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NBFCs & Banks In INDIA
Debraj Das | Debayan Ray
Koushik Dutta | Anindya Mondal
School of Management Sciences
Indian Institute of Engineering Science and Technology,
Shibpur
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ADVANTAGE INDIA
Robust Demand• Increase in working
population and growing disposable incomes will raise demand for banking and related services
• Housing and personal finance are expected to remain key demand drivers
• Rural banking is expected to witness growth in the future
Innovation in services• Mobile, Internet banking and
extension of facilities at ATM stations to improve operational efficiency
• •Vast un-banked population highlights scope for innovation in delivery
Policy support• Wide policy support in the
form of private sector participation and liquidity infusion
• Healthy Regulatory oversight and credible Monetary Policy by the RBI have leaf strength and stability to the country’s banking sector.
Business fundamentals• Rising fee incomes improving
the revenue mix of banks• High net interest margins,
along with low NPA levels, ensure healthy business fundamentals
FY12Total asset size:
₹90.12 trillion
FY25ETotal asset size:
₹1712.28 trillion
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Evolution of the Indian banking sector
1921
1935
1936 - 1955
1956 - 2000
2000 onwards
• Closed market• State-owned
Imperial Bank of India was the only bank existing
• RBI was established as the central bank of country
• Quasi central banking role of Imperial Bank came to an end
• Imperial Bank expanded its network to 480 branches
• In order to increase penetration in rural areas, Imperial Bank was converted into State Bank of India
• Nationalisation of 14 large commercial banks in 1969 and 6 more banks in 1980
• Entry of private players such as ICICI intensifying the competition
• Gradual technology upgradation in PSU banks
• Number of banks increased to 27 public sector banks, 22 private sector banks and 41 foreign banks
• Advent of mobile and internet banking
• Growing FDI in the Indian banking sector
Source: Indian Bank’s Association, Aranca Research, BMI Notes: RBI - Reserve Bank of India, FDI – Foreign Direct Investment Note: The data on number of banks belongs to FY11
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Growth in deposits
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
489
665
822763
1030
1182 1170
1274
1453
Growth in deposits over the past few years ($ bn)
Series 1
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Asset Base of Banks
FY10 FY11 FY12
100 100 120
250 236300
9401000
1090
12901336
1510
Asset Base ($bn)
Foreign Banks Private Banks Public Banks Total Linear (Total)
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Growth in Money Supply
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Market Share by Deposits
FY05 FY12
78.2 77.5
17.1 18.2
4.7 4.3
Market Share by deposits
Public Banks Private Banks Foreign Banks
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Incomes of Banks
FY09 FY10 FY11 FY12
56.9 63.876.3
101
17.7 17.3 20.227.9
6.3 5.5 5.9 7.6
Incomes from interest ($ bn)
Public Banks Private Banks Foreign Banks
FY09 FY10 FY11 FY12
8.910.2 10 10.5
3.74.3 4.3
5.1
3.12.1 2.3 2.3
Other Income ($ bn)
Public Banks Private Banks Foreign Banks
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ROI of Banks
SBI & its as-sociate
Nationalised Banks
Public Banks Private Banks Foreign Banks
91%100% 97%
128% 126%
79%
103%96%
143%
175%
89% 88% 88%
153%
176%
Return on Asset
FY10 FY11 FY12
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ROI of Banks
SBI & its as-sociate
Nationalised Banks
Public Banks Private Banks Foreign Banks
77%
71%
73%
77%
70%
80%
74%
76%
80%81%
82%
76%
78%
82%83%
Loan-to-Deposit Ratio
FY10 FY11 FY12
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All About Indian Banks:RBI
(Apex Bank)
Scheduled Banks
Co-operative banks
Urban co-operative Banks (52)
State co-operative Banks (16)
Commercial Banks
Public Sector Banks (27)
Private Sector Banks (30)
Foreign Banks (40)
Regional Rural Banks
(196)
Unscheduled Banks
State Banks of Indian and associates (8 )and other nationalised bank
(19)
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Primary Functions• Accepting Deposits
1. Saving Deposits
2. Fixed Deposits
3. Current Deposits
4. Recurring Deposits
• Granting of Loans and Advances1. Overdraft2. Cash Credits3. Loans4. Discounting of Bill of Exchange
So, Profit of a Bank is = ∑ Loan amount x lending interest rate −
∑ Publics’ deposit amount x deposit interest rate
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Secondary functions• Agency Functions
The bank acts as an agent of its customers.
Transfer of Funds1. Collection of Cheque2. Periodic Payments3. Portfolio Management4. Periodic Collections5. Other Agency Function
• General Utility Functions
Issue of Drafts, Letter of Credits, etc.
1. Locker Facility2. Underwriting of Shares3. Dealing in Foreign Exchange4. Project Reports5. Social Welfare Programs6. Other Utility Functions
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Indian Banks:Public Sector Banks
Private Sector banks
Foreign Bank
15
• A company registered Company Act -1956
• RBI Act, 1934- 45-IA - Every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution.
• NBFCs are financial intermediaries engaged primarily in the business ofLoans and advancesacquisition of shares / stock / bonds / debentures / securities issued by
government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business
• does not include any institution whose principal business that ofagriculture activityindustrial activitySale / purchase / construction of immovable property.
What are NBFC’s
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Exemption from Registration• Certain category of NBFCs which are regulated by other regulators
are exempted from the requirement of registration with RBI:
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, 1956
Chit Funds Act, 1982, Sec 2 (b) Housing Finance Companies regulated by National Housing Bank.
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Features of NBFC’s• All the NBFC are not entitled to accept public deposits.
Only those NBFCs holding a valid Certificate of Registration (CoR) with authorisation to accept Public Deposits can accept/hold public deposits.
The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund and comply with the Directions issued by the Bank.
• Accept deposit for a period less than 12 months and more than 60 months
• They cannot accept deposits repayable on demand
• NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time (at present @12.5% © RBI)
• NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
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Features of NBFC’s• NBFCs (except certain AFCs) should have minimum investment grade credit
rating.
• The deposits with NBFCs are not insured
• The repayment of deposits by NBFCs is not guaranteed by RBI
• There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits
• If a NBFC defaults in repayment of deposit, the depositor can approach
A. Company Law Board
B. Consumer Forum
C. file a civil suit to recover the deposits.
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Types of NBFCs • NBFCs can be classified into two broad categories, viz.,
NBFCs accepting public deposit (NBFCs-D) NBFCs not accepting/holding public deposit (NBFCs-ND)
• Residuary Non-Banking Company
Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Leasing, Hire-Purchase, Loan Company.
These companies are required to maintain investments as per directions of RBI, in addition to liquid assets.
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Major NBFCs in India • Birla Global Finance
• Cholamandalam Investment & Finance Co. Ltd
• First Leasing Company of India
• Sundaram Finance
• Countrywide Finance
• Housing Development Finance Company
• LIC Housing Finance
• CanFin Homes
• Sakura Capital India Ltd
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Why NBFC’s?• Only 34% of Indian individuals have access to banks.
• Banks have a lot of constraints in lending.
• Conditions for getting a loan.
• Proximity of financial services.
• Size of loans.
• Higher risk taking ability.
• Innovative business model.
• Expert skills.
• Relationship with customers.
• Single product and dedicated business.
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Some examples
• In infrastructure financing credit risk evaluation is the main job.
• For collecting the dues they use human resources and pay them lower than what banks pay. Banks lack here.
• In truck financing majority of the truck drivers don’t have proper papers to get the loans.
• Many SME’s in India are like truck drivers.
• In home finance, housing finance companies (HFC) flourish with higher focus and better customer service.
• NBFC’s are the top priority in the above sectors.
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BANKS Vs. NBFC’s• NBFC cannot collect deposits in the manner of a bank
• Interest rates for NBFC’s are different compared
• NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheque drawn on itself
• NBFC cannot issue Demand Drafts like banks
• While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956.
• Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
• NBFC cannot engage into - 1. agriculture activity,2. industrial activity, 3. sale/purchase/construction of immovable property
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Online & ATM usages
1988-94
1995-99
2001-2004
2004-2006
2007 onwards
• Deposit of Cash• Withdrawal of
Cash
• Mini-statement
• Balance Enquiry
• Coupon dispensing
• Fulfilling request from customers
• Account Transfer• Touch screen
menus
• Bill payments• Mobile
Recharging
• Check Deposit with scanning
• Customised ATMs
Source: IBA statistics, Aranca Research
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Growth in ATMs
2005 2006 2007 2008 2009 2010 2011 2012 2014 E
16750 21509 2708834789
43651
6015374743
104500
210000
Growth in ATMs – CAGR 29.9%
No of ATMs Exponential (No of ATMs)
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ADVANTAGE INDIA
2007 2008 2009 2010 2011 2012 20130.40%
9.20%
15.20%
24.30%
37.50%39.90% 40.80%
Rural Teledensity
Rural Teledensity
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New Banking Licences as on 04-04-2014• Bandhan Financial Services
• Infrastructure Development Finance Company (IDFC)
• A committee headed by former RBI governor Bimal Jalan had examined 25 applications for new banking licences,
L&T Finance an arm of engineering-to-IT conglomerate Larsen & Toubro Bajaj Finance Anil Ambani-controlled Reliance Capital Aditya Birla Financial Services.
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Notable trends in Banking Sector
Increasing focus on Women Banking
Wide usability of RGTS & NEFT
Know Your Client (KYC)
Technological Innovations
Diversification of Revenue stream
Improved Risk Management Practices
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Thank you all…