Executive summary

Non- Banking Financial Companies are an important segment of the Indian Financial system in

extending credit to the unbanked segments of the society particularly to micro, small and

medium enterprises. They are classified into different categories based on their status and

principal activities. In this paper, an attempt has been made to analyze the performance of the

five different categories of NBFCs in India across 2015 to 2019. The performance is analyzed by

examining key indicators like Liquidity ratio, Profitability Ratio and Debt to Equity Ratio. The

findings indicate that the selected categories of NBFCs differ significantly in terms of Liquidity

and Profitability ratios from one another.

India is a developing country where large sections of the population are unbanked which give

rise to several forms of financial intermediaries including non - banking financial companies. A

Non- Banking Financial Company (NBFC) is a company registered under the Companies Act

1956 engaged in the business of loans and advances acquisition of stocks, equities, debt etc

issued by government or any local authority or other marketable securities like leasing, hire

purchase, insurance business , chit business. NBFC sector has evolved considerably in terms of

size, operations, technological sophistication, and entered into newer areas of financial services

and products. It is essential to analyze and measure the growth of NBFCs for better

understanding about the transformation of financial intermediaries in the context of Indian

banking system. Financial performance can be measured using solvency and profitability ratios

and applying statistical tools to analyze the results. NBFCs are playing a crucial role in economic

development of a country. They cater to needs of people in both rural and urban areas through

various schemes which helps in bridging the credit gaps. NBFCs do enjoy flexibility in
operations when compared to banks. Some of the top NBFCs in India are Power Finance

Corporation Limited, Mahindra & Mahindra Financial Services Limited,

Muthoot Finance Ltd. Etc. This project ss is mainly focused on the studying the growth of

NBFCs and finding the reasons or factors behind their performance and non- performance. The

financial performance is analyzed through ratio analysis technique and results are interpreted for

5-year period.
CHAPTER 1

INTRODUCTION
1.1 INTRODUCTION OF NON-BANKING FINANCIAL COMPANIES

(NBFCS)

Non-Banking Financial Companies are financial companies which performs like banks but

they are not actual bank. These types of financial companies have to be registered under

Companies act,1956. These financial companies engage in the business of financial loans

and advances, acquisition of securities/bonds/debentures which are issued by Government or

local authority or the marketable securities of a like nature, leasing, hire- purchase, insurance

business, chit business but does not it does not include whose prime principal business is

that of agricultural activity, industrial activity, purchase or sale of any goods. A Non-

Banking Financial Companies have head business of accepting stores under any plan or

course of action in one singular amount or in portions by method for commitments or in

some other way, is additionally a non-banking budgetary organization.

NBFCs garnered the attention of the Reserve Bank of India (‘RBI’) when several depositors

lost their money, during the failure of several banks in the late 1950s and early 1960s. In

order to prevent the large number of depositors, RBI initiated regulating them by introducing

Chapter IIIB in the Reserve Bank of India Act, 1934.In March 1996, there were around

41,000 NBFCs in India and they were not recognized as a separate class. However, due to

the failure of some of the institutions the regulatory structure along with the reporting and

supervision was constricted by RBI. In the late 90s, sweeping changes were brought to

protect the interest of depositors and ensuring the desired functioning of NBFCs. The capital

requirement was changed in the year 1999, NBFCs getting registered on or after the issuance

of notification dated April 21, 19991 were required to have the minimum net owned funds of

` 200 lakhs in order to commence the business of an NBFC. Due to snowballing trend in the
sector and to ensure the growth of the sector in a healthy and efficient manner various

regulatory measures were taken for identifying the systemically important companies and

bringing them under the austere norms. The NBFC-ND with asset size of ` 100 crores or

more were considered to be systemically important companies. During the FY 2011-12, two

new categories of NBFCs were introduced viz., IDF and MFI

DEFINITION ( Reserve Bank of India)

Definition for Non-Banking Financial Company, it carries functions like bank but it is not

actual bank. Reserve bank of India has defined NBFC as below. RBI has defined it in 4

systematic way, it has explained each term in detailed i.e. what is financial institution? What

is non-banking? An NBFC is a company registered under the Companies act, 1956 or

Companies act, 2013 and is engaged in the Business of financial Institution. Section 45I(f)

of the Reserve Bank of India act, 1934 defines “Non-Banking Financial Companies” as

(i) A financial Institution which is a company;

(ii) A non-banking financial institution which is company and which has its principal

business the receiving of deposits, under any scheme or arrangement or in any order manner,

or in lending in any manner;

(iii) Such other non-banking financial institution or class of such institution, as the bank

may, with the previous approval of the central government and by notification in the Official

gazette, specify; Section 45I(c) of the Reserve Bank of India act, 1934 defines the term

“Financial Institution” as

Financial institution means any non-banking institution which carries on as it’s business or

part of its business any of the following activities, namely:

activities other than its own;

(ii) The acquisition of shares, stocks, bonds, debentures or securities issued by

government or local authority or other marketable securities of a like nature;

(iii) Letting or delivering of any goods to a hirer under hire-purchase agreement as

defined in clause (c) of section 2 of the hire purchase act, 1972;

(iv) The carrying on of any class of business;

(iv) Managing, conducting or supervising, as foreman, agent or in any other capacity, of

chits or kooris as defined as any law which is for the time being in force in any state,

or in any business, which is similar thereto;

(v) Collecting, for any purpose or under any scheme or arrangement by whatever name

called, monies in lump sum or otherwise, by way of subscription or by sale of units,

or other instruments or other any manner and awarding prizes or gifts, whether in

cash or kind, or disbursing monies in any other way, to persons from 5 whom monies

are collected or to any other person, but does not include any other institution, which

carries on as its personal business:

• Agricultural operations; or

• Industrial activity; or

• The purchase or sale of any goods (other than securities) or the providing of any services;

or
 • The purchase, construction or sale of any immovable property, so however, that no other

portion of income of the institution is derived from the financing of the purchases,

constructions or sale of immovable property by other persons.

1.2 REQUIREMENT FOR REGISTRATION WITH RBI

Section 45-IA of the RBI Act, 1934 states thatNo Non-Banking Financial company shall

commence or carry on the business of a NonBanking Financial Institution without-

➢ Obtaining Certificate of Registration; and

➢ Having Net Owned Fund of Rs. 2 crores (Prior to the issuance of notification dated 21st April,

1999 the requirement of having minimum Net owned fund was revised from 25 lac to 2 crores)

However, as per revised regulatory framework if a NBFC having NOF less than Rs. 2 crores then

such companies need to increase the NOF in the following manner

➢ Rs. 1 crore before 1st April, 2016;

➢ and Rs. 2 crores before 1st April, 2017. An application for the registration needs to be

submitted by the company in the prescribed format along with the necessary documents for the

RBIs consideration. RBI has specified different indicative list of documentation/information to

be submitted along with for the application for NBFC-CIC (Core Investment Companies),

NBFC-Factors, NBFC-MFI (Micro Finance Company), and other NBFCs. However, in order to

avert dual registration, RBI has exempted certain class of companies from the requirement of

registration with the RBI.

1.3 TYPES OF NBFCS

There are two types in classification of NBFCs by Liability.

➢ Deposit accepting NBFCs

➢ Non-Deposit accepting NBFCs All Non-Banking Financial Companies don’t accept deposits.

Only those NBFCs which are holding a valid Certificate of Registration (COR) with

authorization to accept Public Deposits can accept/hold public deposit. Section 45-I(bb) of the

Reserve Bank of India Act, 1934 defines the term deposits asStores (Deposits) incorporates and

will be deemed always to have included any receipt of cash by way of deposit or credit or in any

other structure, however does exclude –

(i) Amounts raised by the way share capital;

(ii) Amounts contributed as capital by partners of the firm;

(iii) Amounts received from scheduled bank or co-operative bank or any other banking

company as defined in clause (c) of section 5 of the banking regulation act, 1949;
(iv) Any amount received from, - a State financial corporation, any financial institution

specified in or under section 6 a of IDBI act, 1964, or any other institution that may

be specified by bank in this behalf;

(v) Money got in normal course of business, by method for – Security Deposits,

Dealership Deposits, sincere cash, and advance against request of merchandise,

properties or administrations.

(vi) Any sum got from an individual or a firm or a relationship of a people not being a body

corporate, enlisted under any institution identifying with cash loaning which is for now in

power in any state;

Size

NBFCs are categorized into two different categories viz. Deposit accepting and non-Deposit

accepting. The non-depositing NBFCs further bifurcated into:

1. Systematically ImportantThe term “Systematically important non-deposit taking non-

banking financial company” has been defined to means a Non-Banking Financial Company

not accepting/holding public deposits and having total assets of Rs. 500 crores and above.

2. . Non-systematically ImportantThe term “non-systematically important non-deposit taking

non- banking financial company” has been defined to means a Non-Banking Financial

Company not accepting/holding public deposits and having total assets less than Rs. 500

crores.

Activity
1.4 THE CURRENT STATUS OF NON- BANKING FINANCIAL

COMPANIES.

Prudential norms:

The Reserve Bank put in place in January 1998 a new regulatory framework involving

prescription of prudential norms for NBFCs which deposits are taking to ensure that these

NBFCs function on sound and healthy lines. Regulatory and supervisory attention was focused

on the ‘deposit taking NBFCs’ (NBFCs – D) so as to enable the Reserve Bank to discharge its

responsibilities to protect the interests of the depositors. NBFCs - D are subjected to certain bank

–like prudential regulations on various aspects such as income recognition, asset classification

and provisioning; capital adequacy; prudential exposure limits and accounting / disclosure

requirements. However, the ‘non-deposit taking NBFCs’ (NBFCs – ND) are subject to minimal

regulation. The application of the prudential guidelines / limits is thus not uniform across the

banking and NBFC sectors and within the NBFC sector. There are distinct differences in the

application of the prudential guidelines / norms as discussed below:

i) Banks are subject to income recognition, asset classification and provisioning norms;

capital adequacy norms; single and group borrower limits; prudential limits on capital

market exposures; classification and valuation norms for the investment portfolio;

CRR / SLR requirements; accounting and disclosure norms and supervisory reporting

requirements.

ii) NBFCs – D are subject to similar norms as banks except CRR requirements and

prudential limits on capital market exposures. However, even where applicable, the
 norms apply at a rigor lesser than those applicable to bank. Certain restrictions apply

to the investments by NBFCs – D in land and buildings and unquoted shares.

iii) Capital adequacy norms; CRR / SLR requirements; single and group borrower limits;

prudential limits on capital market exposures; and the restrictions on investments in

land and building and unquoted shares are not applicable to NBFCs – ND.

iv) Unsecured borrowing by companies is regulated by the Rules made under the

Companies Act. Though NBFCs come under the purview of the Companies Act, they

are exempted from the above Rules since they come under RBI regulation under the

Reserve Bank of India Act. While in the case of NBFCs – D, their borrowing capacity

is limited to a certain extent by the CRAR norm, there are no restrictions on the

extent to which NBFCs – ND may leverage, even though they are in the financial

services sector.

Financial Linkages between Banks and NBFC:

Banks and NBFCs compete for some similar kinds of business on the asset side. NBFCs offer

products/services which include leasing and hire-purchase, corporate loans, investment in

non-convertible debentures, IPO funding, margin funding, small ticket loans, venture capital,

etc. However, NBFCs do not provide operating account facilities like savings and current

deposits, cash credits, overdrafts etc. NBFCs avail of bank finance for their operations as

advances or by way of banks’ subscription to debentures and commercial paper issued by

them. Since both the banks and NBFCs are seen to be competing for increasingly similar

types of some business, especially on the assets side, and since their regulatory and cost-

incentive structures are not identical it is necessary to establish certain checks and balances to

ensure that the banks’ depositors are not indirectly exposed to the risks of a different cost-
incentive structure. Hence, following restrictions have been placed on the activities of

NBFCs which banks may finance:

i) Bills discounted / rediscounted by NBFCs, except for rediscounting of bills discounted by

NBFCs arising from the sale of –

a) Commercial vehicles (including light commercial vehicles); and

b) Two-wheeler and three-wheeler vehicles, subject to certain conditions;

c) Investments of NBFCs both of current and long term nature, in any company/entity by

way of shares, debentures, etc. with certain exemptions;

ii) Unsecured loans/inter-corporate deposits by NBFCs to/in any company.

iii) All types of loans/advances by NBFCs to their subsidiaries, group companies/entities.

iv) Finance to NBFCs for further lending to individuals for subscribing to Initial Public

Offerings (IPOs).

v) Bridge loans of any nature, or interim finance against capital/debenture issues and/or

in the form of loans of a bridging nature pending raising of long-term funds from the

market by way of capital, deposits, etc. to all categories of Non-Banking Financial

Companies, i.e. equipment leasing and hire-purchase finance companies, loan and

investment companies, Residuary Non-Banking Companies (RNBCs). Should not

enter into lease agreements departmentally with equipment leasing companies

Banks and NBFCs operating in the country are owned and established by entities in the

private sector (both domestic and foreign), and the public sector. Some of the NBFCs are

subsidiaries/ associates/ joint ventures of banks – including foreign banks, which may or may

not have a physical operational presence in the country. There has been increasing interest in

the recent past in setting up NBFCs in general and by banks, in particular. Investment by a

bank in a financial services company should not exceed 10 per cent of the bank’s paid-up

share capital and reserves and the investments in all such companies, financial institutions,

stock and other exchanges put together should not exceed 20 per cent of the bank’s paid-up

share capital and reserves. Banks in India are required to obtain the prior approval of the

concerned regulatory department of the Reserve Bank before being granted Certificate of

Registration for establishing an NBFC and for making a strategic investment in an NBFC in

India. However, foreign entities, including the head offices of foreign banks having branches

in India may, under the automatic route for FDI, commence the business of NBFI after

obtaining a Certificate of Registration from the Reserve Bank.

NBFCs can undertake activities that are not permitted to be undertaken by banks or which

the banks are permitted to undertake in a restricted manner, for example, financing of

acquisitions and mergers, capital market activities, etc. The differences in the level of

regulation of the banks and NBFCs, which are undertaking some similar activities, gives rise

to considerable scope for regulatory arbitrage. Hence, routing of transactions through NBFCs

would tantamount to undermining banking regulation. This is partially addressed in the case

of NBFCs that are a part of banking group on account of prudential norms applicable for

banking groups
1.5 ROLE OF NON- BANKING FINANCIAL COMPANIES

1. Promoters Utilization of Savings:

Non- Banking Financial Companies play an important role in promoting the utilization of

savings among public. NBFC’s are able to reach certain deposit segments such as

unorganized sector and small borrowers were commercial bank cannot reach. These

companies encourage savings and promote careful spending of money without much

wastage. They offer attractive schemes to suit needs of various sections of the society. They

also attract idle money by offering attractive rates of interest. Idle money means the money

which public keep aside, but which is not used. It is surplus money.

2. Provides easy, timely and unusual credit:

NBFC’s provide easy and timely credit to those who need it. The formalities and procedures

in case of NBFC’s are also very less. NBFC’s also provides unusual credit means the credit

which is not usually provided by banks such as credit for marriage expenses, religious

functions, etc. The NBFC’s are open to all. Every one whether rich or poor can use them

according to their needs.

3. Financial Supermarket:

NBFC’s play an important role of a financial supermarket. NBFC’s create a financial

supermarket for customers by offering a variety of services. Now, NBFC’s are providing a

variety of services such as mutual funds, counseling, merchant banking, etc. apart from their

traditional services. Most of the NBFC’s reduce their risks by expanding their range of

products and activities.

NBFC’s invest the small savings in productive purposes. Productive purposes mean they invest the

savings of people in businesses which have the ability to earn good amount of returns. For example –

In case of leasing companies lease equipment to industrialists, the industrialists can carry on their

production with less capital and the leasing company can also 13 earn good amount of profit.

5. Provide Housing Finance:

NBFC’s, mainly the Housing Finance companies provide housing finance on easy term and

conditions. They play an important role in fulfilling the basic human need of housing finance.

Housing Finance is generally needed by middle class and lower middle-class people. Hence,

NBFC’s are blessing for them.

6. Provide Investment Advice:

NBFC’s, mainly investment companies provide advice relating to wise investment of funds

as well as how to spread the risk by investing in different securities. They protect the small

investors by investing their funds in different securities. They provide valuable services to

investors by choosing the right kind of securities which will help them in gaining maximum

rate of returns. Hence, NBFC’s plays an important role by providing sound and wise

investment advice.

7. Increase the Standard of living:

NBFC’s play an important role in increasing the standard of living in India. People with

lesser means are not able to take the benefit of various goods which were once considered as

luxury but now necessity, such as consumer durables like Television, Refrigerators, Air

Conditioners, Kitchen equipment, etc. NBFC’s increase the Standard of living by providing
consumer goods on easy installment basis. NBFC’s also facilitate the improvement in

transport facilities through hire- purchase finance, etc. Improved and increased transport

facilities help in movement of goods from one place to another and availability of goods

increase the standard of living of the society.

8. Accept Deposits in Various Forms:

NBFC’s accept deposits forms convenient to public. Generally, they receive deposits from

public by way of depositor a loaner in any form. In turn the NBFC’s issue debentures, units’

certificates, savings certificates, units, etc. to the public.

9. Promote Economic Growth:

NBFC’s play a very important role in the economic growth of the country. They increase the

rate of growth of the financial market and provide a wide variety of investors. They work on

the principle of providing a good rate of return on saving, while reducing the risk to the

maximum possible extent. Hence, they help in the survival of business in the economy by

keeping the capital market active and busy. They also encourage the growth of wellorganized

business enterprises by investing their funds in efficient and financially sound business

enterprises only. One major benefit of NBFC’s speculative business means investing in risky

activities. The investing companies are interested in price stability and hence NBFC’s, have a

good influence on the stock- market. NBFC’s play a very positive and active role in the

development of our country.

1. Receiving benefits: The primary function of NBFC is receive deposits from the public in

various ways such as issue of debentures, savings certificates, subscription, unit certification,

etc. thus, the deposits of NBFC are made up of money received from public by way of

deposit or loan or investment or any other form.

2. Lending money: Another important function of NBFC is lending money to public. Non-

banking financial companies provide financial assistance through.

3. Hire purchase finance: Hire purchase finance is given by NBFC to help small important

operators, professionals, and middle-income group people to buy the equipment on the basis

on Hire purchase. After the last installment of Hire purchase paid by the buyer, the

ownership of the equipment passes to the buyer.

4. Leasing Finance: In leasing finance, the borrower of the capital equipment is allowed to

use it, as a hire, against the payment of a monthly rent. The borrower need not purchase the

capital equipment but he buys the right to use it.

5. Housing Finance: NBFC’s provide housing finance to the public, they finance for

construction of houses, development of plots, land, etc.

6. Other types of finance provided by NBFCs include: Consumption finance, finance for

religious ceremonies, marriages, social activities, paying off old debts, etc. NBFCs provide

easy and timely finance and generally those customers which are not able to get finance by

banks approach these companies.

areas.

1.6 COMMERCIAL BANK VERSUS (V/S) NON-BANKING FINANCIAL COMPANIES

While commercial banks and non-banking financial companies are both financial intermediaries

(middleman) receiving deposits from public and lending them. Commercial bank is called as

“Big brother” while the “NBFC” is called as the “Small brother. But there are some important

differences between both of them, they are as follows:

1. Power finance corporation ltd. Power Finance Corporation Ltd is a leading power sector

public financial institution and a non-banking financial company providing fund and non-fund

based support for the development of the Indian power sector. The company is engaged in power

sector financing and the integrated development of the power and associated sectors. They

provide large range of Financial Products and Services like Project Term Loan Lease Financing

Direct Discounting of Bills Short Term Loan and Consultancy Services etc for various Power

projects in Generation Transmission and Distribution sector as well as for Renovation &

Modernization of existing power projects.

Rural Electrification Corporation Ltd is a Navratna Central Public Sector Enterprise under the

Ministry of Power. The company is engaged in the financing and promotion of transmission

distribution and generation projects throughout India. Their main objective is to finance and

promote rural electrification projects all over the country. They provide financial assistance to

State Electricity Boards State Government Departments and Rural Electric Cooperatives for rural

electrification projects sponsored by them. The company provides loan assistance to SEBs/State
Power Utilities for investments in rural electrification schemes through its extensive network of

23 offices across the country

3. Mahindra & Mahindra Limited

Mahindra & Mahindra Limited is the flagship company of the Mahindra Group which consists of

diverse business interests across the globe and aggregate revenues of around USD 19.4 billion.

The company operates in nine segments: automotive segment comprises of sales of automobiles

spare parts and related services; farm equipment segment comprises of sales of tractors spare

parts and related services; information technology (IT) services comprises of services rendered
for IT and telecom; financial services comprise of services relating to financing leasing and hire

purchase of automobiles and tractors; steel trading and processing comprises of trading and

processing of steel; infrastructure comprise of operating of commercial complexes project

management and development; hospitality segment comprises of sale of timeshare; Sys tech

segment comprises of automotive components and other related products and services and its

others segment comprise of logistics after-market two wheelers and investment.

Muthoot Finance Limited is the largest gold financing company in India in terms of loan

portfolio. The company provides personal and business loans secured by gold jewellery or Gold

Loans primarily to individuals who possess gold jewellery but could not access formal credit

within a reasonable time or to whom credit may not be available at all to meet unanticipated or

other short-term liquidity requirements

5. Larsen & Toubro

services conglomerate with global operations. The company is one of the largest 20 and most

respected companies in India’s private sector. The company operates in three segments

Engineering & Construction Segment Electrical & Electronics segment Machinery & Industrial

Products and others

6. Siemens financial services

Siemens Financial Services (SFS) is a Division of Siemens. The company’s global headquarters

is in Munich, Germany. SFS offers international financing solution in the business-to-business

area. Financial Services serves Siemens as well as other companies – primarily in the energy,

industry, healthcare and infrastructure & cities markets. The division finances infrastructure,

equipment as well as working capital investments, and acts as a manager of financial risks within
Siemens AG. The network of financing companies coordinated by Siemens Financial Services

GmbH in Munich comprises about 3,150 employees worldwide.

7. Reliance capital

Reliance Capital, a constituent of MSCI Global Small Cap Index, is a part of the Reliance

Group. It is amongst India’s leading and most valuable financial services companies in the

private sector. Reliance Capital has interests in life, general and health insurance; commercial &

home finance; equities and commodities broking; wealth management services; distribution of

financial products; asset reconstruction; proprietary investments and other activities in financial

services. Reliance Nippon Life Insurance and Reliance General Insurance are amongst the

leading private sector insurers in India. Reliance Securities is one of the India’s leading retail

broking houses and distributors of financial products and services. Reliance Money and Reliance

Home Finance are one of the most rapidly expanding businesses in the lending space.