of the NBFC horror
story albeit with the new chapter on the erosion of NBFC investment value affecting investors across
categories.
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CHAPTER-1
INTRODUCTION
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A Non Banking Financial Company (NBFC) is a company registered under the companies Act, 1956 and
is engaged in the business of loan and advances, acquisition of share/stock/bonds/debentures/securities
issued by Government of local authority or other securities of like marketable nature, leasing, hirepurchase, insurance business, chit business but does not include any institution whose principal business
is that of agriculture activity, industrial activity, sale/purchased/ 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
is also a non-banking financial company (Residuary non-banking company)
NBFCs doing function akin to that of bank; however there are few differences:
An NBFC cannot accept demand deposit.
an NBFC is not a part of the payment and settlement system and such an NBFC cannot issue cheque
drawn on itself; and
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for
NBFC depositors unlike in case of Banks.
1.1TYPES OF NBFCS
Originally, NBFCs registered with RBI were classified as:
Equipment leasing company;
Hire purchase company;
Loan company;
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Investment Company.
However, with effect from Dec-6-2006 the above NBFC registered with RBI have been reclassified as
Assets Finance company (AFC)
Investment company (IC)
Loan company (LC)
1.2REGULATIONS OF NBFCS
In term of the section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered
with RBI to commence or carry on any business of non-banking financial institution as defined in clause
(a) of section 45 I of the RBI Act, 1934. However to obviate dual regulation, certain categories of
NBFCs which are regulated by other regulatory are exempted from the requirement of registration with
RBI viz. Venture capital Fund / Merchant Banking companies / stock broking companies registered with
SEBI, Insurance company holding a valid certificate of Registration issued by IRDA, Nidhi companies as
notified under section 620A of the companies act 1982 or Housing Finance Companies regulated by
National Housing Bank.
A company incorporated under company Act 1956 and desirous of commencing of non banking financial
institution as defined under Section 45 I (a) of the RBI Act, 1934 should have a minimum net owned fund
of Rs.25 Lakh ( raised to Rs 200 Lakh w.e.f April 21, 1999). The company is required to submit its
application online by accessing RBIs secured website https://secweb.rbi.org.in/COSMOS/rbilogin.do
(the application companies do not need to log on to the COSMOS application and hence user id of these
companies are not required). The company has to click on the CLICK for company registration on the
login page. A window showing the excel application from available for download would be displayed.
The company cane then downloads suitable application form (i.e. NBFC or SC/RC) from the above
website, key in the data and upload the application form. The company may note to indicate the name of
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the correct regional office in the field of C/8 of the annx Identification Particulars worksheet of the
Excel application form. The company would then get a Company Application Reference Number for the
COR application filed on-line. Thereafter, the company has to submit the hard copy of the application
form (indicating the Company Application Reference Number of its on-line application), along with the
supporting documents, to the concerned Regional Office. The company can then check the status of the
application based on the acknowledgement number. The Bank would issue issue Certificate of
Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934
are satisfied.
All NBFCs are not entitled to accept public deposit. Only those NBFCs holding a valid Certificate of
Registration with authorization to accept public deposit can accept / hold public deposit besides having
minimum stipulated Net Owned fund (NOF) should also comply with the directions such as investing part
of the funds in liquid assets, maintain reserves, rating etc. issued by the Bank.
Yes there is the ceiling on acceptance of public deposits. An NBFC maintaining required NOF / Capital
to risk assets Ratio (CRAR) and complying with the prudential norms can accept public deposits as
follows:
Category of NBFC having minimum NOF of Rs 200 lakhs

AFC*maintaining CRAR of 15% without credit rating
Rs.10
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Ceiling on public deposit

1.5 times of NOF of

Crore whichever is
less
AFC with CRAR of 12% and having minimum investment
Grade credit rating
4 times of NOF
LC/IC**with CRAR of 15% and having minimum investment

Grade create rating
1.5 times of NOF
*AFC=Assets Finance company

**LC/IC=Loan company / Investment company
As has been notified on June 17, 2008 the ceiling on level of public deposits for NBFCs accepting public
deposits but not having minimum net Owned Fund of Rs 200 lakh is revised as under:
Category of NBFC having NOF more revised Ceiling on public than Rs 25 Lakh but less than Rs.200 lakh
deposits AFCs maintaining CRAR of 15% without credit rating and equal to NOF, AFC with CRAR of
12% and having minimum investment 1.5 times of NOF grade credit rating.
LCs / IC with CRAR of 15% and having minimum investment Equal to NOF grade credit rating
Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or
compounded at rates not shorter than monthly rests.
The NBFC are allowed to accept / renew public deposits for a minimum period of 12 months and
maximum period of 60 months. They cannot accept deposits payable on demand.
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NBFC cannot offer interest rate higher than the ceiling rate prescribed by the RBI from time to time. The
present ceiling is 12.5% per annum. The interest may be paid or compounded at rests not shorter than
monthly rests.
NBFCs cannot offer gift, incentives or any other additional benefits to the depositors.
NBFCs (except certain AFCs) should have minimum investment grade credit rating.
The deposits with NBFCs are not insured.
The repayments of deposit by NBFCs are not guaranteed by RBI.
Certain mandatory disclosures are to be made about the company in the application from issued by the
company soliciting deposits.
Effective from April 24, 2004, NBFC cannot accept deposit from NRIs except deposits by debit to NRO
account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR
(B) account. However, the existing NRI deposits can be renewed.
1.3GUIDELINE FOR NEW DEPOSITS

Customer identification: Know your customer (KYC) should be the key guiding principle for
identification of an individual / corporate customer (depositor or borrower).
Accordingly, the KYC framework should have two-fold objective, (i) to ensure customer
identification and verifying his identity and residential address; and (ii) to monitor transactions
of a suspicious nature.
NBFCs should ensure that the identity of the customer, including beneficial owner is done based
on disclosures by customers themselves.
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Typically easy means of establishing identity would be documents such as Permanent Account
Number (PAN), ration card, driving license, Election commissions identity card, passport in
case of individual and registration certificate, partnership deed / agreement and other reliable
documents in respect of companies, firms and other bodies.
Verification through such documents should be in addition to the introduction by a person known
to the NBFC.
Procedures for existing customers
In respect of existing customer, NBFCs should ensure that gaps and missing information in
compliance of KYC guideline on customer identification procedure is filled up and completed
before June 30, 2004.
Ceiling and monitoring of cash transactions.
NBFCs would normally not have large cash withdrawals and deposits.
However, whenever transactions of Rs.10L (1 Mn) and above are undertaken, they should keep
record of these transactions in a separate register maintained at branch, as well as at Registered
office.
Such information should be made available for regulatory and investigating authorities, when
demanded.
Guidelines and monitoring procedures
The Board of director of NBFCs should formulate policies and procedures to operationalise the
guidelines as put in place and effective monitoring system to ensure compliance by their
branches.
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Early computerization of branch / office reporting will facilitate prompt generation of such
reports and monitoring.
Internal control systems
Duties and responsibilities should be explicitly allocated among the staff for ensuring that
policies and procedures are managed effectively and that there is full commitment and
compliance to an effective KYC programme in respect of both existing and prospective customers
/ clients.
Internal audit/inspection
Internal auditors must specifically scrutinize and comment on the effectiveness of the measures
taken by branches / offices of NBFC in adoption of KYC norms and steps towards prevention of
money laundering.
Specific cases of violation should be immediately brought to the notice of head / controlling /
registered office.
Record keeping
NBFCs should prepare and maintain proper documentation on their customer relationships and
cash transactions of Rs.10L or above.
The records of all the transactions should be retained for at least ten year after the transaction
has taken place and should be available for perusal and scrutiny by audit functionaries as well as
regulator and law enforcement authorities; as and when required, at the branch as well as at
registered office.
Training of staff and management
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It is important that all the operating and management staff is made fully aware of the
implications and understand the need for strict adherence to KYC norms.
NBFCs may take suitable steps to impart training to their operational staff on anti -money
laundering measures.
1.4RESPONSIBILITIES.
The NBFCs accepting public deposits should furnish to RBI
i. Audited balance sheet of each financial year and an audited profit and loss account in
respect of that year as passed in the annual general meeting together with a copy of the report of
the Board of Directors and a copy of the report and the notes on accounts furnished by its
Auditors;
ii. Statutory Annual Return on deposits NBS1;
iii. Certificate from the Auditors that the company is in a position to repay the deposits as and
when the
claims arise;
iv. Quarterly Return on liquid assets;

v. Half-yearly Return on prudential norms;
vi. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above or
with assets of Rs. 100 crore and above irrespective of the size of deposits ;
vii. Monthly return on exposure to capital market by companies having public deposits of Rs. 50
crore and above; and
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viii. A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns
on prudential norms as at (v) above.
1.5CURRENT SCENARIO
Nearly 11 years after the last of the two banking licences were issued by RBI to private sector entities,
the government has again started the process of allowing the better-managed non- banking finance
companies (NBFCs) to graduate to full-fledged banks. FM Pranab Mukherjees Budget proposal on
Friday was the first step towards the same.
The second step will be enacted on Tuesday morning. A select group of officials from top NBFCs, under
the aegis of the Finance Industry Development Council (FIDC), the trade body for NBFCs in India, are
meeting R Gopalan, the banking secretary in the finance ministry, to present a case for select NBFCs to
be converted into full-fledged banks, sources said. About 12-15 NBFCs and corporate houses having
presence in the financial sector are expected to join the race to float a bank.
The finance minister is convinced that there is a huge need for low -cost financing at the semi- urban and
rural areas in India, said a industry source. The financial services industry believes the Budget
proposal was a reflection of the same. In the finance ministry things are moving in the right direction and
the banking secretarys meeting proves the same, said the source. FIDC office bearers could not be
contacted during the extended weekend the last Union Budget, the FM had announced that RBI is
considering giving additional banking licenses to private sector players, including NBFCs. This was
ostensibly to further financial inclusion and also to improve the size and sophistication of the Indian
banking system. The announcement set the financial markets on fire with a lot of conjecturing as to who
would be the lucky few. The access to low-cost current account and savings accounts and the ability to
offer all financial products under one roof were cited as major attractions for NBFCs to rush to seek
banking licenses. It was also expected that RBI would give new licenses to private players very soon. But,
an analysis reveals a different picture. Neither is RBI in a hurry to issue fresh licenses nor are many
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NBFCs keen to get into commercial banking. The reasons for this are manifold. RBI rules are stringent
for commercial banks as they are the visible face of the Indian financial system and commercial banks
are primarily the custodians of public money. RBI places restrictions on commercial banks in their
lending operations. Out of Rs 100 taken in as deposits, approximately Rs 30 has to be set apart as
statutory requirements towards CRR and SLR. This leaves the banks with Rs 70 to lend. Out of this, 40%
has to be statutorily lent towards the priority sector as defined by RBI. This leaves banks with
approximately Rs 42 to lend at their own discretion. Many NBFCs would definitely find this as restrictive
to say the least.
As per the guidelines of 2001, NBFCs seeking a banking license should have a minimum paid-up capital
of Rs 200 crore, which must be increased to Rs 300 crore within 3 years of conversion into a bank.
Further, banks have to invest large funds in fixed assets and information technology primarily to
facilitate financial inclusion, risk management, anti money laundering, etc. These huge capital
expenditures increase the payback period for the investments made. Also, banking-as-a-business model is
far more people-, process- and product-driven than a simple NBFC model. For example, in order to
adopt universal banking the staff needs to be multi-skilled in banking functions. So, the operating
expenses will be substantially higher, which, in turn, would reduce the profitability of operations. Also,
there are restrictions on ownership and voting rights. Current stipulations cap voting rights at 10%
higher rights require the specific approval of
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Chapter-2
Literature review
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2.1 IMPORTANCE OF NBFCS
According to RBI Non Banking Finance Companies (NBFCs) is a constituent of the institutional structure
of the organized financial system in India. NBFCs perform a significant and important role in our
financial system. They facilitate the process of channelizing of public savings and provide better return to
the depositors. We are aware that due to liberalization and globalization, banking industry and financial
sector has gone through many reforms. In the present economic environment it is very difficult to cater
need of society by Banks alone so role of Non Banking Finance Companies and Micro Finance
Companies become indispensable. The activities of non-banking financial companies (NBFCs) in India
have undergone qualitative changes over the years through functional specialization. The role of NBFCs
as effective financial intermediaries has been well recognized as they have inherent ability to take quicker
decisions, assume greater risks, and customize their services and charges more according to the needs of
the clients. While these features, as compared to the banks, have contributed to the proliferation of
NBFCs, their flexible structures allow them to unbundle services provided by banks and market the
components on a competitive basis. The distinction between banks and non-banks has been gradually
getting blurred since both the segments of the financial system engage themselves in many similar types
of activities. At present, NBFCs in India have become prominent in a wide range of activities like hirepurchase finance, equipment lease finance, loans, investments, etc. By employing innovative marketing
strategies and devising tailor-made products, NBFCs have also been able to build up a clientele base
among the depositors, mop up public savings and command large resources as reflected in the growth of
their deposits from public, shareholders, directors and their companies, and borrowings by issue of nonconvertible debentures, etc.
According to KPMG survey The Indian Non Banking Finance Company (NBFC) sector has often been
relegated to the shadows, in most discussions on the Indian Financial Services (FS) industry. Banks,
insurance companies and capital market players take centre stage and invariably, NBFCs attract public
attention only during times of crisis. Little attention has been paid to the silent but effective manner in
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which NBFCs have spread their operations across the country. NBFCs have provided financial solutions
to sections of society who hitherto were at the mercy of unorganized players for credit and savings
products, which were delivered on economically and socially usurious terms. Ironically, in recent times,
NBFCs are once again in the spotlight for their perceived strengths and capabilities rather than their
problems. While this re-rating ought to bring cheer to a much maligned sector, a degree of caution needs
to be instilled within potential investors in NBFCs, who need to clearly understand the true drivers of
value for finance companies. This understanding is imperative to enable a better judgment of the intrinsic
worth of NBFCs. This article proceeds to illustrate the key factors responsible for the strong re-rating of
the NBFC sector, as well as discuss the validity of each of these factors, as actual drivers of value. Today,
the NBFC sector is as financially sound as it has ever been. To an extent, this can be attributed to the
very problems affecting the sector which have resulted in the purging of several players, leaving the fittest
few to dominate the landscape. Taking the Reserve Bank of Indi as (RBI) definition of reporting
NBFCsas a proxy for non- dormant players, a mere 24 NBFCs held 92.7 percent of the total assets of all
NBFCs in 2005-2006. The balance assets, amounting to less than 8 percent of the total, were fragmented
across 439 NBFCs. In addition to this consolidation, at present, NBFCs in general are well-capitalized
with strong parent support. A majority of active NBFCs reported capital adequacy ratios exceeding 12
percent
2.2 ROLE OF NBFCS

According to EPW Research Foundation (EPWRFThe Indian economy is going through a period of rapid
`financial liberalization'. Today, the `intermediation' is being conducted by a wide range of financial
institution through a plethora of customer friendly financial products. The segment consisting of NonBanking Financial Companies (NBFCs), such as equipment leasing/hire purchase finance, loan and
investment companies, etc. have made great strides in recent years and are meeting the diverse financial
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needs of the economy. In this process, they have influenced the direction of savings and investment. The
resultant capital formation is important for our economic growth and development. Thus, from both the
macroeconomic perspective and the structure of the Indian financial system, the role of NBFCs has
become increasingly important. The crucial role of Non Banking Finance Institutions (NBFIs) in
broadening access to financial services, and enhancing competition and diversification of the financial
sector has been well recognized. The main advantages of these companies lie in their ability to lower
transactions costs of their operations, their quick decision-making ability, customer orientation and
prompt provision of services. While NBFIs are sometimes seen as akin to banks in terms of the products
and services offered, this is strictly not accurate, as more often, NBFIs play a range of roles that
complement banks. Further, Status Note on NBFCs NBFIs can add to economic strength to the extent
they enhance the resilience of the financial system to economic shocks. A well developed and properly
regulated NBFI sector is thus an important component of broad, balanced, efficient financial system that
spreads risks and provides a sound base for economic growth and prosperity.
2.3 ON GLOBAL CRISIS
According to CARE: NBFC sector faced significant stresses on asset quality, liquidity and funding costs
due to the global economic slowdown & its impact on the domestic economy While all the NBFCs were
affected, the impact varied according to the structural features of each NBFC. Asset-liability maturity
(ALM) profiles, type of assets financed and origination / collection models followed were the primary
differentiators within NBFCs. The support provided by the Reserve Bank of India (RBI) highlighted the
explicit acceptance of the systemic importance of the sector. FY10 was marked by re-aligning of the
liability profiles, tightening of lending norms coupled with closing down of many of the unsecured loan
Segments. On a structural basis, the sector is now more robust due to the lessons learned by NBFCs from
this crisis. Profitability is expected to be lower than historical levels due to conservative ALM
management, higher provisioning and avoidance of high yielding unsecured loan segments. However
profits are at the same time expected to be much more stable & less susceptible.
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CHAPTER-3
RESEARCH
METHODOLOGY
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3.1 RESEARCH DESIGN
Since the research is for industry analysis and it is structured for NBFCS. The research uses secondary
data for analysis and interpretation.
3.2 OBJECTIVE
The confined objectives of the present study are:
To analyze the market of NBFCs in India
To study the financials of NBFCs
3.3 SCOPE OF THE STUDY

The study was limited to the Financial Service market of India which included NBFCs
Mainly from The study was completed within the time frame of 4 months starting from 1st June 2011 and
ending on 25st Sep, 2011. The target group of the study were the NBFCs
3.4 DATA COLLECTION
There are two methods of data collection that can be considered when collecting data for research
purpose. These data collection types include the following:
Primary data
Secondary data
Both the secondary and primary data collection methods were used in the study.
3.4.1 PRIMARY DATA
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The primary data required for this study was collected by visiting the financial services and analyzing the
information provided by them.
3.4.2 SECONDARY DATA
The secondary data for the research was collected from journals, research articles, books and internet
websites, annual reports etc whose details and references has been given in Chapter-2 and in References.
The source of the secondary data was British Library, NBFCs and Internet. Secondary data was the
main source in formulating the constructs of A comparative study of NBFCs in India.
3.5 FIELD WORK PLAN.

The study was conducted in Mumbai (RBI and visiting different institutions and analyzing the different
NBFCs Work.)
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CHAPTER-4
MAJOR PLAYERS AND SELECTED COMPANY
FOR STUDY
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4.1 SHRIRAM TRANSPORT FINANCE COMPANY LTD.
4.1.1 Economic Review
2010-11 was a year of revival for the most of the developed economics
. Global gross domestic product
recovered significantly during 2010 to 3.9percent on account of dynamic economic development in

emerging markets of Asia and South America, the positive effects of the government economic stimulus
program and the restocking of industrial inventories. Other growth impetus resulted from the world wide
rise in demand for capital goods and the market revival of international trade, which particularly allowed
export oriented economics such as Germany and Japan to recover quickly.
However develop economics in Europe continued to grapple with the higher debts, even as the emerging
nations continued to improve their economic clout. In the wake of the crisis, power has shifted from the
once unshakable developed world to rapidly growing nations such as India and China, whose
consumption power is leading the global recovery. The world is yet not out of the global financial
slowdown of 2008. The developed countries are still facing a demanding task of bringing their economies
back on track. The developing economies like India and China continue to propel the growth, based on
increasing in-house Consumption, demographic advantage and increased per capita income. The
increased standards of living are also leading to higher inflation, which in turn is making the cost of
funds dearer. The increased cost of funds would not only taper off the corporate margins but also limit
the spending Capacities of individuals thereby pressurizing the growth Rate of the economy.
The Indian economy is believed to emerge as the third largest economy by 2030. Sustaining the
envisioned growth of 8 percent per year for the next two decades would entail higher value-creation
across regional, industrial and individual levels. About 2/3rd of the entire Indian population resides in
rural and semi-urban regions. For a nation to grow in a true sense, it is as important for the growth to
trickle down to the deeper levels of the society.
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COMMERCIAL VEHICLE INDUSTRY OVERVIEW.
The total commercial vehicle (CV) segment accounts for about only 5 percent of total automobile sales in
India. The Indian Commercial Vehicle (CV) Industry is the lifeline of the economy. Approximately 66
percent of the goods and 87 percent of the passenger traffic in the country moves via road. The trends
have clearly indicated that the CV demand is closely correlated with GDP growth rate (more strongly
with the Index of Industrial Production, IIP) of the country and therefore, from the days of traditional allpurpose 9 tonner trucks; the industry has moved towards more usage specific vehicles. The developing
road infrastructure is giving a push to a modern Hub & Spoke model of distribution of goods, which in
turn is changing the kind of vehicles being deployed for goods transportation The Industry is now
witnessing a clear segmentation in demand, with the sales of 805,260 units commercial vehicles (CVs)
segment in the country is expected to register 13.6% growth during 2011-12. Production of CVs in India
had gone up from 497,676 units in 2009 to 742,676 units in 2010, registering 49.32% growth over the
last one year and a CAGR of 8.21% in the last 5 years.
Describing the Indian CV market as the fastest growing in the world, polarization of the truck segment
will drive growth in the Heavy Commercial Vehicle (HCV) and Light Commercial Vehicle (LCV)
segments, which is expected to drive volumes for the Indian CV market. The contribution of medium and
heavy commercial vehicles (M&HCV) to overall CV sales dipped from 51.09% to 44.64% during the
same period and is expected to reach 35.35% by 2015. It notes that the Union for FY 2011-12 had given
clear indications about heavy investments in the Indian infrastructure segment, which is expected to boost
the CV market. The growth in CV sales mainly due to improving conditions of state highways and
development of expressways, a fast growing economic, coupled with increasing disposable incomes, this
would generate demand for more than 1.8 million CVs by 2018.
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The Industry witnessed a healthy growth during the first half of the 2009-10, post which the CV sales
started declining at high rate. This can be primarily attributed
to the wreaking of macroeconomic
indicators, resulting in drop in freight availability, and restricted credit availability. However, in the
fourth quarter, the industry witnesses the slight
revival in sales, on a month on month basis, partly
driven by stimulus packages provided by the government. The key steps taken include reduction in excise
duty and provision of accelerated depreciation to benefit CV buyers. In addition to this, the government
also undertook measure to improve liquidity for NBFCs and provide financial assistance to state
Transport Undertakings for purchasing buses under the Jawaharlal Nehru national urban mission.
MAJOR DEMAND DRIVERS.

1. Roadways have remained a dominant transport mode:
Over the last few decades, roadways have dominantly improved their share due to greater
coverage, higher flexibility of door to door delivery and lower risk of handling losses. Further,
the governments investment in the development of national highways over the last few years has
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led to higher demand for road transport (Which are primarily transported though roadways);
Road freight is expected to account for 63.5%of the total freight movement.
2. Higher replacement demand: Higher CV sales over the last few years were also supported by
replacement demand which stemmed from stricter regulations on overloading and emissions. The
Supreme Court, in the November 2005, banned overloading of goods trucks and trailers in
excess of prescribed gross vehicle weight to reduce pollution, the automotive research.
3. OWNERSHIP TREND IN CVS: Shriram Transport caters to small truck operators (STO-owning
less than 5 trucks) and first time users (FTU), and is currently the only organised player
financing this segment (others are private financiers). STOs and FTUs control around 75% of
the total truck fleet; however, they have poor freight origination skill and are therefore dependent
on brokers for a majority of their contracts.
4.1.2 STFC (Introduction)

STFC is a part of the SHRIRAM conglomerate which has significant presence in financial
services viz., commercial vehicle financing business, consumer finance, life and general
insurance, and stock broking, chit funds and distribution of financial products such as life and
general insurance products and units of mutual fund. Apart from these financial services, the
group is also present in non-financial services such as property development, engineering
projects and information technology.
Our company was incorporated in the year 1979 and is registered as a Deposit taking NBFC
with Reserve Bank of India under section 45IA of the Reserve Bank of India Act 1934.
27 | J B I M S

STFC decided to finance the much neglected Small Truck Owner. Shriram understood the power
of Aspiration much before marketing based on Aspiration become fashionable. Shriram
started lending to the small Truck Owner to by new trucks. But we found a mismatch between the
Aspiration and ability. The truck Operator was honest but the equity at his command was not
sufficient to support the credit levels required to by a new truck. From Driver to Owner, even if
only of a Pre-owned Truck and from Pre-owned Trucks to New truck, we have been with him in
his journey of prosperity as he has been our partner in our road to success and leadership.
UNIQUE BUSINESS MODEL OF STFC.
CV Financing Business model
New
Pre owned (5-12 Year Old CVs)
Owned Fund
Average core lending business yields 1516%
Securitization
Average back-stop funding-Net spread:
5-6%
Target
T
Segment
Market
share
Performance
28 | J B I M S
Small truck owner (Less than 2-3 trucks)

with underdeveloped banking habits
Existing customer base upgrading to

new trucks
Leadership position with market

share of 20-25%
7-8%
AUM of approximately Rs.

278.73bn at the end of Q1 FY12
AUM of approximately Rs. 90.27bn

at the end o f Q1, FY12
Vehicles
sold during
FY06-11
Particular
LCV
MHCV
Total
FY06
2,07,446
1,43,237
3,50,683
FY07
2,75,600
2,47,040
5,22,640
FY08
2,71,045
2,50,361
5,21,406
FY09
1,83,541
2,00,581
3,84,122
FY10
2,87,776
2,44,503
5,32,279
FY11
3,53,621
3,22,749
6,76,370
4.1.3 SHRIRAM TRANSPORT FINANCE. (Financial performance)
STFCL is a major player in the domestic CV finance segment, with assets under
management of Rs.361.83 billion as on March 2011. It is the leader in the pre-owned CV
finance segment, with a market share of around 25 per cent. STFCL has also improved
its market position in the new CV finance segment, with a market share of around 8 per
cent. The company lends predominantly to the single-road transport operator (SRTO)
segment, which accounts for more than 95 per cent of its outstanding portfolio.
29 | J B I M S
30 | J B I M S
The company's profits have grown significantly over the past few years; the return on assets stood at
around 4.96 per cent for the year ended March 31, 2011. STFCL has also maintained its stable asset
quality, supported by its well-established origination, valuation, and collection mechanisms aligned to
the prevailing business practices in the SRTO segment. The company's gross non-performing assets, at
2.6 per cent as on March 31, 2011, as against 2.8 per cent as on March 31, 2010, compares well with the
industry average levels in the CV finance segment. However, STFCL's resource profile is average; while its
cost of funds declined in 2010-11 (refers to financial year, April 1 to March 31) from that in 2009-10, it
remains higher than that of its peers. Increase in interest rates and removal of priority-sector benefit on
loans to non-banking financial companies.
31 | J B I M S
The company had revenues of Rs. 5, 42,965 Lac and a net profit of Rs. 1, 22,988 Lac in the last
fiscal, a decent profit margin of 22.70%, and in the last 5 years the net income has grown at a CAGR
of 40%, and profits have grown at a CAGR of 47%. They have a NPA (Non Performing Loans) to Net
Asset Ratio of 0.43%. Their CAR (Capital Adequacy Ratio) was 20.53% against a RBI mandated
12.00%. Like the IIFL NBFC, the Shriram City Union NBFC also draws on the brand and the ecosystem
of their parent to grow their customer base. The promoters hold 53% of their stock.
PUBLIC ISSUE OF NCD,

The company is largely dependent on wholesale borrowings; borrowings from banks and
financial institutions constituted around 78 per cent of its total borrowings as on March 31,
2011. Considering the potential in raising fund by issue of non convertible debenture
(NCDs), The Board, at its meeting held on January 18, 2010, has decided to offer and allot,
subject to the aforementioned Regulations and such approval as many be necessary,
secured / unsecured, NCDs not exceeding Rs. 50000lac in one or more tranches through
another public issue.
4.1.4 RECENT NCD ISSUE.

Shriram Transport Finance Company Limited is offering NCD (Non Convertible Debentures) with
maximum interest rate of 11.60% to retail investors. The NCD has two options with tenure of 3
years and 5 years. The issue is open from 27 June 2011 to 09 July 2011. It is a public issue of NCDs
aggregating upto Rs. 50,000 lacs with an option to retain over-subscription upto Rs. 50,000 lacs for
32 | J B I M S

issuance of additional NCDs, aggregating to a total of up to Rs. 1,00,000 lacs. Following are the
interest rate and other details of Shriram Transport NCD:
4.1.5 ISSUE OBJECTIVE.
The company is making the current issue of redeemable non-convertible debentures to finance its
lending activities and investments, repay existing loans and meet the needs of business operations
including working capital requirements.
TERMS OF ISSUE:
Options
Frequency of Interest Payment
Minimum Application
I
II
Annual
Annual
Rs. 10,000/- (10 NCDs) (for all options of NCDs, namely Options
I and Option II either taken individually or collectively)
Face Value of NCDs (Rs./ NCD) Rs. 1,000 (1 NCD)
Rs. 1,000 (1 NCD)
Mode of Interest Payment
Through
Various Through
Various
options Available
options Available
Coupon (%) for NCD Holders in 11.10% per annum
11.00% per annum
Category I and Category II
Coupon (%) for NCD holders in 11.60% per annum
11.35% per annum
the Reserved Individual Portion
Coupon (%) for NCD holders in 11.35% per annum
11.10% per annum
the
Unreserved
Individual
Portion
Effective Yield (per annum)
For NCD holders in the For
NCD
holders
in
Reserved Individual Portion the Reserved
Individual
11.60%For NCD holders in the
Portion 11.35%
Unreserved Individual Portion
For NCD holders in the
11.35%
Unreserved Individual Portion
For all other NCD holders
11.10%
11.10%
For all other NCD holders
Put and call option
Exercisable at the end of Nil
48 months from the Deemed
Date ofAllotment
Tenor
60 Months* (5 Years)
36 Months (3 Years)
Redemption Amount (Rs./NCD) Repayment
of
the
Face Repayment of the Face
Value plus any interest that may Value plus any interest that
33 | J B I M S

haveaccrued at the Redemption may haveaccrued
Date,
Redemption
or at the
redemption
date
of
at
the
early Date.
if any Put Option or Call Option

is exercised, as the case may be*
*Subject to the exercise of the put and/or call option
Credit Rating of Shriram Transport NCD 2011
CRISIL
AA/Stable for an amount of upto AA/Stable for an amount of
Rs. 1,00,000 Lacs
upto Rs. 1,00,000 Lacs
CARE
CARE AA+ for an amount of upto CARE AA+ for an amount of
Rs. 1,00,000 Lacs
upto Rs. 1,00,000 Lacs
4.1.6 SWOT ANALYSIS

Strengths
The pioneer in the pre-owned commercial vehicles financing sector.
Knowledge-driven (Products as well as local customers) and relationship-based business model
Significant expertise and experience in valuation of pre owned CVs as well as in recovery / collection
of monthly payments from customer s.
Pan-India presence with 488 branch offices all over the country.
A well defined and scalable organization structure, capable of supporting growth.
Low delinquency as assets is backed with adequate cover and easy to repossess with immediate
liquidity.
Strong financial track record driven by fast growth in AUM with low Non Performing Assets (NPAs)
Experienced and stable management team.
Strong relationship with public, Private as well as foreign banks, institutions and investors.
34 | J B I M S

Weaknesses
The Companys business and its growth are directly linked to the GDP growth of the country. Any
slowdown in GDP growth may have a negative impact on the business.
Opportunities
Growth in CV market driven by the economic growth and the infrastructure develop in the country.
Strong demand for construction equipment
Strong demand for passenger CVs
Strong demand for pre-owned tractors
Loans for working capital requirement of CV users
Partnerships with private financiers will enable the company to enhance its reach without significant
investment in building infrastructure.
Threats
Maintaining relationship with customer who are mobile and have no proper documentation.
Maintaining assets quality.
Regulatory changes in NBFC and transportation sectors.
35 | J B I M S
4.2
L&T Finance Holdings is a financial holding company offering a diverse range of financial products and
services across the corporate, retail and infrastructure finance sectors, as well as mutual fund products
and investment management services, through our direct and indirect wholly-owned subsidiaries. Our
Company is registered with the RBI as a Systemically Important Non-Deposit Taking Non-Banking
Financial Company and has applied for registration as a Core Investment Company.L&T Finance Holdings
is promoted by L&T as a part of its corporate strategy meant to give a distinct identity to the financial
services business.
4.2.1 THE INDIAN ECONOMY
India's population is estimated to be approximately 1.176 billion with a GDP, on a purchasing power
parity basis ("PPP"), of approximately US$ 4,447.758 billion (` 198,325.5 billion). In the past, India has
experienced rapid economic growth, with its GDP growing at an average growth rate of 8.8% between
Fiscal Year 2003 and Fiscal Year 2008.Iin Fiscal Year 2009, with the growth rate of India's GDP
decelerating to 5.8% in the second half of Fiscal Year 2009, compared to 8.9% in Fiscal Year 2008.
36 | J B I M S

The table below sets out the comparison between India's real GDP growth in the 2009 and 2010 calendar
years, and its expected GDP growth during the 2011 and 2012 calendar years, as compared to that of the
United States, Japan, the United Kingdom, China and Brazil.
Countries Name
United States
Japan
United Kingdom
China
India
Brazil
Real GDP
Projected
Actual
2009
-2.60
-6.30
-4.90
9.20
6.80
-0.60
2010
2.80
3.90
1.30
10.30
10.40
7.50
2011
2.80
1.40
1.70
9.60
8.20
4.50
2012
2.90
2.10
2.30
9.50
7.80
4.10
The table above illustrates that in 2010 all the above mentioned countries registered positive real GDP
Growth, with India displaying a strong growth rate of 10.4%. According to the IMF World Economic
Outlook Update, April 2010, there have been four principal factors that have supported Asia's recovery:
firstly, the rapid normalization of trade, following the financial dislocation in late 2008, benefited Asia's
Export-driven economies; secondly, the bottoming out of the inventory cycle, both domestically and in
Major trading partners such as the United States, is boosting industrial production and exports; thirdly, a
resumption of capital inflows into the region has created abundant liquidity in many economies; and
Fourthly, domestic demand has been resilient, owing to strong public and private companies in many of
the region's economies. The IMF believes that, in both China and India, particularly, strong domestic
demand will support the recovery. In India, the growth in real GDP will be supported by rising private
demand, with consumption strengthening as a result of improvements in the labor market, and a boost
to investment brought about by strong profitability, rising business confidence and favorable financing
conditions.
37 | J B I M S

4.2.2 STRUCTURE OF L&T FINANCE HOLDING LIMITED
L&T Finance
Holding Limited
Corporate
Finance
group
Retail
finance
group
Construction
Equipment
Finance
Rural
Product
Finance
Transportation
Equipment finance
Distribution
of Financial
Products
Corporate
Loans and
Leases
Microfinance
Capital
Markets
Finance
Infrastructure
Finance group
Project Finance
and corporate
Loans
38 | J B I M S
Supply Chain
Finance
Equity
Investment
Financial Advisory
Services

4.2.3 FINANCIAL PERFORMANCE.
On a consolidated basis, L&TFH has an outstanding loan book of Rs179.43bn as on 31st Mar 11 as
against Rs114.46bn in the previous year, recording a magnificent 57% y-o-y growth. The Company had
income from operations of Rs20, 864mn and PAT of Rs3, 926mn during FY11 as against Rs14, 056mn and
Rs2,630mn during FY10, recording a 48.4% and 49.3%of y-o-y growth respectively.
39 | J B I M S

SOURCES OF FUND.
40 | J B I M S
In 2008, a little after the sub-prime crisis, Indian policy makers had to offer liquidity support to the NBFC
sector, driving home the risks inherent in the business model of some of these firms. That was prompted
also by the fact that many banks lend to NBFCs, which could mean risks being transferred to banks as
Major borrowing were from the Banks, Banks' exposure to NBFCs at the end of June this year was
16,9321 crore, which was over 50% of its total lending. The RBI has mandate the regulation, NBFCs has
to follow all the rule, Bank will not finance to NBFCs due to risky business model so NBFCs in the last six
months have been on a fund-raising spree. India's top five NBFCs have raised over 5,000 crore through
debt instruments.
RETAIL FINANCE GROUP.
Retail finance group provides financing to retails costumers for the acquisition of income generating
assets and activities that compromise construction equipment finance, transpiration equipment finance,
rural products finance and microfinance. At the end of the FY-11, retail group accounted for Rs.56.8bn
(37%) of the total loan book of L&TFH. Out of which, ~91% of the retail loans are secured. Its contribution
towards income from operations was 48% in FY11. As on 31st Mar 11 the companys exposure to
microfinance segment stood at Rs4.45bn, which accounts for 6.8% of the total loans of Retail Finance
group. Out of this 50% are accounted by Andhra Pradesh, which may pose a threat to the asset quality.
41 | J B I M S

CORPORATE FINANCE GROUP.
Corporate Finance Group offers financial products and services to corporate clients, and comprises the
segments of corporate loans and leases (in the form of asset-backed loans, term loans, receivables
discounting, short-term working capital facilities and operating and finance leases), supply chain finance
(which includes vendor and dealer finance products) and capital markets products. At the end of FY11,
corporate group accounted for Rs35.8bn (~20%) of the total loan book of L&TFH. Out of which, ~71% of
the corporate loans are secured. Its contribution towards income from operations was Rs3.7bn during
FY11 (~18%).
42 | J B I M S
NET INTEREST MARGIN.
RETURN RATIOS.
43 | J B I M S
NPA RATIOS.
L&T Infrastructure Finance Company (L&T Infra)

L&T Infra, a wholly-owned subsidiary, conducts infrastructure finance business, which provides financial
products and services to customers engaged in infrastructure development and construction, with a
focus on the power, roads, telecommunications, oil and gas, urban infrastructure and ports sectors in
India. The Infrastructure Finance Group comprises the segments of project finance and corporate loans,
equity investments and financial advisory services. L&T Infra is registered with the RBI as an NBFC-ND-SI
44 | J B I M S

and an IFC, which allows it to optimize its capital structure by diversifying its borrowings and accessing
long term funding resources, thereby expanding its financing operations while maintaining its
competitive cost of funds. In addition, L&T Infra has been notified as a Public Financial Institution (PFI).
The income from operations of the Infrastructure Finance Group for FY11 was Rs7bn and recorded a
robust CAGR of 88% over the last four years. Its contribution in the total income of L&TFH is 33.3%. The
total loans and advances outstanding as on 31st Mar 11 were Rs71.9bn. Despite slowdown in the
infrastructure sector in recent past, L&T Infra had negligible net NPA ratio of 0.53% in FY11. The
company has an exposure of 28.7% in the power sector. Of the total infrastructure loans, 28.7% are
accounted by the power sector.
45 | J B I M S
NET INTEREST MARGIN
46 | J B I M S

INCOME FROM OPERATION
PAT MARGIN
RETURN RATIO
47 | J B I M S

4.2.4 L&T Finance Holdings' Rs 1,750 crore IPO.
Utilization of fund
There will be 2 main uses for the funds raised from this IPO. They are going to pay off some of their
parents loans, and strengthen the capital base of the subsidiaries. In the prospectus, L&T Finance say
that they are going to raise Rs. 15,750 million, and use it to recapitalize, and pay off parent companys
debt in the following ratio
So, about a fourth of the money is going to repay debt from the promoter which is probably a good thing
since this debt is at a relatively high 9% interest rate
48 | J B I M S
49 | J B I M S

4.3 INDIA INFOLINE INVESTMENT SERVICES LIMITED.
IIISL, a subsidiary of India Infoline Limited (IIFL) is registered with Reserve Bank of India as a Non Banking
Finance Company Received RBI license for undertaking NBFC activities and commenced business In 2005,
IIISL became a public limited company - IIISL acquired Money line Credit Limited, an NBFC and
commenced consumer loan business in 2007. Acquired registration for Housing Finance business from
NHB - Mr A K Purwar, ex-SBI chairman joined the Board and appointed as Chairman of IIISL - Preferential
Allotment to Orient Global Tamarind Fund Pte. Ltd Singapore, an FII in 2009. Launched Gold loans in
2010. Launched Medical Equipment financing in 2011.
PRODUCT PORTFOLIO
Home Loan, Loan against Property
Tenure: home loans up to 20 years, loans against property up to 15 years
Upto 80% of value available for home loans, 65% for loans against property
Repayment through EMIs, or other specially customised repayment schemes
Balance transfers of existing loans obtainable, with additional cash in hand
Loan against Shares

Loans up to ` 180 crores. Tenure: 3 to 12 months. Competitive interest rates,
Funding against both diversified and concentrated securities.
Upto 600 approved Securities and Mutual Fund units.
Margins vary from 25% to 50% depending on securities.
Flexible margin financing and IPO funding schemes also available
50 | J B I M S

Healthcare Finance
Loans up to 85% of the cost of equipment, starting at ` 500,000. Tenure from 12 to 72 months.
Funding for medical and ancillary equipment.
Project finance and receivable financing available
Hospital construction and infrastructure finance
Leasing and advisory services. Choice of personal loans for doctors.
Gold Loan.
Cash against gold in 5 minutes flat.
Loans from ` 10,000 to 1,000,000.
Attractive interest rates.
Choice of EMIs, or interest service options.
Flexible tenure, according to your requirements
4.3.1 INDIAN CONSUMER LENDING MARKET
Despite the rapid growth of the financial services, India remains an under-penetrated market in terms of
credit Penetration. India has a large and rapidly growing middle class with increasing levels of
discretionary income available for consumption and investment purposes. As investments among Indian
consumers increase, the available credit in India has correspondingly increased. The last five years have
seen not only a great expansion of the Indian economy but also a great expansion of consumer lending.
Previously, Indian consumers were averse to the concept of using credit to fund purchases and preferred
to save prior to spending. Today, with a variety of consumer credit products being widely available,
Indian consumers are more willing to acquire assets through The consumer credit market in India has
51 | J B I M S

undergone a significant transformation over the last decade and experienced rapid growth due to
consumer credit becoming cheaper, more widely available and increasingly a more acceptable avenue of
funding for consumers. The market has changed dramatically due to the following factors:
1. Increasing desire by customers to acquire assets such as cars, consumer durables and houses on credit.
2. Fast emerging middle class and growing number of households who are credit worthy.
3. Improved terms of credit as interest rates in India fell sharply during early and mid-2000s and further
reduced interest rates offerings for sophisticated products.
4. Legislative changes that offer greater protection to lenders against fraud and potential default
increasing the incentive to lend.
5. Growth in assignment and securitization arrangements for consumer loans has enabled non-deposit
based entities to access wholesale funding and compete in the market based on ability to originate,
underwrite and service the consumer loan.
Despite high loan growth in consumer financing, it remains an under-penetrated market. We believe
demand for consumer loans will increase going forward in view of household gearing remaining low and
disposable income continues to rise rapidly.
HOUSING FINANCE SECTOR.
Opportunity in the mortgage market remains very large. Mortgage loans/ GDP ratio stands at 9% in
FY10 (Source: IMF, European Mortgage Federation). There is significant opportunity to grow this market
driven by huge demand and supply mismatch for dwelling units, rising income levels and favorable
affordability. Mortgage market has sustained over 25% CAGR over the last 10 years.
52 | J B I M S
Source: European Mortgage Federation, 2010, World Bank, 2010

Given the latent demand for mortgages, loan growth could be sustained at historical levels. The focus of
most lenders in mortgage lending is confined to salaried urban middle to high income segments. The
opportunity could be significantly expanded if the players were to focus on self employed segments as
well. If the market landscape were to be expanded, potential growth rate could be even higher.
KEY DRIVERS OF DEMAND:
1. Improved affordability:
A key driver of strong growth in mortgages over the last 10 years has been improved affordability. Rising
disposable Income, tax incentives and affordable interest rates have lead to improved affordability of
households. Per capita net National income grew 15% CAGR during FY05 through FY11 (Source: CSO).
The Government of India (GOI) instituted several incentives for buying property by households which
includes tax deduction on interest and principal repayment of home loans up to `150,000 and `200,000
respectively. The tax Incentives were enhanced between FY03 and FY08 making home loans more
affordable for households.
53 | J B I M S

2. Increasing urbanization:
India has been witnessing rapid urbanization over the last 10 years. Urbanization rate stood at 28% in
2001 and is expected to have risen rapidly through 2011. Rapid urbanization, favourable demographics
(60% of the population Are between age group of 15-59 years Source: GOI census data) are likely to
create demand for new homes and Hence demand for home loans.
3. Rise in property prices and higher saleable area leading to increase in average ticket size
According to CRISIL Research, Average Ticket Size (ATS a function of price per sq ft, area per unit and
the loan to- value (LTV) ratio) increased by 10-11 per cent in 2009-10. The ATS is estimated to have risen
to ` 1.59 million from ` 1.42 million a year ago. The top five players in the industry who constitute around
45 per cent of the overall disbursements saw an increase in ATS of 14 per cent in 2009-10. Rise in
property prices along with higher saleable area in the second half of the year led to increase in ATS. The
affordability of customers improved in the first half of 2009-10, as builders were offering reduced prices
as well as lower area per unit on account of impact of global slowdown in 2008-09. As the volumes grew
and economy recovered, builders started increasing property prices post September 2009, as was evident
in the markets like Mumbai and Delhi, which account for 28-30 per cent of the overall housing finance
disbursements. Consequently, builders launched many new projects with larger sq ft area, targeted at
the high-end segment.
LOAN AGAINST CAPITAL MARKET

Loan against security is yet another avenue for lending to corporate, HNIs, individuals for financing their
capital market exposures as well as households to tide over their financing gaps that arise from time to
time. Potentially, this could be a significant opportunity given that many small and medium enterprises
aspire to grow large. This product effectively serves the purpose of providing bridge financing for asset
54 | J B I M S

acquisition as well as infusion of capital into new ventures. There is no estimate of potential market
available, however, given the role that small businesses play in the overall economic development, this
would likely be a huge opportunity.
GOLD LOAN MARKET

India is one of the largest markets for gold. The organised gold 2010. It is expected to witness a 35%
CAGR between 2009-12. (Source: IDFC Indian Retail Finance). Indian consumers have a strong preference
for gold that emanates from cultural factors. Further, low level of financial inclusion and poor access to
financial products and services make gold a safe and attractive investment proposition.
Source: World Gold Council, IMaCS

As of FY10, accumulated Gold stock in India is estimated at around 18,000 tonnes which translates into
10% of the total global gold stock (source: IMaCS). Further, Indians accounted for 20% of global gold
jewellery demand. During the period 2002-09, annual gold demand has remained relatively stable at
around 700 tonnes despite the rise in prices from ` 15,026 to ` 51,150 per ounce. South India is the
largest market accounting for 40% of gold demand, followed by West at around 25%, North at 20-25%
and East at around 10-15% of annual Gold (source: IMaCS).Industry experts predict a favourable outlook
55 | J B I M S

for gold for coming years as well, as India registers strong growth that is expected to continue fuelling
the appetite for gold. Further, growth in middle income classes and increase in the
earning capacity of women; a core customer group for gold is expected to further boost the demand of
gold loans
Size and Potential of Gold Loans Market in India

The organized gold loans market in India is estimated at around ` 350-400 billion in FY10 (source:
IMaCS). At this size, the organized gold loans market translates into 1.2% of the value of total gold stock
in India (source: IMaCS) and signifies a hugely under penetrated market with a large potential. The
organized segment has registered a growth of 35-45% and is expected to continue growing at the same
rate over the next few years and reach a portfolio size of ` 520-550 billion by FY11 (source: IMaCS).
37%CA
GR
44%
Source: IMaCS
Key demand drivers of gold loans
High Levels of indebtedness: The NSSO 2003 survey on situational assessment of farmers indebtedness
in the country estimated that 60.4 % of rural households were farmer households, and of them 48.6 %
56 | J B I M S

were indebted. The incidence of indebtedness was highest in Andhra Pradesh (82%) followed by Tamil
Nadu (74.5 %), Punjab (65.4 %), Kerala (64.4 %), Karnataka (61.6 %) and Maharashtra (54.8 %).
Policy Focus: Government views gold loans as effective means to meet the potential micro-finance
demand in India. In 2006-07, Government of Tamil Nadu set a target of jewel loans worth ` 60 billion
(75% of the total loan disbursement target) for co-operatives in Tamil Nadu (source: IMaCS).
Increasing interest of the lenders in the segment: Given the recent rise in default rates in the personal
loan category, banks have started focusing on the gold loans segment, as the segment offers attractive
returns (though lower than personal loans) with very low levels of defaults.
Changing customer attitudes and preferences: Indian customers are experiencing changing
psychographics (debt averse psychology) promoting creation of assets through growth in financial
liabilities which is reflected in an annual growth of more than 35-40% in retail credit over the FY02-10
(source: IMaCS). There is a strong view that gold loans market can be expanded to Northern and
Western regions of India, if one were to launch a targeted promotion and consumer education
campaign. Several large Finance companies started expansion efforts in these regions and the initial
response has been favourable
HEALTHCARE FINANCING MARKET.

The Indian healthcare market is one of the prominent contributors to the countrys gross domestic
product (GDP) having attracted large number of players- domestic as well as international during the
past few years. Highly having attracted large number of players- domestic as well as international
during the past few years. Highly qualified doctors and scientists, state-of-the-art technology and low
57 | J B I M S

costs have helped India become an attractive global destination for medical tourism, clinical studies, and
research and development (R&D) programs. The sector offers massive growth potential and a chance to
capitalize on its expansion, especially as the country sees a rise in the incidence of lifestyle-related
diseases. A growing elderly population paired with a rise in income levels also emphasize the need for
better facilities in the country. The sector comprises the hospitals and allied sectors such as diagnostics
and pathology, medical equipment and supplies, and medical tourism
Healthcare Market Size and Potential

The US$ 50 billion-a-year health care industry has grown rapidly and is now the second-largest servicesector employer in the country, providing jobs to about 4.5 million people directly or indirectly. Currently,
8 per cent of Indias GDP is spent on healthcare. By 2020, the Indian healthcare industry is estimated to
be worth US$ 275.6 billion. A growing economy, lifestyle related health issues, improving healthcare
insurance penetration, government initiatives and increasing disposable income are the key drivers that
will create a robust future for this industry. The industry has witnessed the establishment of world class
pharmaceutical manufacturing and emergence of a vibrant biotechnology industry. Medical tourism too
has been rising in recent years. To conclude, the Indian
Healthcare sector is on a fast growth track.
Medical Equipment and Devices

On the back of relatively low customs duty rates (9.2 per cent 25 per cent) combined with an increasing
number of healthcare centers specializing in advanced surgery, India offers substantial opportunities for
the direct supply of high-technology, specialized medical equipment, products and systems.
58 | J B I M S

Healthcare - Government Initiatives
The Ministry of Health & Family Welfare proposes that domestic funding should be increased to at least
2 per cent of the GDP in the 12th Plan period. The Government has increased the plan allocation for the
public health spending to US$ 5.96 billion in 2011-12 from US$ 4.97 billion in 2010-11 and US$ 4.35
billion in 2009-10 respectively.
RETAIL FINANCE DISBURSEMENTS

Rs.2.5Tn-FY10 and Rs.4.2Tn Estimated
59 | J B I M S

TOTAL LOAN BOOK (PRODUCT WISE BREAK UP)
When you look at thses segments you realize that while almost all their loans are secured, they are
secured against assets that have volatile prices. Stocks are very volatile, and with the current Greater
Noida issue going on you cant be too sure of property either.
.
60 | J B I M S

Performance Highlights
61 | J B I M S
62 | J B I M S
The company has increasing revenue and control over the administrative expenses. Company has been
able to maintain to earn increasing interest margin. IIISL has been efficiently managing the NPA that
effect in the PAT. PAT has been showing increasing trends over the years. IIISL has increasing debt/equity
ratio which bad for the company but it has not yet crossed the danger level. Still company has the
efficiency to pay out the interest cost on regular basis. Return on Assets is decaling for a movement but it
is assured by the other performance that this will improve over the period of time as company is
managing its PAT incremental.
4.3.3 IIIFL NCD issued.

India Infoline issued NCDs worth Rs. 3,750 million, with a green-shoe option of another Rs. 3,750 million,
and that makes it a reasonably large NCD issue compared to the size of the company.
As a NBFC, their primary business is lending, and their total income for the fiscal 2011 was Rs. 4,697.76
million and profit after tax was Rs. 922.48 million, which is a pretty decent profit margin of 19.2%. 99%
of the loans are secured, and they have a CAR (Capital Adequacy Ratio) of 29.95%.
63 | J B I M S
The issue has been rated AA- or Stable by ICRA, and CARE AA- by CARE.
The prospectus says that while a cover of 1.10 is needed to be made on this issue as this is a secured debt
issue, there will be other creditors who will have pari passu charge over the security that they provide.
This means that other creditors may also have equal rights on the security provided by the company for
this issue, and thats a definite risk.
The India Info line NCD will have three options for investors with different maturities and rate of
interests. Two of them will pay interest every year, while a third will pay a lump sum at the end of the
maturity period.
Here are the details of the three options.
64 | J B I M S
4.4 LIC HOUSING FINANCE.

Indias housing finance industry comprises of banks and housing finance companies. They have
contributed to new residential home loans at a compounded annual growth rate (CAGR) of more than 30
percent during the period 2002-2007. This has been due to the combined effect of a booming economy
and low interest rates.
Further, steady prices and continuation of tax concessions to self-occupied residential home borrowers
are contributors to the growth of the industry. The average age of borrowers has declined over the years,
while the number of double income households has grown significantly enabling them to borrow higher
loan amount due to higher repaying capacity. The scenario of unprecedented growth in housing finance,
driven by low interest rates, increasing purchasing power and attraction of the yield in this sector has
begun to show signs of change last year. There has been a decrease in demand during the last one year.
Earlier to that i.e., during 2006 to 2007 home prices increased at a CAGR of 30 to 40 percent against a 20
percent increment in salaries witnessed in metros and large cities. This had affected the buyers
affordability. As the borrowing cost for banks and housing finance companies steadily increased in line
with rising interest rates in the economy in the past two years up to Q3 of 2008-09, banks and housing
finance companies resorted to hike in interest rates so as to maintain their interest spreads. Interest
rates on new home loan originations have increased significantly by 200 basis points during April2008
to September October 2008. As a result a higher proportion of monthly income was being paid out as
home loan equated monthly installments (EMI).
The combined effect of an increase in property prices and interest rates has meant that home loan
buyers, who would have had to borrow less at an interest rate of 8.75 percent a year ago, now have to
borrow more to buy the same property due to higher property prices at higher interest rates of 10.5 to 11
percent. This trend has resulted in both lower affordability i.e., an average home at a higher multiple of
annual income, and higher debt burden (meaning that a larger proportion of income gets spent as home
65 | J B I M S

loan EMI). Further, the increase in interest rates on fresh loans to 10.5 to 11 percent from 8.75 percent
meant increase in debt burden i.e., higher installment to income ratio. Along with, the economic down
turn and consequential apprehensions of job insecurity and income reduction led to slump in the market.
However the scenario has taken the reverse turn in the last quarter of the financial year 2008-09, which
was evident from the higher booking of flats, and sharp increase in the disbursements. Real estate
developers have taken sensible decision in reducing or slashing rates in major centers specially Mumbai,
Thane, Navi Mumbai, Delhi NCR and Bangalore to en cash on the existing demand in the real estate
market. The good deals might be offered for a few weeks or for the first ten properties or for a killer deal
for a time-bound two days or similar schemes but yes, the writing is clear on the wall that the willingness
to connect with the real pricing has dawned on the developers to sell at reduced prices to encourage
more and more sales. The sales teams in the builder/ developer offices are at their all-time creative best
with sales tactics. They now understand clearly that with buyers unwilling to relent on unrealistic pricing,
there is an even greater need to price competitively, maybe with a lower profit margin, than holding on
to the price and project as the interest meter runs. These proactive steps should ensure renewed
demands and increased volumes during the current year. The Indian economy, which was on a robust
growth path up to 2007-08, averaging at 8.9 per cent during the period 2003-04 to 2007-08, witnessed
moderation in 2008-09, with the deceleration turning out to be somewhat sharper in the third quarter.
Industrial growth experienced a significant downturn and the loss of growth momentum was evident in
all categories, viz., the basic, capital, intermediate and consumer goods. However, the fiscal stimulus
packages of the Government and the monetary easing of the Reserve Bank will, however, arrest the
moderation in growth and revive consumption and investment demand, though with some lag, in the
months ahead. Furthermore, prospects of the agricultural sector also remain bright, and this will
continue to support the rural demand. Finally, in the wake of expected improvement in agricultural
66 | J B I M S

production as well as low international commodity prices, inflationary pressures are also anticipated to
remain at a low level through the greater part of the 2009-10.
4.4.1 INDIAN HOUSING FINANCE SCENARIO

Indias housing finance industry comprises of banks and housing finance companies. They have
contributed to new residential home loans at a compounded annual growth rate (CAGR) of more than 30
percent during the period 2002-2007. The scenario of unprecedented growth in housing finance, driven
by low interest rates and booming economy has begun to show signs of change last year. There has been
a decrease in home prices during the last one year. Earlier to that i.e., 2006 to 2008 home prices
increased at a CAGR of 30 to 40 percent against a 20 percent increment in salaried witnessed in metros
and larger cities. This had affected the buyers affordability. The average home buyer spent around 4
times his net annual income for purchasing a new residential home in the 3-4 years till March 2005.
(Source CRISIL report 19th February, 2009) As the borrowing cost for banks and housing finance
companies steadily increased in line with rising interest rates in the economy in the past two years up to
September 2008, banks and housing finance companies resorted to hike in interest rates so as to
maintain their interest spreads. Interest rates on new home loan originations had increased significantly
by 200 basis points during April 2008 to August September2008. As a result
a higher proportion of monthly incomes was paid as home loan equated monthly installments (EMI). But,
the scenario has taken the reverse turn in the last quarter of the financial year 2008-09 which was
evident from the higher booking of flats and sharp increase in the disbursements. As interest rates are
heading southward, public sector banks have set the pace Housing finance companies would follow the
suit. It may be mentioned here that with the decline in interest rates, LIC Housing Finance has passed on
150 basis points rate cut to the customers i.e. 75 basis points each on 1st January, 2009 and 1st April,
2009. Our interest rates are among the lowest in the industry. This has helped our company in retaining
67 | J B I M S

customers and maintaining high growth rates even in tough conditions. And interest rate is just one of
the factors. Transparency, hassle- free services, property prices and buyers repayment capacity are
equally important. The customer would not arrive at a decision solely based on the reduction in interest
rates for one year. LIC Housing Finance is one of the best players in the industry in terms of EMI as our
company has no hidden costs.
LIC HOUSING FINANCE.

LIC Housing Finance Ltd. is one of the largest Housing Finance Company in India Incorporated on 19th
June 1989 under the Companies Act, 1956, the company was promoted by LIC of India and went public in
the year 1994. The Company launched its maiden GDR issue in 2004. The Authorized Capital of the
Company is Rs.1500 Million (Rs.150 Crores) and its paid up Capital is Rs.850 Millions (Rs.85 Crores). The
Company is recognized by National Housing Bank and listed on the National Stock Exchange (NSE) &
Bombay Stock Exchange Limited (BSE) and its shares are traded only in Demat format. The GDR's are
listed on the Luxembourg Stock Exchange. The main objective of the Company is providing long term
finance to individuals for purchase / construction / repair and renovation of new / existing flats / houses.
The Company also provides finance on existing property for business / personal needs and gives loans to
professionals for purchase / construction of Clinics / Nursing Homes / Diagnostic Centres / Office Space
and also for purchase of equipments. The Company possesses one of the industry's most extensive
marketing network in India: Registered and Corporate Office at Mumbai, 6 Regional Offices, 13 Back
Offices and 158 marketing units across India. In addition the company has appointed over 1352 Direct
Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777 Customer Relationship Associates (CRAs) to
extend its marketing reach. Back Offices spread across the country conduct the credit appraisal and
administrative functions The Company has set up a Representative Office in Dubai and Kuwait to cater to
the Non-Resident Indians in the GLCC countries covering Bahrain, Dubai, Kuwait, Qatar and Saudi Arabia.
68 | J B I M S

Today the Company has a proud group of over 10, 00,000 prudent house owners who have enjoyed the
Company's financial assistance.
Profile & Progress
Provides loans for homes, construction activities, and corporate housing schemes.
Around 91% of the loan portfolio derived from the retail segment and the rest from large
corporate clients
Formed three new wholly owned subsidiaries in 2007-08 to promote marketing of
Financial products and venture capital fund.
Rated AAA by CRISIL for the 8th consecutive time in 2008

-09; maiden Fixed Deposit
Program received an FAAA/stable rating by CRISIL.
An offshoot of Life Insurance Corporation of India (LIC), incorporate in 1989.
Registered & Corporate Office at Mumbai with 6 regional offices, 13 Back Offices
And 130 marketing units across the country.
1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777 customers.
Relationship Associates (CRAs) comprise its pan-Indian marketing network.
Representative overseas presence in Dubai and Kuwait.

Listed on the Bombay Stock Exchange Limited, National Stock Exchange of India
Limited and the Luxembourg Stock Exchange.

69 | J B I M S
More than 10, 00,000 satisfied customers across the country since inception.
Reported a 23.90 percent increase in disbursals in 2008-09.
Improved return on net worth by 267 basis points to 23.80 percent in 2008-09.
Reduced net NPA to a record low of 0.21 percent in 2008-09.
Enhanced PAT 37.30 percent to Rs. 531.62 crore in 2008-09.
Un-interrupted dividend payment record since 1990.
Recommended 30 percent increase in dividend over previous year i.e. from
100 percent to 130 percent.
Interest income from housing loans increased 34.90 percent from Rs. 2036.79 crore in 2007-08 to Rs.
2747.65 crore in 2008-09. The net interest income grew by 31.97 percent from Rs.553.94 crore in
70 | J B I M S

2007-08 to Rs. 731.04 crore in 2008-09. Profit after tax surged 37.30 percent from Rs. 387.19 crore in
2007-08 to Rs. 531.62 crore in 2008-09. The main thrust continues on individual loans with a
disbursement growth of 41% during the year. However, project loans were also given due weight age
resulting in an overall disbursement growth of 34% over previous year. During the year, the Company
sanctioned 1, 32,707 individual Housing loans for Rs.20, 227.35 crore and disbursed 1,61,466 loans
for Rs.17,512.36 crore. Housing Loan to Individual i.e., retail loans constitute 89.49% of the total
sanctions and 87.95% of the total disbursements for the year 2010-11 compared to the last year's
figure of 78.43% and 83.81% respectively. The gross retail loan portfolio grew by over 37.52% from
Rs.34, 031.64 crore as on 31st March, 2010 to Rs.46, 800.27 crore as on 31st March, 2011.
FINANCIAL PERFOMANCE.
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72 | J B I M S
The asset quality of the corporate loan book is good with the gross non-performing assets from this
segment at 0.08 per cent as on October 31, 2010. This is lower than the gross NPAs from the retail
segment which stood at 0.84 per cent. LIC Housing Finance has managed to keep its NPAs under 1 per
cent for more than nine consecutive quarters. As on September 30, the net NPAs of the company stood at
0.21 per cent.
Operations:
Funds mobilized grew 49.38 percent from Rs. 7489.70 crore in 2007-08 to Rs.11,188.33 crore in
2008-09.
Sanctions (Ind.+Proj.) increased 26.46 percent from Rs. 8617.88 crore in 2007-08 toRs. 10898.47
crore in 2008-09.
Disbursements (Ind.+Proj.) grew 23.90 percent from Rs. 7071.48 crore in 2007-08 toRs. 8762.01
crore in 2008-09.
Loan portfolio grew 26.18 percent from Rs. 21936.41 crore in 2007-08 to Rs.27679.28 crore in
2008-09
Margins:
73 | J B I M S
Net interest margin improved by 10 basis points from 2.85 percent in 2007-08 to 2.95percent in
2008-09.
Return on equity grew by 267 basis points from 21.13 percent in 2007-08 to 23.80percent in
2008-09.
Net profit margin improved by 49 basis points from 17.82 percent in 2007-08 to 18.31percent in
2008-09
On funds
On the performance of the Company: In the turbulent times when Housing sector was passing
through rough patch, LIC Housing Finance largely could manage the environment well, in spite of
various global as well as domestic economic challenges and was successful introducing good
business growth by its inherent strength in meeting difficult challenges through unceasing and
untiring efforts. The Company has not only ensured consolidation of the gains achieved in the
past years, but also ensured further growth and increased profitability. The year 2008-09 has
been a year of further containment of defaults and NPA levels when compared to previous years
Lending operations.
The main thrust continues on individual loans with a growth of 25 percent as against 20percent
in the previous year. However, project loans were also given due weightage resulting in a modest
growth of 20 percent over previous year. During the year, the Company sanctioned 67,886
individual loans for Rs. 8,186.02 crore and disbursed 67,237 loans for Rs.7, 351.09 crore during
2008-09. Individual retail loans constitute 75.11 percent of the total sanctions and 83.94 percent
of the total disbursements for the year 2008-09 compared to the last years figure of 75.84
percent and 83.47 percent respectively. The retail (individual) loan portfolio grew by over 22
percent from Rs. 20,618.78 crore as on 31st March, 2008 to Rs.25, 252.87 crore as on 31st
March, 2009. The cumulative sanctions and disbursements since the incorporation, in respect of
74 | J B I M S

individual loans are: Amount sanctioned : Rs. 45,624.24 crore Amount disbursed : Rs. 42,993.98
crore
4.4.3 MACRO ECONOMIC ANALYSIS.

The Housing Finance Industry is one of the most keenly competitive segments of the Economy, with the
Banking sector having a significant presence. However, Housing Finance Companies with a dedicated
focus on the industry and better understanding of the underlying real estate markets stand on a better
footing when it comes to understanding the needs and requirement of the customers as also assessing
the risks in the industry. It may be mentioned here that with the decline in interest rates, LIC Housing
Finance has passed on 150 basis points rate cut to the customers during the calendar year 2009 so far 75
basis points each on1st January, 2009 and 1st April, 2009. Our interest rates are among the lowest in the
industry. This has helped our company in retaining customers and maintaining high growth rates even in
tough conditions. And interest rate is just one of the factors. Transparency, hassle-free services, property
prices and customer affordability are equally important. NHB has lower edits interest rates on refinance
to housing finance companies. Refinance for rural housing at
Concessional rate of 8 percent per annum for seven years has also been provided. ItsPLR has
been reduced to 10.75 percent per annum. The refinance facility of Rs. 4,000 crore extended by RBI to
NHB will be on-lent by NHB to housing finance companies with a cap of Rs. 400crore per housing finance
company with the condition that the refinance would be available attain interest of 8 percent, only for
loans below Rs. 20 lakh. Housing Finance, the Company, through its competitive pricing, transparency in
operations, wide distribution network and good customer service, has not only been able to show a good
growth in new business, but has shown an improved retention rate, which is reflected in high growth of
loan book.
75 | J B I M S

4.4.4 Opportunities.
There are many unique characteristics of housing distinguishing it from other goods. It is universal
necessity. Home ownership is a social goal, bringing social status to the buyer. Housing is also a relatively
expensive asset, often soaking up a lifetimes savings. Housing
Properties have a downward sloping demand curve, which means that less people would effectively buy
when prices are high and vice versa. At high prices, buyers postpone their buying decisions and opt for
rented accommodation. At low prices, people often purchase more than one house. Disposable incomes
determine purchasing power. Government policies relating to interest rates, mortgage subsidies, tax
rebate and other taxes like stamp duty etc. Also impact the housing property market. The housing sector
is marked by a variety of taxes and regulations. These are meant to ensure the safety of houses for
occupation and to confer rights of ownership to enable further transactions. Given that building or
acquisition of a house usually involves several intermediary agents (either statutory like registration
of various title documents or facilitating agents such as brokers, builders or financiers), the final cost of
acquisition includes not just the price of the property that is paid to the seller (in case the property is
purchased) but also all the intervening transaction costs. As for the housing property market in India, the
residential housing property segment constitutes about 75percent of the real estate market in terms of
value. Real estate development activity has shifted from metros to their suburbs and tier-two cities. A
gradual shift to tier-three cities and rural areas is taking place. Easy availability of finance from the
housing finance companies and commercial banks at lower interest rates, increased salaries and
availability of fiscal and tax benefits are propelling the demand for housing properties. The growth of the
Information Technology Enabled Services (ITES), industry has been a significant contributor of housing
property demand in recent years. ITES firms are moving from traditional centres like Mumbai, Delhi,
Bangalore, Hyderabad and Chennai to the National Capital Region, Pune, Chandigarh, Jaipur, etc. in
order to be cost effective. This is resulting in not only the boom in residential property markets but also in
76 | J B I M S

the institutional property markets in these cities. There is great demand for modern office buildings and
commercial spaces in India.
Threats (bottlenecks)
Impact of legal charges and documentation fees there are taxes / duties / fees payable to the state at
the construction stage. There are two aspects of the cost namely:
i) Monetary cost and :
ii) Cost in terms of time devoted in obtaining various permissions and clearances.
The number of permissions and documentation required can be quite large. Further, permissions have to
be taken from different departments and that too sequentially. This delays the process of housing
construction and occupation. The actual fees imposed by the government are not necessarily high but
the time taken to obtain requisite permissions is very long, procedures cumbersome and sometimes
involves extra payments to facilitate the movement of files and getting the transaction through, is
significant vis--vis the statutory fees. The delays highlight the sluggishness of the market by increasing
the gap between change in demand and the market response to it.
Future Outlook:
It is estimated that the housing finance industry will be able to maintain a higher growth in fresh
origination of residential home loans over next three to five years mainly due to increased affordability of
the borrower i.e. ratio of average property price to average annual income, on account of the falling loan
interest rates and decrease in property prices. The average age of borrowers has declined over the years,
while the number of double-income households has grown significantly thereby enabling them to borrow
higher loan quantum due to increased affordability and repayment capacity. The growth drivers will
continue to increase demand for self-occupied residential housing; Revival of economy will certainly lead
77 | J B I M S

to a steady increase in monthly incomes across key sectors. Rising proportion of double income
households, renewed confidence in higher income generation, reassurance of job security and availability
of variety of financing options should stimulate growth of the housing sector. All these factors will
further boost the impact of increased affordability, leading to the sec
tors steady and comfortable growth. Looking forward, LIC Housing Finance would like to remain focused
in end-user segment for growth and increased profitability and wish to make the coming year, a year of
further consolidation and progress by crossing greater milestones.
78 | J B I M S
CHAPTER-5
INDIAN BANKS V/S
NBFCS
79 | J B I M S

2009-10 was a difficult year, especially for the financial segment across the globe. However, Indias
strong macroeconomic fundamentals and financial policies have shielded it from the turmoil.. The study
considered those banks that have announced their results between 15th April -20th May 2009- 10 posted
on the website of Bombay Stock Exchange. They have analyzed in total 29 banks (both public & private
sector) and 7 NBFCs the) study has examined and compared the profitability of banks with NBFCs
during the financial year 2008-09. Simple average and profitability ratio of the two segments have been
studied Methodology - The AFP analysis of the Indian commercial banks & NBFCs profitability is
calculated using two broad parameters including net profit and total income. Profitability Ratio is a class
of financial metrics that is used to assess a business's ability to generate earnings as compared to its
expenses and other relevant costs incurred during a specific period of time.
Profitability is calculated as:
(Net Profit/Total income)*100
NBFCs more profitable than commercial banks despite slowdown Even as the worldwide financial crisis
and slowdown in key sectors of the Indian economy led the Non Banking Financial Companies to face
severe cash shortage during the financial year 2008-09, the overall profitability of NBFCs has remained
higher than the scheduled commercial banks. During the financial year 2008-09, Non- Banking Financial
Companies (NBFCs) average profitability stood higher at 18.90 per cent as compared to the banks with
10.08 per cent. The NBFCs generally operates on the model of lending to riskier projects with interest
rates higher than offered by the banking institutions. As the financial markets faced the heat of global
crisis during the financial year 2008-09, most of the NBFCs faced problems in fund raising. Among the
seven NBFCs, in 2008-09 the highest profitability was reported by Infrastructure Development Finance
Company Limited at 20.89 per cent, with total income stood at Rs.3626.38 crore and net profit at
Rs.757.73 crore. It was followed by Housing Development Finance Companies Limited (HDFC) and
Power Finance Companies Limited (PFCL) at 20.76 per cent and 20.67 per cent respectively. The
80 | J B I M S

Reserve Bank of India (RBI) monetary measures by cutting interest rates during 2008-09 has benefited
the NBFCs since many of them finance their operations through market borrowings aid Mr. Sajjan Jinda
President Aggregate net profit to total income ratio of 17 public sector banks and 12 private sector banks
reported to be 10.08 per cent during 2008-09.
5.1 Top 5 Banks and NBFCs with highest profitability

Top 5 Banks and NBFCs with highest
profitability
Bank
Profitability
Ratio
(2010-2011)
NBFCs
Profitability
Ratio (20102011)
Indian Bank
18.31%
Infrastructure Development Finance

Company Ltd
Bank of India
Axis Bank
Union Bank of India
15.92%
17.12%
11.25%
Housing Development Finance

companies Ltd
Power Finance corporation Ltd
LIC Housing Finance Ltd
16.11%
25.78%
17.14%
7.65%
Manappuram General Finance and

Leasing Limited
17.86%
State Bank of India
25.92%
Among the 17 public sector banks, the highest profitability was reported by Indian Bank and Bank of
India at 18.31 per cent and 15.92 per cent respectively. Out of the private sector banks the top positions
were occupied by Axis Bank and Yes Bank at 17.12 per cent and12.46 per cent respectively, among
others. The 7 NBFCs, aggregate total income grew by a whopping 57.3 per cent to Rs.28, 208.72 crore in
FY10 from Rs.17, 906.84 crore in the previous fiscal. However, the aggregate total income of 29 banks
have increased by 25.3 percent from Rs 2,69,055 crore in 2007-08 to Rs 3,37,206.9 crore in 2009-10.
Year-on-year performance of the 29 banks regarding net profit to total income ratio at the aggregate
level showed a marginal decline during FY09 with 10.08 percent as against FY08 recorded at 10.52 per
cent, while in the case of 7 major NBFCs, the ratio declined during 2008-09 at18.90 per cent as against
21.80 per cent in FY10.
81 | J B I M S

5.2 Banking versus NBFC regulatory arbitrage in India.
Banking Vs Non-Banking Financial Companies
Regulatory Arbitrage in India
Particular
Banks
NBFC's
Carrying on checking accounts,

remittance factions and typical retail
Banking
Permitted
Not Permitted
Acceptance of term deposits
Permitted subject to term

restrictions (short term
deposits are accepted by
banks
Permitted subject to
limitation, but the term of
deposit is at least 1 year.
Trusteeship function, nominee
Permitted
No express bar is there
Other functional Limitations
Banking regulation Act

expressly bars any business
other than that permitted by
Act (Sec 6(1))
1. For domestic NBFCs no

bar on non-financial
business, except that on
crossing of a certain barrier
(50% of income or assets),
the NBFC will lose its
character as an NBFC. 2.
For NBFC's having
international funding under
automatic route, any activity
included within the 19
permitted activities is
possible. Any other activity is
possible only with the express
FIPB approval.
Leasing and hire purchase
Banks are allowed to a limit

of 10% of their assets
No Limit
Operating Lease
Treated as a non-Financial
business, not permitted
Permitted , though treated as

non-financial business
Securitization
Permitted subject to capital

norms and other limitations
Permitted subject to capital

norms and other limitations
Functional restrictions
Licensing restrictions
82 | J B I M S
Any new bank needs a

license. Licensing norms are
tightly controlled and
generally, it is perceived to
be quite difficult to get a
license for a bank
It is comparatively much
easier to get registration as
on NBFC Besides, there are
some 30000 NBFC's
currently registered, many of
which may be available for
sale.
Indian ownership
Not more than 10% of capital

in a bank may be acquired
without the approval of the
RBI
While prior intimation of

takeover is required in case
of NBFCs, there is no need
for express permission for a
change in voting control.
There is no limit as to the
percentage holding permitted
in case of NBFCs
Foreign ownership
Up to 74% Capital in
banking companies may be
acquired for foreign owners.
100% capital may be held by

foreign owners subject or
minimum capitalization
requirement under FDI
norms
Basic norms
Present capital regulations

are based on Basle I. Basle II
is proposed to be
implemented effective 2007,
Capital requirement
generally 9% of risk weighted
assets
Prudential Regulations which

lay down capital adequacy
have been substituted in feb2007, but they are based on
Basle and Basle II. Capital
requirement generally 10% of
risk -weighted assets.
Provisioning
90 days past due leads to

NPA characterization and
call for provisioning as per
international standards.
As much as 12 months
overdue is permitted in case
of lease and hire purchase
transaction 6 months in case
of loans and other exposures.
Need for a license
Ownership structure / change in

ownership
Capital adequacy requirements and

provisioning
Credit control and sectoral assets

restrictions
83 | J B I M S
SLR / CRR norms
A substantial part of the

assets of banks is blocked due
to statutory liquidity ratio
(SLR) and cash reserve ratio
(CRR). These are periodically
changed to control the
expansion of M3 in the
economy.
Only 15% of the deposit

liabilities of NBFCs is to be
held in certain permitted
securities.
Sectoral exposures
Period regulation place limits

on the extent to which banks
may invest in capital market
and other specific markets.
There are certain segments in
which banks need to allocate
minimum percentage of their
assets
Very scanty limitations have

been placed on assets of
NBFC's. Investment in real
estate and unquoted equity
shares are controlled. Capital
market exposure is only
required to be reported.
84 | J B I M S
Chapter 6 Porters five forces
85 | J B I M S
PORTERS FIVE FORCES MODEL OF COMPETITION

The nature of competition in the industry in large part determines the content of strategy, especially
business level strategy .based it is on the fundamental economics of the industry, the very profit potential
of an industry is determine by competition interaction. Where these interactions are intense, profit tends
to be whittled away by the activities of competing.
Porters model is based on the insight that a corporate strategy should meet the
Opportunities and threats in the organizations external environment. Especially, competitive strategy
should base on and understanding of industry structures and the way they change. Porter has identified
five competitive forces that shape every industry and every market. These forces determine the intensity of
competition and hence the profitability and attractiveness of an industry. The objective of corporate
strategy should be to modify these competitive forces in away that improve the position of the
organization On. Porters model Supports analysis of the driving forces in an industry. Based on the
information derived from the Five Forces Analysis, management can decide how to influence or to exploit
particular characteristics of their industry.
Barriers to entry
Product differentiation is very difficult: As most of the NBFCs offer similar types of loans which
caters to same market. Innovation of a product plays a very important role in the market.
Licensing requirement: There are already 13000 registered NBFC. So, the licensing requirement
is also low. The regulations are not that stringent as that of a Bank.
Threat of substitute:
86 | J B I M S

Banks: Banks are important substitutes. As they are leaders in the markets. They have a quite
strong brand presence and a good credit appraisal method also.
Money Lenders: Small NBFCs cater to the rural areas where there is already a very strong
presence. They dominate the market in the rural areas and its mostly the unorganised market they
tap in
Bargaining Power of suppliers

Many alternatives: The suppliers in this case are the depositors or the NBFCs funds. Suppliers
have lots of alternatives to put their money. With the risk they can invest their money. E.g. Low
Risks: Banks, Bonds etc. High Risk: Stocks, Investment
RBI rules and regulations: RBI rules and regulations are not as stringent as of Banks. NBFCs
are governed by many bodies. E.g. RBI, FIDC, NHB etc
Bargaining power of consumer very high
Large no. of alternatives
87 | J B I M S

Low switching costs
Undifferentiated services
Full information about the market
Threat of competitors
Large no of NBFCs
High market growth rate
Low switching costs
Undifferentiated services
High fixed cost
High exit barriers
88 | J B I M S
Rivalry among competitors is very fierce in Indian Non Banking Financial Industry
The services NBFCs offer is more of homogeneous which makes the Company to offer the same service
at a lower rate and eat their competitor markets share. Market Players use all sorts of aggressive selling
strategies and activities from intensive advertisement campaigns to promotional stuff. Even consumer
switch from one bank to another, if there is a wide spreading the interest. Hence the intensity of rivalry is
very high. The no of factors has contributed to increase rivalry those are.
A large no of NBFC serving similar loan products: There is so many NBFCs and nonfinancial
institution fighting for same pie, which has intensified competition
High market growth rate: India is seen as one of the biggest market place and growth rate in
Indian financial industry is also very high. This has ignited the competition.
Homogeneous product and services: The services banks offer is more of homogeneous which
makes the company to offer the same service at a lower rate and eat their competitor markets
share.
Undifferentiated services: Almost every NBFC provides similar services. Every bank tries to copy
each other services and technology which increase level of competition.
89 | J B I M S

High exit barriers: High exit barriers humiliate banks to earn profit and retain customers by
providing world class services.
90 | J B I M S
CHAPTER-7
FINDINGS &
MANAGERIALIMPLICATIONS
91 | J B I M S

7.1 FINDINGS
Top-rated NBFCs have not only been successful in managing their market share but also in protecting
their profitability. A combination of the factors cited earlier had helped these NBFCs earn better returns
on their deployment. In fact, almost all the top-rated NBFCs enjoy return on total assets that is higher
than HDFC Bank's, one of the better-run banks. The higher return on assets was despite their operating
cost ratio being similar to that of HDFCBank. For example, operating expenses as a proportion of net
margin worked out to 68 percent for HDFC Bank. On an average, this was not significantly higher than
the ratio for most top-rated NBFCs. If return on assets were still superior, then it was because of the
higher return on their funds. For top NBFCs, the interest income worked out to 17-21 per cent of their
total assets for the year ended FY. The liquidity in the banking system also helped these finance
companies. Spreads over government securities for AAA rated corporate sector debt instrument are now
only 50 basis points. In other words, if the cost of funds for banking companies has declined sharply, then
top-rated NBFCs have also benefited from such a decline in interest rates. Some of these companies are
now raising funds at 7-8 per cent.
Also, these companies have displayed the ability to manage their portfolio without large incidence of nonperforming assets. For instance, LIC Housing Finance, IDFC and ShriramTransport Finance boast of net
non-performing assets to net advances ratio of less than 1 percent. This again has helped them lower the
overall cost of operations and, thereby, protect their profitability. Higher profitability and innovative
financing options, such as securitization, have also helped in boosting the capital adequacy ratio of this
NBFCs.among others, LIC Housing Finance, IDFC and Shriram Transport Finance, Reliance Capital,
boast of capital adequacy ratios upwards of 15 per cent. In other words, their balance sheets continue to
be strong to accommodate further growth in disbursements.
92 | J B I M S

7.1.1 Disbursements - Sharp fall during the crisis.
Disbursements were clearly hit during the crisis as is visible from Primary reason for this initial fall was
lack of supply of funds after the market liquidity dried up. Impact however differed depending on the
capital structure of the company, with NBFCs having larger ALM mismatches and those which had more
dependence on mutual funds for funding were affected more severely as mutual funds themselves faced
redemption pressure on their short term schemes. To support the sector, RBI undertook several measures
to improve liquidity flow to the NBFC sector. This was a significant development as the regulator
highlighted the systemic importance of the sector.
RBI measures to improve liquidity of NBFCs

The systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI)
were permitted to raise short-term foreign currency borrowings.
Allowed banks to avail liquidity support under the LAF for the purpose of meeting the funding
requirements of NBFCs through relaxation in the maintenance of SLR up to1.5 per cent of their
NDTL.
Risk weights on banksexposures to claims on NBF Cs-NDSI were reduced to 100 percent from
150 per cent.
Setting up of a special purpose vehicle (SPV) for addressing the temporary liquidity constraints
of systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI).
Deferring the higher CAR norms for NBFCs-ND-SI by 1 year.
93 | J B I M S

While liquidity conditions started improving from Q4 FY09, disbursements growth remained subdued for
the sector till the first half of FY10. On a y-o-y basis the cumulative disbursements showed a fall during
Q1 FY10 and H1 FY10. This period saw deterioration in asset quality of most NBFCs, which was
especially high in their unsecured loan portfolios. Lower disbursements were mainly because of the pull
back of NBFCs out of unsecured lending segments. On a cumulative basis 9ME FY10 disbursements
increased by more than19%. Even if we consider the low base effect of Q3FY09 disbursements, there is
clear indication of pick up in disbursements and a positive outlook for the sector. With improvement in
overall economic activity and higher thrust on infrastructure financing by the government, the scenario is
expected to improve further in FY11.
7.1.2 Cost of Funding - Shot up during the crisis due to short tenure borrowings, stabilized now &
expected to be less volatile due to larger proportion of long term funding.
Many NBFCs took advantage of the lower interest rate regime at the shorter end of the yield curve by
borrowing short term funds (3months 1 year) at lower rates and lending for maturities ranging from 3-4
years at higher rates. However the level of mismatches differed between NBFCs and those with higher
mismatch faced not only liquidity pressure, but their cost of funding also increased during this period due
to inversing of the yield curve and a general rise in interest rates. Average borrowings costs1 (on an
aggregate basis for CARE rated NBFCs) increased from around 9.5-10.0% in FY08 to 11.5-12.0% in
FY09. This shows the severity of the impact as financial crisis affected funding costs in the second half of
FY09and led to a 200 bps increase for the entire year. The response by NBFCs was to gradually replace
short term funding with long term sources. This is a significant structural change in the borrowing
profiles that will bring more stability in profitability of the sector. However spreads will also be lower
compared to historical levels due to this change. During the 9MEFY10 cost of borrowing reduced from
the average of 11.5-12.0% of FY09 to 10.2 10.5% for the 9 month period and is expected to remain
94 | J B I M S

around these levels for FY10. This however is still higher than the FY08 levels due to the structural move
towards longer term borrowings.
7.1.3 Asset Quality Deteriorated more due to unsecured loans which is now virtually stopped by
most players, provisioning has improved & asset quality expected not to worsen further.
Asset quality for the sector deteriorated significantly during the crisis. Aggregate Gross NPA ratio
trended from around 1.1% for FY08 to around 2.1% in FY09. While there was deterioration in all asset
classes, unsecured asset classes (Personal Loans, Unsecured SME loans) showed the maximum
deterioration and were the key drivers for overall increase in NPAs. Apart from the asset-type financed,
another differentiator between asset qualities was the origination & collection model followed. NBFCs
which originated majority of their portfolio through branches & own employees showed better asset
quality performance than those which used the DSA model. Aggregate Gross NPA ratio has further
worsened to 3.0%at the end of 9M FY10; however it is close to peaking out. De-growth in unsecured
portfolio segment has also lowered the portfolio outstanding growth thereby leading to a base effect
on the Gross NPA ratio and adding to the rise in reported numbers. Provision coverage has increased
from around 50% for FY09 to around 60% at the end of 9MFY10 as players have become more
conservative. Unsecured lending has virtually stopped for many NBFCs and underwriting norms have
also been tightened in general for other asset classes. These developments indicate positive structural
changes
95 | J B I M S
CHAPTER-8
RECOMMENDATIONS ANDCONCUSION
96 | J B I M S
8.1 Recommendation:
Domestic Financial markets can be integrated by making NBFCs Channel partners to Banks. It
will help in better allocation and funds availability. It will also help in better management of
financial services sector in India
Enhancing the credit delivery mechanisms: The credit delivery mechanism needs to be more
transparent and hassle free. There should be more stringent norms for the defaulters.
Strengthening the professionalism of NBFC sector through education and training: NBFCs are
organized players. Regulatory body needs to educate people about
To reduce in interest cost and hence benefit the ultimate consumer
8.2 Conclusion
It is encouraging that the NBFC sectors importance is finally being acknowledged across FS market
constituents as well as the regulator. However, the importance attached to the sector is often
transcending into misplaced exuberance. Over simplified and vague drivers for NBFC valuations such as
strategic fit and customer base, can never substitute dispassionate business analytics. A rational
assessment of the intrinsic values of NBFCs factoring issues such as past performance, structural
weaknesses of the sector (for instance funding disadvantages), along with an identification of real
97 | J B I M S

capabilities are essential to ensure that the equilibrium between price paid and value realized is reached
to the extent possible. In the absence of this, India issuer to witness the re-opening of the NBFC horror
story albeit with a new chapter on the erosion of NBFC investment values affecting investors across
categories. Ratings of the NBFCs whose profitability and asset quality was affected due to the crisis were
supported by their strong parentage. Based on the parental strength some players have raised further
equity and also managed to re-align their business models while maintaining their solvency. Overall
positive outlook on the sector due to the better ALM position, focus on relatively safer asset classes and
the demonstrated acceptance of the sector as systemically important by the regulator. The crisis has
imposed an overall sense of caution even for the newer entrants in the market. Also going forward
higher capital adequacy norms will put a airly conservative cap on the leverage of the sector thereby
improving the credit profile of many entities (NBFC-NDSI).
98 | J B I M S
R EF ER E N C E S
http://www.rediff.com/money/2004/jan/07rbi.htm
http://www.scribd.com/doc/22498809/Porters
-Five-Forces-Model-of-Competition
http://www.financialexpress.com/news/Column---Why-NBFCs-may-not-want-to-bebanks/614492/http://www.stockwatch.in/nbfcs-offering-high-dividends-yet-again25964http://www.livemint.com/2010/04/30204917/IDFC-seeks-infrastructureNBFC.htmlhttp://www.encyclopedia.com/doc/1G1-143176307.htmlhttp://mba-bbadissertations.blogspot.com/2010/05/capital-structure-of-indiabullsnbfc.htmlhttp://www.nbfc.rbi.org.inhttp://www.rediff.com/money/2007/jul/20nbfc.htmhttp://www.th
ehindubusinessline.com/2009/11/14/stories/2009111451870100.htmhttp://indiabudget.nic.in/es9899/chap35.pdf http://www.banknetindia.com/finance/fbanking.htmhttp://www.mydigitalfc.com/news/
nbfcs-again-doling-out-higher-dividend-fy10-732www.livemint.com/2008/.../The-multiplicity-ofregulation.htmlhttp://www.coolavenues.com/know/fin/svs_nbfc_1.php3www.thehindubusinessline.co
m/.../2005022800330800.htm
Annual Reports:
1)
2)
3)
4)
LIC Housing Finance

Shriram Transports
L&T Finance holding Ltd
IIISL
India Vantage by KPMG

Indian Banks v/s NBFCs
NBFC Research by CARE
99 | J B I M S
100 | J B I M S

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A COMPARATIVE STUDY OF NBFC IN INDIA 2011

4.3.1 Indian Consumer Lending market

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

Chapter-5 Indian Bank Vs NBFCs

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

Category of NBFC having minimum NOF of Rs 200 lakhs

Ceiling on public deposit

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

LC/IC**with CRAR of 15% and having minimum investment

1.5 times of NOF

*AFC=Assets Finance company

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

1.3GUIDELINE FOR NEW DEPOSITS

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

iv. Quarterly Return on liquid assets;

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

2.2 ROLE OF NBFCS

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

3.3 SCOPE OF THE STUDY

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

3.5 FIELD WORK PLAN.

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

. Global gross domestic product

recovered significantly during 2010 to 3.9percent on account of dynamic economic development in

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

to the wreaking of macroeconomic

revival in sales, on a month on month basis, partly

MAJOR DEMAND DRIVERS.

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

4.1.2 STFC (Introduction)

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

CV Financing Business model

Pre owned (5-12 Year Old CVs)

Small truck owner (Less than 2-3 trucks)

Existing customer base upgrading to

Leadership position with market

AUM of approximately Rs.

AUM of approximately Rs. 90.27bn

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

4.1.3 SHRIRAM TRANSPORT FINANCE. (Financial performance)

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

PUBLIC ISSUE OF NCD,

4.1.4 RECENT NCD ISSUE.

A COMPARATIVE STUDY OF NBFC IN INDIA 2011

For NCD holders in the

Unreserved Individual Portion

For all other NCD holders