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ROLE OF NON BANKING FINANCIAL

INTITUTIONS IN INDIAN FINANCIAL SYSTEM

A Major Project Report

Submitted in partial fulfillment of the requirements for BBA (General)

programme of Guru Gobind Singh Indraprastha University,

Delhi

Submitted by

BBA (General)Semester-VI

Enroll. No.: 0891221708

Delhi College Of Advanced Studies

B-7, Shankar Garden, Vikaspuri

New Delhi-110088

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CONTENTS

S.No. Topic Page No.

1 Declaration -

2 Acknowledgement -

3 List of Tables -

4 List of Figures -

5 List Of Symbols -

6 List Of abbreviations -

7 Chapter-1: Introduction

8 Chapter-2:Conceptual

Framework

9 Chapter-3: Summary and

Conclusion

10 References/Bibliography -

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LIST OF TABLES

Table No. Title Page No.

1 Business mix of Reliance Capital

2 Weakening Demand For Transportation Services

3 Top five banks and NBFCs with highest profitability

4 Banking versus NBFCregulatory arbitrageinIndia

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LIST OF FIGURES

Figure No. Title Page No.

1 Financial Performance of LICHousing finance

2 Debt-Equity Ratio and RONW

3 PBDTM and PAT

4 ROG Sales

5 Non-performing assets andprovisions

6 Financial performance

7 PBDTM and RONW8 ROG Sales and PAT

9 Financial Performance

10 PBDTM and RONW

11 Debt equity ratio and ROGSales

12 ROG and PAT

13 Debtequity ratio and PBDTM

14 RONW

15 IDFC consolidated net profit atRs.750 crore for FY 2009

16 ROG Sales

17 PAT

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LIST OF SYMBOLS

Table No. Title Nomenclature &

Meaning

1. % Percentage

2. $ Dollar

LIST OF ABBREVIATIONS

S.No. Title Meaning

1. IRDA Insurance RegulatoryDevelopment Act

2. CRR Credit Return Rate

3. w.e.f With effect from

4. CoR Certificate of Registration

5. SEBI Securities Exchange Board ofIndia

6. COSMOS Cosmopolitan

7. SLR Statutory Liquidity Ratio

8. GDP Gross Domestic Product

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DECLARATION

I hereby declare the major project report, entitled Role of Non-Banking Financial Institutions in

Indian Financial System is based on my original study and has not been submitted earlier for

award of any degree or diploma to any institute or university.

The work of author(s), wherever used, has been acknowledged at appropriate place(s).

Place:New Delhi Candidates signature

Date: 2011 Name: ChhaviGoswami

Enrol. No.: 0921221708

Countersigned

Name: Ms. PriyankaRaoName: Prof.(Dr). J.P. Vashney

Supervisor Director

Delhi College Of Advanced Studies Delhi College Of Advanced Studies

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ACKNOWLEDGEMENT

An independent project is a contradiction in terms. Every project involves contribution of many

people. This project also bears the imprints of many people and it is a pleasure for me to

acknowledge and thank all of them.

I am deeply indebted to Ms. PriyankaRao who acted as a mentor and guide, providing knowledge

and giving me their valuable time out of their busy schedule, at every step throughout the research.

It is only because of her this project came into being.

I also thank the Director of Delhi College Of Advanced Studies, for providing an opportunity of

doing this project under his leadership.

I also take the opportunity to express my sincere gratitude to each and every person, who directly or

indirectly helped me throughout the project and without anyone of them the research would not

have been possible.

The immense learning from this project would be indelible forever.

ChhaviGoswami

Enrl.No.0921221708

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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 channelising of public savings and provide

better return to the depositors. We are aware that due to liberalization and globalisation, 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 specialisation. The role of NBFCs as effective financial intermediaries has been well

recognised as they have inherent ability to take quicker decisions, assume greater risks, and

customise 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

hire-purchase 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 non-convertible debentures, etc.

According to KPMG survery 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

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effective manner in 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. ronically, 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 Indias (RBI) definition of .reporting NBFCs

as 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

Role of NBFCs

According to EPW Research Foundation (EPWRF) The Indian economy is going through a period

of rapid `financial liberalisation'. 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 Non-Banking 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 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

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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.

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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Guidelines for new deposit

Customeridentification:'KnowTheCustomer'(KYC)shouldbethekeyguiding principle foridentification of an individual / corporate customer (depositor orborrower).

Accordingly, the KYC framework should have two-fold objective, (i) to ensurecustomeridentificationandverifyinghisidentityandresidentialaddress;and(ii)to monitor

transactions of asuspicious

nature.NBFCsshouldensurethattheidentityofthecustomer,includingbeneficialowneris

donebased on disclosures bycustomers themselves.

TypicallyeasymeansofestablishingidentitywouldbedocumentssuchasPermanentAccountNumber(PAN),rationcard,drivinglicence,ElectionCommission'sidentity

card,passport,etceteraincaseofindividualsandregistrationcertificate,partnership

deed/agreement,etceteraandotherreliabledocumentsinrespectofcompanies,firms and

otherbodies.

Verificationthroughsuchdocumentsshouldbeinadditiontotheintroductionbya person known to

theNBFC.

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Proceduresfor existingcustomers

In respect of existing customers, NBFCs should ensure that gaps and missinginformationincomplianceofKYCguidelinesoncustomeridentificationprocedureis filled up and

completed beforeJune30, 2004.

Ceilingand monitoringof cash transactions

NBFCs would normallynot havelargecash withdrawals and deposits. However, wherever transactions of Rs10 lakh (Rs1 million) and above are undertaken, they

should keep record of these transactions in a separate register maintained at branch, aswellas

at RegisteredOffice.

Such information shouldbemadeavailableto regulatoryand investigating authorities, whendemanded.

Guidelines andmonitoringprocedures

Theboard of directors of NBFCs should formulate policies and procedures tooperationalisetheguidelines andput in place an effectivemonitoringsystem to ensure

compliancebytheirbranches.

Earlycomputerisationofbranch/officereportingwillfacilitatepromptgenerationofsuchreports and monitoring.

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Internal controlsystems

Duties andresponsibilitiesshouldbeexplicitlyallocatedamongthestaffforensuring that policiesand procedures aremanaged effectivelyand that thereis full commitment andcompliancetoan

effectiveKYCprogrammeinrespectofbothexisting and prospective customers/clients.

Internal audit/inspection

Internalauditorsmustspecificallyscrutiniseandcommentontheeffectivenessofthemeasurestakenbybranches/officesofNBFCinadoptionofKYCnormsandsteps towards

prevention ofmoneylaundering.

Specificcasesofviolationshouldbeimmediatelybroughttothenoticeofhead/controlling/ registered office.

Record keeping

NBFCs sho uld p repare and maintainproper documentation on their customerrelationships and cash transactions of Rs.10 lakh and above.

Therecordsofallsuchtransactionsshouldberetainedforatleasttenyearsafterthetransactionhastakenplaceandshouldbeavailableforperusalandscrutinybyaudit

functionariesaswellas regulatorsandlawenforcementauthorities;asandwhen required,at

thebranch aswellas at registered office.

Trainingof staffand management

Itisimportantthatalltheoperatingandmanagementstaffismadefullyawareofthe implications andunderstand the needforstrict adherenceto KYC norms.

NBFCsmaytakesuitablestepstoimparttrainingtotheiroperationalstaffonanti-moneylaunderingmeasures.

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Responsibilities

TheNBFCs acceptingpublicdeposits should furnish to RBI

i. Auditedbalancesheetofeachfinancialyearandanauditedprofitandlossaccountin

respectofthatyearaspassedintheannualgeneralmeetingtogetherwithacopyof

thereportoftheBoardofDirectorsandacopyofthereportandthenotesonaccounts furnished

byits Auditors;

ii. StatutoryAnnual Returnon deposits-NBS1;

iii. CertificatefromtheAuditorsthatthe companyisinapositionto repaythedeposits as andwhen

the claims arise;

iv. QuarterlyReturn on liquid assets;

v. Half-yearlyReturn onprudential norms;

vi. Half-yearlyALMReturnsbycompanieshavingpublicdepositsofRs.20croreand aboveor with

assets of Rs. 100 croreand aboveirrespectiveof thesizeof deposits ;

vii. Monthlyreturnonexposuretocapitalmarketbycompanies havingpublicdeposits ofRs. 50

croreand above; and

viii. AcopyoftheCreditRatingobtainedonceayearalongwithoneoftheHalf-yearly

Returns on prudential norms as at (v)above.

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Current Scenario

Nearly11years after thelast of thetwo bankinglicences wereissued byRBIto private sector

entities,the governmenthasagainstartedtheprocessofallowingthebetter-managednon- banking

finance companies (NBFCs) to graduate to full-fledged banks. FM Pranab Mukherjee Budget

proposal on Friday was thefirst steptowardsthesame.

ThesecondstepwillbeenactedonTuesdaymorning.Aselectgroupofofficialsfromtop NBFCs, under

theaegisoftheFinanceIndustryDevelopment Council (FIDC), thetradebody

forNBFCsinIndia,aremeetingRGopalan,thebankingsecretaryinthefinanceministry,to

presentacaseforselectNBFCstobeconvertedintofull-fledgedbanks,sourcessaid.About

12-15NBFCsandcorporatehouseshavingpresenceinthefinancialsectorareexpectedto join the raceto

floatabank.

Thefinanceministerisconvincedthatthereisahugeneedforlow-costfinancingatthe semi-

urbanandruralareasinIndia,saidaindustrysource.Thefinancialservicesindustry

believestheBudgetproposalwasareflectionofthesame.Inthefinanceministrythingsare

movingintherightdirectionandthebankingsecretary smeetingprovesthesame,saidthe

source.FIDC officebearers could notbe contacted duringtheextended weekend.

InthelastUnionBudget,theFMhadannouncedthatRBIisconsideringgivingadditional

bankinglicencestoprivatesectorplayers,includingNBFCs.Thiswasostensiblytofurther

financialinclusionandalsoto improvethesizeandsophisticationoftheIndianbanking

system.Theannouncementsetthefinancialmarketsonfirewithalotofconjecturingasto

whowouldbetheluckyfew.Theaccesstolow-costcurrentaccountandsavingsaccounts

andtheabilitytoofferallfinancialproductsunderoneroofwerecitedasmajorattractions

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forNBFCstorushtoseekbankinglicences.ItwasalsoexpectedthatRBIwouldgivenew

licencestoprivateplayersverysoon.But,ananalysisrevealsadifferentpicture.Neitheris RBIinahurry

toissuefreshlicencesnoraremanyNBFCskeentogetintocommercial banking.

Thereasonsforthisaremanifold.RBIrulesarestringentforcommercialbanksastheyare thevisibleface

ofthe Indian financial system and commercial banks areprimarilythe

custodiansofpublicmoney.RBI placesrestrictionsoncommercialbanksintheirlending

operations.OutofRs100takeninasdeposits,approximatelyRs30hastobesetapartas

statutoryrequirementstowardsCRRandSLR.ThisleavesthebankswithRs70tolend.Out

ofthis,40%hastobestatutorilylenttowardstheprioritysectorasdefinedbyRBI.This

leavesbankswithapproximatelyRs42tolendattheirowndiscretion.ManyNBFCswould definitelyfind

this as restrictiveto saythe least.

Aspertheguidelinesof2001,NBFCsseekingabankinglicenceshouldhaveaminimum paid-

upcapitalofRs200crore,whichmustbeincreasedtoRs300crorewithin3yearsof conversion intoa bank.

Further, banks have to invest large funds in fixed assets and information technology primarily to

facilitate financial inclusion, risk management, anti

moneylaundering,etc.Thesehugecapitalexpendituresincreasethepaybackperiodforthe investments

made. Also, banking-as-a-business model is far more people-, process- and product-

driventhanasimpleNBFCmodel.Forexample,inordertoadoptuniversalbanking,

thestaffneedstobemulti-skilledinbankingfunctions.So,theoperatingexpenseswillbe

substantiallyhigher,which,inturn,wouldreducetheprofitabilityofoperations.Also,there

arerestrictionsonownershipandvotingrights.

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Objectives of the study

Theconfined objectivesofthe present studyare:

To analyzethemarket ofNBFCs inIndia. To study the financial structure of NBFCs in Indian financial system.

NBFCspossessoneoftheindustry'smostextensivemarketingnetworkinIndia.BackOfficessprea

dacrossthecountryconductthe creditappraisal and administrative functions. One of the main

objectives is to analyse these functions.

TheCompanyhassetupaRepresentativeOfficeinDubai and KuwaittocatertotheNon-ResidentIndians intheGLCCcountriescoveringBahrain,Dubai, Kuwait,Qatar and Saudi

Arabia.TodaytheCompany hasaproudgroupofover10,00,000prudenthouseownerswho have

enjoyed theCompany's financial assistance.

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Scope of the study

ThestudywaslimitedtotheFinancialServicemarketofIndiawhichincludedNBF Cs. Thestudywascompletedwithinthetimeframeof60days(2months) startingfrom1stApril,2010and

endingon1stJune,2010.

To conduct the analysis on the NBFCs , secondary data from the published sources has beencollected.

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Research Methodology

Research design

SincetheresearchisforindustryanalysisanditisstructuredforNBF CS.Theresearchuses

secondarydata for analysIsandinterpretation.

Data collection

Therearetwomethodsofdatacollectionthatcanbeconsideredwhencollectingdatafor research purpose.

Thesedata collection types includethe following:

1.Secondarydata

Thesecondarydatacollection methods wereused in thestudy.

Secondary data

Thesecondary datafortheresearchwascollectedfromjournals,researcharticles,booksand internet

websites, annualreportsetcwhosedetails andreferences has beengiven in Chapter-

2andinReferences.ThesourceofthesecondarydatawasBritishLibrary, NBFCsand

Internet.

Secondarydatawasthemainsourceinformulatingtheconstructsof Acomparativestudy ofNBFCs

inIndia

Field Work Plan

ThestudywasconductedinNewDelhi(NCRandBangalorevisitingdifferentinstitutions

and analyzingthe different NBFCswork.

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CHAPTER 2

CONCEPTUAL FRAMEWORK

Regulations of NBFCs

In terms of 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 regulators 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, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or

Housing Finance Companies regulated by National Housing Bank.

A company incorporated under the Companies Act, 1956 and desirous of commencing business 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 applicant companies do not need to log on to

the COSMOS application and hence user ids for these companies are not required). The company

has to click on CLICK for Company Registration on the login page. A window showing the Excel

application forms available for download would be displayed. The company can then download

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 the correct Regional Office in

the field wC-8 of the wAnnx-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

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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 Certificate

of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI

Act, 1934 are satisfied.

IntermsofSection45-IAoftheRBIAct,1934,itismandatorythateveryNBFCshouldberegisteredwithRBItocommenceorcarryonanybusinessofnon-banking

financialinstitutionas definedinclause(a)ofSection45IoftheRBIAct,1934.

However,toobviatedualregulation,certaincategoriesofNBFCswhichareregulated

byotherregulatorsareexemptedfromtherequirementofregistrationwithRBIviz. Venture

Capital Fund/Merchant Banking companies/Stock broking companies

registeredwithSEBI,InsuranceCompanyholdingavalidCertificateofRegistration

issuedbyIRDA,NidhicompaniesasnotifiedunderSection620AoftheCompanies

Act,1956,Chitcompaniesasdefinedinclause(b)of Section2oftheChitFundsAct,

1982orHousing FinanceCompanies regulated byNational Housing Bank.

A company incorporated under the Companies Act, 1956 and desirous ofcommencingbusiness ofnon-bankingfinancial institution as defined under Section 45

I(a)oftheRBIAct,1934shouldhaveaminimumnetownedfundofRs25lakh (raised to Rs 200

lakh w.e.f April 21, 1999). Thecompany isrequiredtosubmititsapplication onlineby

accessingRBIssecured websitehttps://secweb.rbi.org.in/COSMOS/rbilogin.do(the

applicantcompaniesdo not need to log on to the COSMOS application and hence user ids

for these companiesarenotrequired).Thecompanyhastoclickon CLICKforCompany

Registration onthelogin page. A window showing the Excel application forms available for

download would be displayed. The company can then download

suitableapplicationform(i.e.NBFCorSC/RC)fromtheabovewebsite,keyinthe

dataanduploadtheapplicationform.Thecompanymaynotetoindicatethenameof

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thecorrectRegionalOfficeinthefieldC-8oftheAnnex-

IdentificationParticularsworksheetoftheExcelapplicationform.Thecompanywould

thengetaCompany ApplicationReferenceNumberfortheCoRapplicationfiledon-

line.Thereafter,the companyhas to submit thehardcopyof theapplication

form(indicatingtheCompany ApplicationReferenceNumberofitson-

lineapplication),alongwiththesupporting documents,totheconcernedRegional Office.

Thecompanycanthencheckthestatus oftheapplicationbasedon

theacknowledgementnumber.TheBankwouldissue

CertificateofRegistrationaftersatisfyingitselfthattheconditionsasenumeratedin Section 45-IA

ofthe RBI Act, 1934 aresatisfied.

AllNBFCsarenotentitledtoacceptpublicdeposits.OnlythoseNBFCsholdinga validCertificateofRegistrationwithauthorisationtoacceptPublicDepositscan

accept/holdpublicdeposits.NBFCsauthorisedtoaccept/holdpublicdepositsbesides

havingminimumstipulatedNetOwned Fund(NOF)shouldalsocomplywiththe

Directionssuchasinvestingpartofthefundsinliquid assets,maintainreserves, rating etc. issued

bytheBank.

Presently,themaximumrateofinterestanNBFCcanofferis12.5%.Theinterest may be paid orcompounded at rests not shorter than monthly rests.

TheNBFCsareallowedtoaccept/renewpublicdepositsforaminimumperiodof12

monthsandmaximumperiodof60months.They cannotacceptdepositsrepayable on demand.

TheNBFCsareallowedtoaccept/renewpublicdepositsforaminimumperiodof12monthsandmaximumperiodof60months.They cannotacceptdepositsrepayable on demand.

NBFCscannotofferinterestrateshigherthantheceilingrateprescribedbyRBIfromtimetotime.Thepresentceilingis12.5percentperannum.Theinterestmaybepaid or compounded

at restsnot shorter than monthlyrests.

NBFCs cannot offergifts/incentives or anyother additional benefit to the depositors.

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NBFCs (except certain AFCs) should haveminimum investment grade creditrating. Thedeposits with NBFCs arenot insured. The repayment of deposits byNBFCs isnot guaranteed byRBI. CertainmandatorydisclosuresaretobemadeaboutthecompanyintheApplication Form issued

bythe companysolicitingdeposits.

EffectivefromApril24,2004,NBFCscannotacceptdepositsfromNRIsexceptdepositsbydebittoNROaccountofNRIprovidedsuchamountdoesnotrepresent

inwardremittanceortransferfromNRE/FCNR(B)account. However,theexisting NRIdeposits

can berenewed.

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LICHousing Finance

Housing Finance Industry

Indiashousingfinanceindustrycomprisesofbanksandhousingfinancecompanies.They

havecontributedtonewresidentialhomeloansatacompoundedannualgrowthrate(CAGR) ofmorethan

30 percentduringthe period 2002-2007. This has been duetothe combined effect of

aboomingeconomyand low interest rates.

Further,steadypricesandcontinuationoftaxconcessionstoself-occupiedresidentialhome

borrowersarecontributorstothegrowthoftheindustry.Theaverageageofborrowershas declined over

the years, while the number of double income households has grown significantlyenablingthem to

borrow higher loanamountdueto higher repaying capacity.

Thescenario ofunprecedented growth in housingfinance, drivenbylow interest rates,

increasingpurchasingpowerandattractionoftheyieldinthissectorhasbeguntoshowsigns

ofchangelastyear.Therehasbeenadecreaseindemandduringthelastoneyear.Earlierto

thati.e.,during2006to2007homepricesincreasedataCAGRof30to40percentagainsta

20percentincrementinsalarieswitnessedinmetrosandlargecities.Thishadaffectedthe

buyers affordability.

Astheborrowingcostforbanksandhousingfinancecompaniessteadilyincreasedinline withrising

interestratesintheeconomyinthepasttwoyearsuptoQ3of2008-09,banksand

housingfinancecompaniesresortedtohikeininterestratessoastomaintaintheirinterest

spreads.Interestratesonnewhomeloanoriginations haveincreasedsignificantlyby200

basispointsduringApril2008toSeptember October2008.Asaresultahigherproportion

ofmonthlyincomewasbeingpaidoutashomeloanequatedmonthlyinstallments (EMI).

Thecombinedeffectofanincreaseinpropertypricesandinterestrateshasmeantthathome

loanbuyers,whowouldhavehadtoborrowlessataninterestrateof8.75percentayearago,

nowhavetoborrowmoretobuythesamepropertyduetohigherpropertypricesathigher

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interestratesof10.5to11percent.Thistrendhasresultedinbothloweraffordabilityi.e.,an

averagehomeatahigher

multipleofannualincome,andhigherdebtburden(meaningthata

largerproportionofincomegetsspentashomeloanEMI).Further,theincreaseininterest rates on fresh

loans to 10.5 to 11 percentfrom 8.75 percent meant increasein debt burden i.e.,

higherinstallmenttoincomeratio.Alongwith,theeconomicdownturnandconsequential apprehensionso

fjobinsecurityandincomereductionledtoslumpinthemarket.

However,thescenariohastakenthereverseturninthelastquarterofthefinancialyear2008-09,which

wasevidentfromthehigherbookingofflats,andsharpincreaseinthedisbursements.Real

estatedevelopershavetakensensibledecisioninreducingorslashingratesinmajorcentres

speciallyMumbai,Thane,NaviMumbai,DelhiNCRandBangaloretoencashontheexisting

demandintherealestatemarket.Thegooddealsmightbeofferedforafewweeksorforthe

firsttenpropertiesorforakillerdealforatime-boundtwodaysorsimilarschemesbutyes,

thewritingisclearonthewallthatthewillingnesstoconnectwiththe realpricinghas

dawnedonthedeveloperstosellatreducedpricestoencouragemoreandmoresales.The salesteamsin

thebuilder/developerofficesareattheirall-timecreativebestwithsales tactics.Theynowunderstand

clearlythat withbuyersunwillingto relentonunrealistic pricing,thereisanevengreaterneedtoprice

competitively,maybewithalowerprofit

margin,thanholdingontothepriceandprojectastheinterestmeterruns.Theseproactive steps should

ensure renewed demandsand increased volumes duringthecurrentyear

TheIndianeconomy,whichwasonarobustgrowthpathupto2007-08,averagingat8.9per cent duringthe

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

growthexperiencedasignificantdownturnandtheloss of growthmomentumwasevidentinall

categories, viz., the basic, capital, intermediateand consumergoods.

However,thefiscalstimuluspackagesoftheGovernmentandthemonetaryeasingofthe ReserveBank

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will,however,arrestthemoderationingrowthandreviveconsumptionand

investmentdemand,thoughwithsomelag,inthemonthsahead.Furthermore,prospectsof

theagriculturalsectoralsoremainbright,andthiswillcontinuetosupporttheruraldemand.

Finally,inthewakeofexpectedimprovementinagricultural productionaswellaslow

internationalcommodityprices,inflationarypressuresarealsoanticipatedtoremainatalow level

through thegreaterpart ofthe 2009-10.

IndianHousing Financescenario

Indiashousingfinanceindustrycomprisesofbanksandhousingfinancecompanies.They

havecontributedtonewresidentialhomeloansatacompoundedannualgrowthrate(CAGR)

ofmorethan30percentduringtheperiod2002-2007.Thescenarioofunprecedentedgrowth

inhousingfinance,drivenbylowinterestratesandboomingeconomy,hasbeguntoshow

signsofchangelastyear.Therehasbeenadecreaseinhomepricesduringthelastoneyear.

Earliertothati.e.,2006to2008homepricesincreasedataCAGRof30to40percentagainst

a20percentincrementinsalarieewitnessedinmetrosandlargercities.Thishadaffectedthe

buyersaffordability.Theaveragehomebuyerspentaround4timeshisnetannualincome

forpurchasinganewresidentialhomein the3-4yearstillMarch2005.(sourceCRISIL report

19thFebruary,2009)Astheborrowingcostforbanksandhousingfinancecompanies

steadilyincreasedinlinewithrisinginterestratesintheeconomyinthepasttwoyearsuptoSeptembe r2008

,banksand housing financecompanies resorted to hikein interest rates so as

tomaintaintheirinterestspreads.Interestratesonnewhomeloanoriginationshadincreased significantly

by200basispointsduringApril2008toAugust September2008.Asaresult

ahigherproportionofmonthlyincomeswaspaidashomeloanequatedmonthlyinstalments

(EMI).But,thescenariohastakenthereverseturninthelastquarterofthefinancialyear 2008-

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09whichwasevidentfromthehigherbookingofflatsand sharpincreaseinthe

disbursements.Asinterestratesare heading southward,publicsectorbankshavesetthepace.

Housingfinancecompanies wouldfollowthesuit.Itmaybementionedherethatwiththe

declineininterestrates,LICHousingFinancehaspassedon150basispointsratecuttothe customersi.e.75

basispointseachon1stJanuary,2009and1stApril,2009.Ourinterest rates areamong the lowest in the

industry. This hashelped our company in retaining

customersandmaintaininghighgrowthratesevenintoughconditions.Andinterestrateis just oneof the

factors. Transparency, hassle-free services, property prices and buyers

repaymentcapacityareequally important.Thecustomerwouldnotarriveatadecisionsolely

basedonthereductionininterestratesforoneyear.LICHousingFinanceisoneofthebest players in the

industryin terms ofEMIas ourcompanyhas no hiddencosts.

LIC Housing Finance

LIC HousingFinance Ltd. is oneof thelargest Housing Finance Company inIndia.

Incorporatedon19thJune1989undertheCompaniesAct,1956,thecompanywaspromoted

byLICofIndiaandwentpublicintheyear1994.TheCompanylauncheditsmaidenGDR

issuein2004.TheAuthorizedCapitaloftheCompanyisRs.1500Million(Rs.150Crores)

anditspaidupCapital isRs.850Millions(Rs.85Crores).The Companyisrecognizedby

NationalHousingBankandlistedontheNationalStockExchange(NSE)&BombayStock

ExchangeLimited(BSE)anditssharesaretradedonlyinDematformat.TheGDR'sare listed on

theLuxembourgStock Exchange.

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Profile&Progress

Provides loans forhomes, construction activities,and corporate housingschemes.

Around91%oftheloanportfolioderivedfromtheretailsegmentandtherestfrom largecorporateclients

Formed threenew whollyowned subsidiaries in 2007-08 to promotemarketingofFinancial products and venture capital fund.

RatedAAAbyCRISILforthe8thconsecutivetimein2008-09;maidenFixedDeposit. program receivedan FAAA/stable ratingbyCRISIL. An offshoot ofLifeInsuranceCorporation ofIndia(LIC), incorporate in 1989. Registered &CorporateOfficeat Mumbai with 6 regional offices, 13 BackOffices and 130 marketingunits across the country. 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777Customer Relationship Associates (CRAs) comprise its pan-Indian marketingnetwork. Representative overseaspresencein Dubai and Kuwait. Listed on theBombayStock ExchangeLimited, National Stock ExchangeofIndiaLimited

and theLuxembourgStock Exchange.

Morethan 10,00,000 satisfied customers across the countrysinceinception. Reported a23.90 percentincreasein disbursals in 2008-09. Improved return onnetworthby267 basispoints to 23.80 percent in 2008-09. Reduced net NPA to arecord low of0.21 percent in 2008-09. Enhanced PAT 37.30 percent to Rs. 531.62 crorein 2008-09. Un-interrupted dividendpayment record since1990.

Recommended 30 percent increasein dividend over previousyear i.efrom100 percent to130 percent.

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Figure 1: FinancialPerformance

Interestincomefromhousingloansincreased34.90percentfromRs.2036.79crorein2007-

08toRs.2747.65crorein2008-

09.Thenetinterestincomegrewby31.97percentfromRs.553.94crorein2007-

08toRs.731.04crorein2008-09.Profitaftertaxsurged37.30percent from Rs. 387.19

crorein2007-08 to Rs. 531.62 crorein 2008-09.

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Figure 2: Debt-equity Ratio

Figure-3: PBDTM & PAT

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Figure-4: ROG Sales

Operations:

Funds mobilizedgrew 49.38 percent from Rs. 7489.70 crorein 2007-08 to Rs.11,188.33crorein 2008-09.

Sanctions(Ind.+Proj.)increased26.46percentfromRs.8617.88crorein2007-08toRs.10898.47 crorein 2008-09.

Disbursements(Ind.+Proj.)grew23.90percentfromRs.7071.48crorein2007-08toRs.8762.01 crorein 2008-09.

Loan portfoliogrew 26.18 percent from Rs. 21936.41 crorein 2007-08 to Rs.27679.28crorein 2008-09.

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Margins:

Netinterestmarginimproved by 10basispointsfrom2.85percentin2007-08to2.95 percent in2008-09.

Returnonequitygrewby267basispointsfrom21.13percentin2007-08to23.80 percent in2008-09.

Net profitmargin improved by49basispoints from 17.82 percent in2007-08 to 18.31percentin 2008-09.

AssetQuality:GrossNPAdeclinedby63basispointsfrom1.70percentin2007-08to1.07percentin2008-09.NetNPAlevelsdeclined43basispointsfrom0.64percent in 2007-08

to 0.21 percent in 2008-09.

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Figure-5: Non-Performing Assetsand

provisions:

TheamountofgrossNon-PerformingAssets(NPA)ason31stMarch,2009wasRs.297

crores,whichisequivalentto1.07percentofthehousingloanportfoliooftheCompany,as

againstRs.372.92crorei.e.,1.70 percentofthehousingloanportfolioason31stMarch,

2008.ThenetNPAason31stMarch,2009isreducedtoRs.57crorei.e.0.21percentofthehousingloan

portfolio vis--vis Rs. 140.90 crorei.e., 0.64 percent ofthehousing loan

portfolioason31stMarch,2008.Thetotalcumulativeprovisiontowardshousingloanason31stMarch

,2009isRs.240.25crore.Duringtheyear,theCompany haswrittenoffRs.5.40 croreof housingloan

portfolio as againstRs. 38.99 croreduring the previousyear.

FundraisingTheCompanyraisedfundsaggregatingtoRs.11,188.33crorethroughterm

loansfrombanks,Non-ConvertibleDebenture(NCD),sub-ordinatedebts,commercialpaper,

Public Deposit and others which were used for fresh disbursements as well as

repayments/prepaymentsofpastborrowings.TheCompanysNCDissuewasratedAAAandPubli

cDeposit was rated as FAAA/STABLE byCRISIL.

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Macro-Economic AnalysisCompetition

TheHousing Finance Industry is one of the most keenly competitive segments of the

Economy,withtheBankingsectorhavingasignificantpresence.However,HousingFinance

Companieswithadedicatedfocusontheindustryandbetterunderstandingoftheunderlying

realestatemarketsstandonabetterfootingwhenitcomestounderstandingtheneedsand

requirementofthecustomersasalsoassessingtherisksintheindustry.Itmaybementioned

herethatwiththedeclineininterestrates,LICHousingFinancehaspassed on150basis

pointsratecuttothecustomersduringthecalendaryear2009sofar75basispointseachon

1stJanuary,2009and1stApril,2009.Ourinterestratesare among thelowestintheindustry.

Thishashelpedourcompanyinretainingcustomersandmaintaininghighgrowthrateseven

intoughconditions.Andinterest rateisjustoneofthefactors.Transparency,hassle-free

services,propertypricesandcustomeraffordabilityareequallyimportant.NHBhaslowered

itsinterestratesonrefinancetohousingfinancecompanies.Refinanceforruralhousingat

concessionalrate of 8 percent perannum for sevenyears has also been provided.Its PLRhas

beenreducedto10.75percentperannum.TherefinancefacilityofRs.4,000croreextended

byRBItoNHBwillbeon-lentbyNHBtohousingfinancecompanieswithacapofRs.400 croreper

housingfinancecompanywith the condition that the refinancewould be availableat

aninterestof8percent,onlyforloansbelowRs.20lakh.HousingFinance,theCompany,

throughitscompetitivepricing,transparencyin operations,widedistributionnetworkand

goodcustomerservice,hasnotonlybeenabletoshowagoodgrowthinnewbusiness,but has shown an

improved retention rate, which is reflectedin highgrowth ofloan book.

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Opportunities

Therearemanyuniquecharacteristicsofhousingdistinguishingitfromothergoods.Itisa universal

necessity.Homeownershipisasocialgoal,bringingsocialstatustothebuyer.

Housingisalsoarelativelyexpensiveasset,oftensoakingupalifetime ssavings.Housing

propertieshaveadownwardslopingdemand curve,whichmeansthatlesspeoplewould

effectivelybuywhenpricesarehighandviceversa.Athigh prices,buyerspostponetheir

buyingdecisionsandoptforrentedaccommodation.Atlowprices,people oftenpurchase

morethanonehouse.Disposableincomesdeterminepurchasingpower.Governmentpolicies

relatingtointerestrates,mortgagesubsidies,taxrebateandothertaxeslikestampdutyetc.

alsoimpactthehousingpropertymarket.Thehousingsectorismarkedbyavarietyoftaxes

andregulations.Thesearemeanttoensurethesafetyofhousesforoccupationandtoconfer

rightsofownershiptoenablefurthertransactions.Giventhatbuildingoracquisitionofa

houseusually involves several intermediary agents (either statutory like registration of

varioustitledocumentsorfacilitatingagentssuchasbrokers,buildersorfinanciers),thefinal

costofacquisitionincludesnotjustthepriceofthepropertythatispaidtotheseller(incase

thepropertyispurchased)butalsoalltheinterveningtransactioncosts.Asforthehousing

propertymarket in India, the residential housing property segment constitutes about 75

percentoftherealestatemarketintermsofvalue.Realestatedevelopment activityhas

shiftedfrommetrostotheirsuburbsandtier-twocities.Agradualshifttotier-threecitiesand

ruralareasistakingplace.Easyavailabilityoffinancefromthehousingfinancecompanies

andcommercialbanksatlowerinterestrates,increasedsalariesandavailabilityoffiscaland

taxbenefitsarepropellingthedemandforhousingproperties.ThegrowthoftheInformation

TechnologyEnabledServices(ITES),industryhasbeenasignificantcontributorofhousing

property demandin recent years. ITES firmsare moving from traditional centreslike

Mumbai,Delhi,Bangalore,HyderabadandChennaitotheNationalCapitalRegion, Pune,

Chandigarh,Jaipur,etc.inordertobecosteffective.Thisisresultinginnotonlytheboomin residential

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propertymarketsbutalsointheinstitutionalpropertymarketsinthesecities. Thereisgreat

demandfor modern officebuildingsand commercial spaces inIndia.

Threats (bottlenecks)

Impact of legal charges and documentation fees

Therearetaxes/duties/feespayabletothestateattheconstructionstage.Therearetwo aspects of

thecost namely:

i) monetarycost 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 havetobetakenfromdifferentdepartmentsandthattoosequentially.This

delaystheprocessofhousingconstructionandoccupation.Theactualfeesimposedbythe

governmentarenotnecessarily highbutthetimetakentoobtainrequisitepermissionsisvery long,

procedures cumbersome and sometimes involves extra payments to facilitate the

movementoffilesandgettingthetransactionthrough,issignificantvis--visthe statutory

fees.Thedelayshighlightthesluggishnessofthemarketbyincreasingthegapbetween

changein demand and themarketresponse to it.

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FutureOutlook:

Itisestimatedthatthehousingfinanceindustrywillbeabletomaintainahighergrowthin fresh

origination ofresidential homeloans overnext threeto five yearsmainlydueto

increasedaffordabilityoftheborroweri.e.ratioofaveragepropertypricetoaverageannual

income,onaccountofthefallingloaninterest ratesanddecreaseinpropertyprices.The

averageageofborrowershasdeclinedovertheyears,whilethe numberofdouble-income

householdshasgrownsignificantlytherebyenablingthemtoborrowhigherloan quantum

duetoincreasedaffordabilityandrepaymentcapacity.Thegrowthdriverswillcontinueto increase

demandforself-occupiedresidentialhousing;Revivalofeconomywillcertainly

leadtoasteadyincreaseinmonthlyincomesacrosskeysectors.Risingproportionofdouble

incomehouseholds,renewedconfidencein higherincomegeneration,reassuranceofjob

securityand availability of varietyof financing options should stimulate growth of the

housingsector.Allthesefactorswillfurtherboosttheimpactofincreased affordability, leading to

the sectors steady and comfortable growth. Looking forward, LIC Housing Finance would

like to remain focused in end-user segment for growth and increased

profitabilityandwishtomakethecomingyear,ayearoffurtherconsolidationandprogress

bycrossing greater milestones.

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Reliance Capital:

IndianEconomy:

Afterseveralquartersofaround9percentGDPgrowth,theratemoderatedto7.6percent

and5.3percentinthelasttwoquartersof2008, andisexpectedtoaverage7percentfor

FinancialYear(FY)2009.The slowdownhas beenlargelycausedbyadecelerationin industrial

growthfrom about 8.5 percent in FY 2008 to 2.4 percent in thethird quarter ofFY

2009.Surprisingly,theagriculturesectorsloweddownfrom4.5percentinFY2008to-2.2

percentinthethirdquarterofFY2009.Incontrast,theremarkableservicesectorsuccess

storyremainedintactasoutputgrew9.9percentinthirdquarter,downonlyslightlyfrom

10.8percentin2008.Themoderationfrompreviousyearswasduetoseveralfactors.The

financialcrisis andglobalslowdownaffectedbothexportgrowthingoods,servicesand

henceindustrialproductionas well ascorporatesaccesstodiverseandlowcostfunding.

Moreover,highinflationduringthefirsthalfof FY2009forcedRBItopursueatight

monetarypolicy,whichfurtherdampenedinvestmentand consumption.However,thefact

thatIndiasgrowthinthelastfewyearshasbeenfairlybroadbased (across sectorsand

regions)andbalanced(withconsumption,investment,savingsandexportsallrising)bodes

wellforthestructuraltransformationoftheeconomyasthebusinesscycleentersarecovery phase, in

thesecond halfof FY 2010.

RBIcutsratesaggressively:IndiasWholesalePriceIndex,whichwasashighas12.9per

centinAugust2008fellto0.3percentbyMarch2009resultinginanaverageinflationof around8 per

cent for FY09. Thesharpfall in inflation was caused byahigh base, a

significantfallincommoditypricesandvarious dutycutsannouncedbytheGovernment.

Inflationisexpectedtoremainlowandmayevenenterthenegativeterritoryforashorttime

beforemovingup again towards the end of 2009.

FallinginflationandslowinggrowthgavetheCentralbankenoughroomandreasontocut

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ratesaggressively.FromSeptember08toMarch09,theRBIhascutRepo,ReverseRepo

andCRRby400,250and400bpsrespectively.Thiseasinginmonetarypolicyislikelyto

translate,withalag,intoasignificantboostfortheeconomy.India sTradeDeficitwidens,

largelyduetoincreasingimportgrowth:Globaldemanddestructionduetotherecentcrisis

ledtoamere3.4percentgrowthinexportsinFY2009whilehigher commodityprices

(includingoil)peggedtheimportsgrowthat14.3percent.ThisresultedinatradedeficitofUS$119billi

oninFY09comparedtoUS$88.5billioninFY2008.Forthefirstthreequarters inFY2009,the

highertradedeficit,coupledwithnegativecapitalflows,reducedIndia s BalanceofPayments(BoP)

surplus toadeficitofUS$20.4billion.After10consecutive

quartersofsurpluses,thisisthesecondtimeinthreequartersthatBoPhasendedinadeficit. The

capitala/c balancetoo turned negative (-US$3.7 billion) in third quarter FY 2009 mainly

duetonetoutflowsunderportfolioinvestment,bankingcapitalandshort-termtradecredit. Outflows

under portfolioinvestment wereled bylargesales of equities byFIIsand slowdown

innetinflowsunderADRs/GDRs.IndiasforeignexchangereservesdeclinedbyaboutUS$59billion

inFY2009,butstillremainedatanimpressiveUS$250billionin March2009.The countryscurrent

foreignexchangereservesfarexceeditstotalofficialandprivatesector external debt makingIndias

balanceof payments position quite

comfortable.Importdeclinesmorethanexportinrecentmonths,therebyimprovingtradedeficit:Sinc

e January 2009,Importshavedeclinedmorethanexportsduetobothloweroilimportbillsand

slowingdomesticinvestment and consumption. This has helped in narrowingour tradedeficit

further.ThetradedeficitforthemonthofMarchnarrowedtoUS$4billion(4.1percentof GDP,

annualized) compared to US$14 billion in August 2008.

RelianceCapital

(RCL)isapartoftheRelianceAnilDhirubhaiAmbaniGroupandisoneofIndiasleading

andfastestgrowingprivatesectorfinancialservicescompanies,andranksamongthetop3

privatesectorfinancialservicesandbankinggroups,intermsofnetworth.Itisaconstituent

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ofS&PCNXNiftyandMSCIIndia. RelianceAnilDhirubhaiAmbaniGroupisamongst Indias top 3

business houses with a market cap of US$ 22 billion, and 150 million

customers.Ithasastrongpresenceacrossawidearrayofhighgrowth consumer-facing

businessessuchasTelecom, FinancialServices,Energy,Power,InfrastructureandMediaan

EntertainmentRelianceCapitalhasinterestsinassetmanagementandmutualfunds,lifeand

generalinsurance,privateequityandproprietaryinvestments,stockbrokinganddepository

services,consumerfinance,asset reconstruction,institutionalbrokinganddistributionof financial

products.

RelianceCapital,aconstituentofS&PCNXNiftyandMSCIIndia,isapartoftheReliance

AnilDhirubhaiAmbaniGroup(www.relianceada.com).ItisoneofIndia'sleading,most valuable

and fastestgrowingfinancial services companies in theprivate sector.

Reliance Capital has interests in asset management and mutual fund; life and general

insurance; consumer finance and industrial finance; stock broking; depository services;

privateequityand proprietary investments;exchanges,assetreconstruction;distributionof

financial products and other activities in financialservices.

RelianceMutualFundisIndia'slargestMutualFundwithoversevenmillioninvestors.

RelianceLifeInsuranceisoneofIndia'sfastestgrowinglifeinsurancecompaniesandamong

thetopfourprivatesector insurers.RelianceGeneralInsuranceisoneofIndia'sfastest growing

general insurance companies and among the top three private sector insurers. RelianceMoney

isoneofIndiasleadingretailbrokeragehousesanddistributorsoffinancial products and services.

RelianceCapitalhasanetworthofRs.7,712crore(US$2billion)andtotalassetsofRs.

26,003crore(US$ 6 billion) as on March 31, 2010.

RelianceConsumerFinanceoffersawiderangeofproducts,whichincludepersonalloans,

vehicleloans(carandcommercial),homeloans,loanagainstproperty,andSMEloans.The

focusinthisbusinessisprimarilytheassetqualityandtheprofitabilityofeachloangiven;

notmerelygrowthormarketsharegains.IntheSeptembertoDecemberquarteroftheyear,

therewasasteepdropinliquidityduetotheglobalfinancialmeltdownthathaditsfallouton

http://www.relianceada.com/http://www.relianceada.com/

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India.Consequentlyweslowedourdisbursals.Thisnaturallyresultedinasmallerloanbook,

whichfellfromRs.9,513crorelastyeartoRs.8,576crorethisyearRelianceConsumer

FinanceoffersawiderangeofproductswhichincludeHomeloans,Loansagainstproperty, Vehicle

loans(carsandcommercialvehicles),SMEloansandPersonalloans.Thefocusin thisbusiness isnot

justonthegrowthofcreditpersebutalsoon thequality ofcredit.Backed bythelong-

standingconservativeapproach,wehavedevelopedstringentin-housecreditrisk

managementsystemstoensurethehighestqualityofcredit.Therewasreductionthesizeof

ourloanbooktoRs.8,576crore(US$2billion)asonMarch31,2009,asagainstRs.8,902

croreattheendofDecember31,2008.Ourloanbookisspreadacross1,19,759customers and 23

locations. The loan book as on March 31, 2008 was Rs.7,120 crore. Reliance

ConsumerFinancegeneratedrevenuesofRs.1,200crore(US$261million)fortheyear

endedMarch31, 2009,asagainstRs.395croreforthecorrespondingpreviousperiod an

increaseof204percent.FortheyearendedMarch2009,itachievedaprofitbeforetaxof

Rs.91crore(US$20million)asagainstRs.36croreanincreaseof152percent._Reliance

Capitalssubsidiariesi.e.RelianceConsumerFinancePvt.Ltd.andRelianceHomeFinance

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Table-1: Businessmix of Reliance Capital

Asset Management Mutual Fund, Portfolio Management, OffshoreFund

Insurance LifeInsurance, GeneralInsurance

ConsumerFinance&Home

Finance

Mortgages,LoansagainstProperty,BusinessLoans,Loansfor

Commercial Vehicles, Loans for Construction Equipment,

AutoLoans,Loans againstshares, BusinessLoans

Brokingand Distribution Stocks Commodities and Derivatives, Wealth Management

Services,PortfolioManagementServices,InvestmentBanking,

Foreign Exchange and Offshore Investment, Third Party

Products

Other Businesses Asset Reconstruction, Institutional Broking, Private Equity,

Exchanges, VentureCapital

Figure-6: FinancialPerformance

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Figure 7: PBDTM & RONW

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Figure 8: ROG Sales & PAT

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TheCompanysgrossincomeforthefinancialyearendedMarch31,2009increasedto

Rs.3,017.29crore,fromRs.2,079.79croreinthepreviousyear,registeringagrowthofover

45.08percent.Theoperatingprofit(PBDIT)oftheCompanyincreased46.24percentto

Rs.2,334.99croreduringtheyear,upfromRs.1596.69croreinthepreviousyear.Interest

expensesfortheyearincreasedby 203.02percenttoRs.1,236.75crore,fromRs.408.15

crore,inthepreviousyear.DepreciationwasatRs.21.22croreasagainstRs.17.09crorein

thepreviousyear.TheprovisionfortaxationduringtheyearwasRs.109crore.Thenetprofit

fortheyeardecreased byover5.60percenttoRs.968.02crorefromRs.1,025.45croreinthe

previousyear.AnamountofRs.193.61crorewastransferredtotheStatutoryReserveFund

pursuanttosection45-

ICoftheReserveBankofIndiaAct,1934,andanamountofRs.96.81crorewastransferredtotheGenera

lReserveduringtheyearunderreview.TheCompanys

NetworthasonMarch31,2009,stoodatRs.6,697.42crore,asagainstRs.5,927.50Fixed

DepositsTheCompanyhasneitheracceptednorrenewedanyfixeddepositsduringtheyear.

Fivedepositaccounts,aggregatingtoRs.26,000,remainedunclaimedontheduedatesason March

31, 2009. The Company has intimated the deposit holders individually of their

unclaimedamountwitharequesttoreturntheFixedDepositReceiptsduly dischargedto enable

theCompanyto repaythe amount.

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Macro-EconomicAnalysis

Opportunities

Lowretail penetration offinancial services / products inIndia Tremendous brand strength andextensivedistribution reach Opportunityto cross sellservices Increasingper-capitaGDP Changingdemographic profileof the countryin favourof theyoung

Threats

Competition from local and multinational players. Execution risk. Regulatorychanges. Attraction and retention of human capital.

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FutureOutlook

Indiahassurvivedoneoftheworstglobalcrisesinhistorybetterthanmostothereconomies. Therecent

recoveryinmanyoftheleadingmacroindicatorsofeconomicactivityhasled

manytobelievethattheworstisoverfortheIndianeconomyandweareonourwaytoa

highergrowthtrajectory.Therehasbeen aresurgenceinsalesacrossavarietyofsectors

fromautomobilestocement,steelandelectricity production. Railandporttraffictoohas

seenanuptick.ThePurchasingManagers Index(PMI)hasshownanimprovementfroma

lowof49.5forMarchto53.3forApril2009,signifyingarenewedtrendofgrowthin

manufacturing.Indiaisthesecondmajoreconomy afterChinawhere thePMIhascrossedthe

baseline50mark,indicatingthestartofanexpansionaryphase.Thegrowthinfirsthalfof

FY2010isexpectedtoremainsoft,withtheeconomy turningaroundinthesecondhalf.The

driversofthisturnaroundincludegovernment sfiscal stimulusmeasures,thecollapsein commodity

prices,thecomingonstreamofsignificantdomesticoilandgasoutput,therecent

infusionofrecordlevelsofFDI,theimprovementintradedeficitandtheenvironmentfor

externalcommercialborrowing(ECB)thefallintherealexchangerate,theRBI saggressive

monetarypolicy actionsandtheexpectedstabilizationoftheglobaleconomy.Indiaremained

thesecondfastestgrowing economyinFY2009afterChina.Inthelightoftheongoing

globalrecession,Indiawill,evenatamodestgrowthof6percentin FY2010,beoneofthe

fastest growingin theworld.

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Shriram Transport Finance

Economic overview

Theglobaleconomicconditionsdeterioratedsharplyduringtheyear2008-09withseveral advanced

economiesexperiencingtheirsharpestdeclines.Theassociatedadverseeffects

spreadacrossemerging marketeconomies(EMEs)particularlybythethirdquarterofthe

yearandaccentuatedthesynchronized globalslowdown.Inflationconditionswitnessed

sharpvolatilityduringtheyearasheadlineinflationinmajoradvancedeconomiesfirmedup

considerably uptoJuly 2008, but declined sharply thereafter. The global

financialenvironmententeredacrisisphaseinmid-

September2008,followingthegrowingdistress

amonglargeinternationalfinancialinstitutions.IndiathethirdlargesteconomyinAsiais

estimatedtohavegrownlessthan7percentin2008-09,aftergrowingatanaveragerateof

around9percentormore inthreefiscalyearstoMarch2008.Thiswasonaccountofa global

economicdownturn and a contraction in domesticdemand.

Commercialvehicleindustryoverview

Thefinancialyear2008-09endedwithanetdeclineof22.3percentinnewcommercial

vehicle(CV)sales(domesticandexports)ascomparedtothepreviousyear.Theindustry

witnessedahealthygrowthduringthefirst-halfof2008-09,postwhichtheCVsalesstarted declining

ata high rate. This can be primarily attributed to the weakening of macro- economic

indicators, resulting in drop in freight availability, and restricted credit

availability.However,inthefourthquarter,theindustrywitnessedaslightrevivalinsales, on a

month-on-month basis, partly driven by the stimulus packages provided by the government.

The key steps taken include reduction in excise duty and provision of accelerated

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depreciationtobenefitCVbuyers.Inadditiontothis,thegovernmentalso undertook measures to

improveliquidityforNBFCs and provide financial assistanceto State

TransportUndertakingsforpurchasing busesundertheJawaharlalNehruNationalUrban Mission.

Major demand drivers

1.Roadways haveremained adominant transportmode:

Overthelastfewdecades,roadwayshavedominantlyimprovedtheirshareduetogreater coverage,

higherflexibilityofdoor-to-doordeliveryand lowerrisk of handlinglosses.

Further,thegovernmentsinvestmentinthedevelopmentofnationalhighwaysoverthelast

fewyearshasledtohigherdemandforroadtransport.Withfurtherimprovementinroad

infrastructureandhighergrowthexpectedinroadtransport(whichareprimarilytransported

throughroadways),roadfreightisexpectedtoaccountfor63.5percentofthetotalfreight movement.

2.Higherreplacementdemand:HigherCVsalesoverthelastfewyearswerealsosupported by

replacement demand which stemmed from stricter regulations on overloading and emissions.

TheSupremeCourt, in November 2005, bannedoverloading ofgoods trucks and trailers in

excess of prescribed gross vehicleweight.

Toreducepollution, the AutomotiveResearch

OwnershiptrendinCVS ShriramTransportcaterstosmalltruckoperators(STO

owninglessthanfivetrucks)andfirst-timeusers(FTU),andiscurrentlytheonlyorganised

playerfinancingthissegment(othersareprivatefinanciers).STOsandFTUscontrolaround

75percentofthetotaltruckfleet;however,theyhavepoorfreightoriginationskillsandare

thereforedependent on brokers for amajorityof theircontracts.

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ShriramTransport Finance

Weareapartofthe"SHRIRAM"conglomeratewhichhassignificantpresenceinfinancial

servicesviz., commercialvehiclefinancingbusiness,consumerfinance,lifeandgeneral

insurance,stockbroking,chit fundsanddistributionoffinancialproductssuchaslifeand

generalinsuranceproductsandunitsofmutualfunds.Apartfromthesefinancialservices,

thegroupisalsopresentinnon-financialservicesbusinesssuchaspropertydevelopment,

engineeringprojects andinformation technology.

OurCompanywasincorporatedintheyear1979andisregisteredasaDeposittaking

NBFCwithReserveBankofIndia underSection45IAoftheReserveBankofIndiaAct,

1934.

STFCdecidedtofinancethemuchneglectedSmallTruckOwner.Shriramunderstoodthe power

of 'Aspiration' much before marketing based on 'Aspiration' became

Fashionable.ShriramstartedlendingtotheSmallTruckOwnertobuynewtrucks.Butwe

foundamismatchbetweentheAspirationandAbility.TheTruckOperatorwashonestbut

theEquityathiscommandwasnotsufficienttosupportthecreditlevelsrequiredtobuya new truck.

FromDrivertoOwner,evenifonlyofaPre-ownedTruckandfromPre-ownedTrucktothe New

Truck, wehavebeen with himin his journeyof Prosperityas hehas been ourpartner in ourroad to

success and leadership.

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Figure-9:

Financial Performance

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Figure 10-PBDTM & RONW

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Figure 11: Debt- Equity Ratio & ROG- Sales

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Figure 12: ROG - PAT

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Public issue of NCDS

Toexplore and develop additional source of financing and with a view to meet The

Companys businessoperations,TheCompany,pursuanttotheSecuritiesandExchange

BoardofIndia(Issueand ListingofDebtSecurities)Regulations,2008andsubjecttothe

necessaryapprovals,consentsandpermissions,issuedandallottedSecuredNon-Convertible

Debentures, through apublicissue and raisedasum of Rs. 99,999.96 lacs.

Consideringthepotentialinraisingfundsbyissueofnon-convertibledebentures(NCDs),

TheBoard,atitsmeetingheldonJanuary18,2010,hasdecidedtoofferandallot,subjectto the

aforementioned Regulations and such approvals as may be necessary, secured /

unsecured,NCDsnotexceedingRs.50,000lacsin oneormoretranchesthroughanother

publicissuewhich is expected to open for publicsubscriptions in May2010.

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SWOT

AnalysisStrengths

Thepioneer in thepre-owned CVs financingsector Knowledge-driven (products as well as local customers) and relationship-based

businessmodel.

Significantexpertiseandexperienceinvaluationofpre-ownedCVsaswellasinrecovery/collection ofmonthlypayments fromcustomers

Pan-India presencewith 484 branch officesallover the country. Awell-definedandscalableorganisationstructure,capableofsupportingsurging growthLow

delinquencyasassetsarebackedwithadequatecoverandareeasyto repossess with

immediateliquidity

Strong financialtrackrecorddrivenbyfastgrowthinAUMwithlowNonPerformingAssets (NPAs).

ExperiencedandstablemanagementteamStrongrelationshipswithpublic,privateas wellasforeign banks, institutions and investors

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Weaknesses

TheCompanysbusinessanditsgrowtharedirectlylinkedtotheGDPgrowthofthecountry.

Anyslowdown in GDP growthmayhaveanegativeimpact on thebusiness.

Opportunities

GrowthintheCVmarketdrivenbytheeconomicgrowthandtheinfrastructure development inthe country

Strongdemandforconstruction equipment Strong demandforpassenger CVs Strongdemand forpre-owned tractorsLoans forworking capital requirements ofCV users

PartnershipswithprivatefinancierswillenabletheCompanytoenhanceitsreachwithoutsignificant investments in buildinginfrastructure

Threats

Maintaining relationships with customers who are mobile and have no properdocumentation

Maintainingasset quality. Regulatory changes in the Non-Banking Financial Company (NBFC) and transportation

sectors.

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Outlookand opportunities

Theglobalfinancialslumpdrastically squeezedexportdemandforourproductsandservices

inthecountrys mainUSandEuropeanmarkets.TheGDPgrowthfor2008-09isnow

projectedtobeintherangeof6.5to6.7percent.TheGovernmentofIndiaaswellasthe Reserve Bank

of India did a splendid task in somewhat insulating the country and its

financialmarketsfromtheeffectsoftheworldwidecrisis.Theyrespondedtothechallenge quickly

and magnificently, thus minimisingthe impact of the crisis on India while

maintainingcomfortabledomesticandforeignexchangeliquidity.TheGovernmentofIndia

providedthreestimuluspackageswhich,amongstothermeasures,cutexcisedutyby fourper

centacrossthe boardandincreasedplannedexpenditurebyRs.20,000crores.Easingof

monetarycurbs andregulatoryactions of theReserveBank ensured that ourfinancial markets

functionednormallyinspiteofthedisturbances acrosstheworld.Thesemeasures,onone hand

stimulated consumption and on the other hand provided enoughliquidityin thefinancial

markets.Theseinitiatives,coupledwithlowercommodityprices,areexpectedtosoftenthe

downswingbystabilisingdomesticeconomicactivity.Severalfactors,suchasincreased movement

of freightat theleadingports, pick-upin project investments, increased hiring, and

encouragingdatafromanumberofkeymanufacturingsegmentscouldbeanindicatorthat

thedowntrendhasbottomedout andthatoureconomyispoisedtoregainitslostvigour shortly. It is

reported that auto, cement, steel and capital goods sectors have started

performingstronglywhichindicatesapossiblestrongturnaroundin theeconomy.Despite

severalchallengeslyingahead,theIndianeconomyremainsresilientandiswidelyexpected

togrowataround6percentinFY2009-10.ThecumulativeproductiondatafortheAuto

industryfor200809recordedagrowthof2.96percentover200708.During2008-09the

salesofCommercialVehiclesdeclinedby21.69percentwhencomparedtothatoflastyear.

SalesofMedium&HeavyCommercialVehicles(M&HCV)fellby33.16percentandLight

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CommercialVehicles(LCV)recordeda negativegrowthof7.10percent.Inspiteofthe

economicslowdowninthecountry,YourCompanywas abletoonceagainpoststerling

growthintheFY2008-09aswell.YourCompanywas,toalargeextent,insulatedfromthe

downswingasitoperatesmainlyinthepreownedcommercialvehiclesegment,andisthe

onlyorganised player in this segment.

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IDFC

Global FinancialandEconomic Crisis

The year2008-09sawtheworstglobalfinancialandeconomiccrisisin60years. The crisis had

asevereknock-on effect on thedevelopingandemergingeconomies,

andcausedIndiatolosemuchsheenfromthestellareconomicperformanceofthe pastyears.

Itexacerbatedthe beginningofacyclicaldownturninIndiaseconomyandIndiasGDP

growth,whichwas9%during 2007-08,slowedto5.3%inthethirdquarterof2008-09. Although

FinancialInstitutions(FIs)inIndiahaveverylimitedexposuretothetox icordistressedassets,dir

ectlyorthroughderivatives,andtothefailedandstressedglobalFIs, Indiahasfelta

strongimpactthroughtrade,financialmarketsandmoderationincapital

flows.Theimpacthasalsobeen feltbytheinfrastructuresectorinthecountry,largely

throughweakeningofdemand,whichwaspronouncedinthetransportationsector(seeTable

1),andreducedavailability offinances,asexternalcapitaldriedupandtheequity marketOn

theotherhand,theglobaleconomicslowdownledtosofteningofcommoditypricessuchas

crudeoil,aluminum,ironore,copperandsteelafterJuly2008,therebyreducingthecostof

projectsalbeitwithsometimelag. Interest ratesalsostarteddecliningin linewith the

monetarypolicymeasuresadoptedbytheReserveBankofIndia.Nevertheless,thesepositive

effectswereoffsetbytheweakening rupee, slackeningdemandandproblems facedby

developersin respectof fund raising.Poorinfrastructurecontinues to hamper theprospects of

Economicgrowth and business in the country.

Table 2 : Weakening Demand For Transportation Services

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To meetthegrowingdemandforinfrastructureservices-regulatoryframeworkandprivate

sectorparticipation.Notwithstandingsuchefforts,theprogressincapacityexpansioninthe

differentsectorswasverylimited(seeTable2).Theglobalcrisisisonlypartlytoblameas

therearecontinuing deficienciesinpolicyandregulatory frameworks,anddelaysindecision

making.Thedelaysinallocationof3Gspectrum andallegationsoffavouredtreatmentto

someoperatorsfor2Gspectrumhavedonelittletostrengthentheinvestmentclimateinnot

onlythetelecomsector,butininfrastructureperse.Similarly,litigationrelating tonormslaid

downinthemodelbiddocumentsfortheroadssectordelayedthemuchneededimpetusfor new

projects underthe National Highways Development Programme(NHDP). The

concessionagreements finalizedfortheawardofnewterminalsatmajorportsin2007-08

alsounderwentseveralrevisionsduring2008-09.Theawardandexecutionofprojectsalso

facedseveralproblems.Theseincludethelargenumberofclearancesrequiredfromvarious

governmentagencies,delaysinlandacquisition.changesinscopeof projectsduringthe

biddingprocess,inadequatesupplyofequipment,delaysinawardofcivilworks,andweak project

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execution capacity.

WhilefinancialmarketsintheUSandEuropewerefeelingthepressureinthesecondhalfof 2007-

08,othercapitalmarkets,especiallyinemergingeconomies,didnotseemtothinkthat thesub-

primeproblemwouldplayoutintoafullblowncrisisoffinancialconfidence.That

changedbythefirsthalfof 2008-09,wheneveryonebegantoseeaclearerpictureofthe

extentofwrite-downsundertakenbythemajorinternationalfinancialhousesonaccountof

theirnon-performing assets.

InfrastructureDevelopment Finance

CompanyLimited(IDFCortheCompany)wassetupin1997toactasafinancierand

catalystforthedevelopmentofprivatesectorsponsoredinfrastructureprojectsinIndia.Over

thelast12years,andmoresosincetheInitialPublicOffering(IPO)inJuly2005,IDFChas

pursuedafocusedgrowthstrategytoevolverapidlyintoaone-stop-shopforinfrastructure

financeinIndia,capableofmeetingtheincreasingly complexandambitiousrequirementsof an

expanding client base. Infrastructure typically involves projects with long gestation

periods, with each project going through different phases of implementation. Broadly

speaking,itbeginswithconceptualizingaproject.Thenthefullprojectplanisdeveloped,

followed byfinancial closure. Next comesthe execution phase, where the underlying

physicalinfrastructureisactuallycreated.Finally,theprojectmovestorevenuegeneration,

whentheunderlyingassetstartsgettingutilisedandgeneratesactualincomestreams.Eachof

thephaseshasdifferentriskreturnprofiles.IDFCsexpertiseliesinadeepunderstandingof

therisksandopportunitiesassociatedwiththedifferentphasesofaprojec tslifecycle,and

appropriatelypackagingdifferentiatedfinancialsolutionsthatbestmeettherequirementsof

investorsandclientsatthedifferentstagesbyprogressivelyexpandingtherangeofitsskills,

productsandservicesbeyondthetraditionalprojectlendingtoinvestmentbankingaswellas

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differenttypesofassetmanagement.Thisdiversifiedrangeofproductandservicecapability

hasstrengthened IDFCscorebusinessmodelandhaspropelledtheCompanyintooneof

Indiaspremierfinancialservicesplatformleveragingknowledgeandtalenttospantheareas

ofinfrastructureprojectfinance,assetmanagementandinvestmentbanking.MuchofIDF Cs

businessisaboutmobilizinginternationalaswellasdomesticcapital.Naturally,likeother

businesses,ithastodealwithdemandandsupplysideissues.Whilethedemandsideissues

aredomesticinnatureandrelatelargelytotheappetiteforprivateinvestmentespeciallyin the

Infrastructuresector,thesupplysideissuesaremoreglobal.Theseincludefactorslike

costofcapital, liquidityandinvestorconfidencethatareintrinsictointernationalcapital flows.

Onbothfrontsthereweresignificantdevelopmentsinthemacro-economicenvironmentand

overallmarketconditions,whichplayedakeyroleindefiningtheCompany sstrategyand

progressduring2008-09.Inthiscontext,itisimportanttofirstanalysethestructuralchanges

thattookplaceinthemacroeconomic environmenttoappreciatethechallengesthatIDFC had to

face and overcomeduring 2008-09.

Thebusinessenvironment and IDFC

AswasreportedinlastyearsAnnualReport,thefallinhousing pricesintheUShadsparked

offthesubprimelendingcrisisinthemiddleof2007.Creditdowngradingbyratingagencies

andincreaseddefaultriskof various housingbackedpaper,particularlycollateraliseddebt

obligations(CDOs)thatweresliced,dicedandfarremovedfromtheoriginalassets,rapidly

spreadthroughouttheUS,andthentotheEuropeanandAsianfinancialsystems.Inamatter

ofmonths,whathadstartedasaUShousingproblembecameamajorcrisisthataffectedthe

entireglobalfinancialsystem.Severallargeinternationalfinancialinstitutionswereleftto

grapplewiththeconsequencesoflargeassetwrite-downs.Soonthisledtoanunprecedented

contractionofcreditinthesystemespeciallyinthelastthreeandahalfmonthsof2008,

afterthecollapseofLehmanBrotherson14thSeptember.Thankstomassivefinancial,

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monetaryand fiscalinterventionsbytheUSaswellasmajorEuropeannations,theacute

financialcrisispassedbyJanuary2009.Butitscarredtherealeconomyeverywhereinthe

world.StartingwiththeUSinthethirdquarterof2008,every majordevelopedcountrywent

intoarecessionwhichcontinuestilltoday.Atthe timeofwritingthisManagement Discussion

and Analysis, the global situation remains grim. Indeed, thisis the worst

economicdownturn thatthe world has seen sincethe Great Depression ofthe 1930s.

TheUShasalreadysufferedfromthreesuccessivequartersofnegativeGDPgrowth,withpossiblymoretofollow.AlthoughitisbelievedbysomethattheUSeconomy

willbottomoutby

theendofthethirdquarterof2009,theestimatedGDPgrowthfor2009willbe-

2.9%.InApril2009,unemploymentwasat8.9%,andrisingtheworst sincethe

early1980s.

TheEuroareaisalsoinadeeprecession,andstructurallymuchworseoffthanthe US.GDPgrowthfor2009 is estimated at-3.7%.

Japanisheadingforyetanotherperiodoflongtermde-growth.Industrialoutputhasbeenfallingby morethan30%everymonthcomparedtoayearearlier;andGDP growth

for2009 is being estimated at 6.4%.

Withanestimated11%to12%fallintherealvalueofworldtradein2009,China s growth isexpected to reduceto high single digits.

Indiasgrowthisdownfromthe9%plusrangeofthelastthreeyearsto6.7%in 2008-09, withthe chances of it beingsimilar in 2009-10.

Figure 13: Debt- Equity Ratio & PBDTM

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Figure 15:IDFC consolidated net profit at Rs. 750 crore for FY 2009

Funding:

IDFCconsolidated net profit atRs. 750 crorefor FY2009

HighlightsofFY2009

ProfitAfterTaxof Rs.750 croreforFY 2009 compared to Rs.742 croreinFY 2008 Balancesheet size as on March 31, 2009: Rs. 29,809 crore:an increaseof7% Net NPAs at 0.21% ofoutstandingloans Capital AdequacyRatioat 23.75% (TierI20.04%; TierII3.71%) NetInterest income (NII)of Rs.922 crore:an increaseof 33% NonInterestIncome ofRs. 613 croreinFY 2009 Assets under managementUSD 4.7 bn Closureof USD 1.0 bnIndiaInfrastructureFundand USD 0.70 bnIDFC Private

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EquityFundIII

At its 72nd Board Meeting held on April 28, 2009, the Board of DirectorsofInfrastructure DevelopmentFinanceCompanyLimited(IDFC)approvedfinancial

resultsfortheperiodApril1,2008toMarch31,2009andrecommendedDividendat

therate of Rs. 1.20 per equityshare forFY 2009.

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Figure16: ROG sales

Income

NetInterestIncome (NII) increased by33%fromRs. 694 crorein FY 2008to Rs. 922 crorein FY 2009. NetInterestIncome (NII) from infrastructureloans increased by34%from Rs. 565 crorein FY 2008toRs. 758 crorein FY 2009. NetInterestIncome fromtreasuryoperations increased by27%from Rs. 129 croreinFY 2008 to Rs. 164 croreinFY 2009 Non-InterestIncomeforFY2009decreasedby 1%fromRs.618croreinFY2008to

Rs.613crorein FY 2009.

FeesfromIDFCs assetmanagement business wereRs. 203 crorein FY 2009. IncomefromInvestmentbankingandbrokingactivityofIDFCwasRs.115crorein

FY 2009.

Income from principal investments was Rs. 184 crorein FY 2009. Other fees wasRs.111 crore in FY 2009.

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Figure 17: PAT

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Indian Banks VS NBFC

2008-09wasadifficultyear,especiallyforthefinancialsegmentacrosstheglobe.However,

Indiasstrongmacro-economicfundamentalsandfinancialpolicieshaveshieldeditfromthe

turmoil..Thestudyconsideredthosebanksthathaveannouncedtheirresultsbetween15th April-

20thMay2008-09postedonthe websiteofBombayStockExchange.Thehave

analyzedintotal29banks(bothpublic&privatesector) and7NBFCsThe)studyhas

examinedandcomparedtheprofitabilityofbankswithNBFCsduringthe financialyear

2008-09.Simpleaverageandprofitabilityratio ofthetwosegmentshavebeenstudied.

Methodology-TheAFPanalysisoftheIndiancommercialbanks&NBFCsprofitabilityis

calculatedusingtwobroad parametersincludingnetprofitandtotalincome.Profitability

Ratioisaclassoffinancialmetricsthatis usedtoassessabusiness'sabilitytogenerate

earningsascomparedtoitsexpensesandotherrelevant costs incurredduringaspecific period

oftime.

Profitabilityis calculatedas:

(Net Profit/Total income)*100

NBFCsmoreprofitablethancommercialbanksdespiteslowdownEvenastheworldwide

financialcrisis and

slowdowninkeysectorsoftheIndianeconomyledtheNonBankingFinancialCompaniestoface

severecashshortageduringthefinancialyear2008-09,the

overallprofitabilityofNBFCshasremained higherthanthescheduledcommercialbanks.

Duringthefinancialyear2008-09,Non-BankingFinancial Companies(NBFCs)average

profitability stoodhigherat18.90percentascomparedtothebankswith10.08percent.The

NBFCsgenerallyoperatesonthemodeloflendingtoriskierprojectswithinterestrates

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higherthanofferedbythebankinginstitutions.Asthefinancialmarketsfacedtheheatof

globalcrisisduringthefinancialyear2008-09,mostoftheNBFCsfacedproblemsinfund raising.

Amongtheseven NBFCs, in 2008-09 thehighest profitabilitywas reported by

InfrastructureDevelopmentFinanceCompanyLimitedat20.89percent,withtotalincome

stoodatRs.3626.38croreandnetprofitat Rs.757.73crore.ItwasfollowedbyHousing

DevelopmentFinanceCompaniesLimited(HDFC)andPowerFinanceCompaniesLimited

(PFCL)at20.76percentand20.67percentrespectively.TheReserveBankofIndia(RBI)

monetarymeasuresbycuttinginterestratesduring2008-09hasbenefitedtheNBFCssince many

ofthemfinancetheiroperationsthroughmarketborrowings saidMr.SajjanJindal

President.

Aggregatenetprofittototalincomeratioof17publicsectorbanksand12privatesector banks reported

to be 10.08 per cent during2008-09.

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Table 3:

Top5 Banks andNBFCs with highest profitability:

Amongthe17publicsectorbanks,thehighestprofitability wasreportedbyIndianBankand

BankofIndiaat 15.83percentand15.50percentrespectively.Outoftheprivatesector

banksthetoppositionswere occupiedbyAxisBankandYesBankat13.22percentand

12.46percentrespectively,amongothers.The7NBFCs,aggregatetotalincomegrewbya

whooping57.3 percenttoRs.28,208.72croreinFY09fromRs.17,906.84croreinthe

previousfiscal.However,theaggregatetotalincomeof29bankshaveincreasedby25.3per

centfromRs2,69,055crorein2007-08toRs3,37,206.9crorein2008-09.Year-on-year

performanceofthe29banksregardingnetprofittototalincomeratioattheaggregatelevel

showedamarginaldeclineduringFY09with10.08percentasagainstFY08recordedat

10.52percent,whileinthecaseof7majorNBFCs,theratiodeclinedduring2008-09at

18.90per centas against21.80 percent inFY08.

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Table 4: Banking versus NBFCregulatory arbitrageinIndia

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Threatofsubstitute:

Banks:Banksareimportantsubstitutes.Asthey areleadersinthemarkets.They haveaquitestrongbrand presenceand agood creditappraisal method also.

MoneyLenders:SmallNBFCscaterto theruralareaswherethereisalreadyaverystrongpresence. Theydominatethemarketintheruralareasanditsmostlythe

unorganised market theytap in.

Bargaining Power ofsuppliers

Manyalternatives:ThesuppliersinthiscasearethedepositorsortheNBF Csfunds. Suppliershavelotsofalternativestoputtheirmoney.Withtherisktheycaninvest

theirmoney.E.g.Low Risks:Banks, Bondsetc. High Risk: Stocks,Investment.

RBIrulesandregulations:RBIrulesandregulationsarenotasstringentasofBanks. NBFCs aregoverned bymanybodies. E.g. RBI,FIDC, NHBetc

Bargaining powerofconsumervery high

Largeno. ofalternatives Low switching costs Undifferentiated services Fullinformation aboutthe market Threat ofcompetitors

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Largeno ofNBFCs High marketgrowthrate Low switching costs Undifferentiated services High fixed cost High exitbarriers

Rivalryamong competitors isvery fierceinIndianNon BankingFinancialIndustry.

TheservicesNBFCsofferismoreofhomogeneouswhichmakestheCompanytoofferthe

sameserviceatalowerrateandeattheircompetitormarke tsshare.MarketPlayersuseall

sortsofaggressivesellingstrategiesandactivitiesfromintensiveadvertisementcampaignsto

promotionalstuff.Evenconsumerswitchfromonebanktoanother,ifthereisawidespread

intheinterest.Hencetheintensityofrivalryisvery high.Thenooffactorshascontributedto

increaserivalrythoseare.

AlargenoofNBFCserving similarloanproducts:ThereissomanyNBFCsandnon financialinstitution fightingfor samepie,which hasintensified competition.

Highmarketgrowthrate:Indiaisseenasoneofthebiggestmarketplaceandgrowth rate inIndianfinancial industryis also veryhigh.This has ignited the competition.

Homogeneous product and services: The services banks offer is more ofhomogeneouswhichmakesthecompanytoofferthesameserviceatalowerrateand eat their

competitor markets share.

Undifferentiatedservices:AlmosteveryNBFCprovidessimilarservices.Everybank tries tocopyeach otherservicesand technologywhich increaselevel ofcompetition.

High exit barriers: High exit barriers humiliate banks to earn profit and retain

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CHAPTER 3

SUMMARY AND CONCLUSION

Results of the Study

Top-ratedNBFCshavenotonlybeensuccessfulinmanagingtheirmarketsharebutalsoin

protectingtheir profitability.Acombinationofthefactorscitedearlierhadhelpedthese

NBFCsearnbetterreturnsontheirdeployment.Infact,almostallthetop-ratedNBFCsenjoy

areturnontotalassetsthatishigherthanHDFC Bank's,oneofthebetter-runbanks.The

higherreturnonassetswasdespitetheiroperatingcostratiobeingsimilartothatofHDFC

Bank.Forexample,operatingexpensesasaproportionofnetmarginworkedoutto68per

centforHDFCBank.Onanaverage,thiswasnotsignificantlyhigherthantheratioformost top-rated

NBFCs.Ifreturnonassetswerestillsuperior,thenitwasbecauseofthehigher

returnontheirfunds.FortopNBFCs,theinterestincomeworkedoutto17-21percentof

theirtotalassetsfortheyearendedFY.Theliquidity inthebankingsystemalsohelpedthese

financecompanies.SpreadsovergovernmentsecuritiesforAAAratedcorporatesectordebt

instrumentarenowonly50basispoints.Inotherwords,ifthecostof fundsforbanking

companieshasdeclinedsharply,thentop-ratedNBFCshavealsobenefitedfromsucha

declineininterestrates.Someofthesecompaniesarenowraisingfundsat7-8percent.

Also,thesecompanieshavedisplayedtheabilitytomanagetheirportfoliowithoutlarge

incidenceofnon-performingassets.Forinstance,LICHousingFinance,IDFCandShriram

TransportFinanceboastofnetnon-performingassetstonetadvancesratiooflessthan1per

cent.Thisagainhashelpedthemlowertheoverallcostofoperationsand,thereby,protect their

profitability. Higher profitability and innovative financing options, such as

securitization, havealso helpedin boosting the capital adequacyratio ofthese NBFCs.

amongothers,LICHousingFinance,IDFCandShriramTransportFinance,RelianceCapital,

boastofcapitaladequacyratiosupwardsof15percent.Inotherwords,theirbalancesheets continueto

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be strongto accommodate furthergrowth in disbursements.

Disbursements-Sharp fallduring the crisis

DisbursementswereclearlyhitduringthecrisisasisvisiblefromPrimaryreasonforthis

initialfallwaslackofsupplyoffundsafterthemarketliquiditydriedup.Impacthowever

differeddependingonthecapitalstructureofthecompan