"Non-banking financial company" means-

Non-bank financial companies (NBFCs) are financial institutions that

provide banking services without meeting the legal definition of a bank,
i.e. one that does not hold a banking license. Operations are,
regardless of this, still exercised under bank regulation. However this
depends on the jurisdiction, as in some jurisdictions, such as New
Zealand, any company can do the business of banking, and there are
no banking licenses issued.
such other non-banking institution or class of such institutions,
as the bank may, with the previous approval of the Central
Government and by notification in the Official Gazette, specify.

NBFCs as described by RBI in points are-

EQUIPMENT-LEASING COMPANY;
HIRE-PURCHASE COMPANY;
LOAN COMPANY;
INVESTMENT COMPANY
ðhey are also categorized in a different format among 8 categories-
LOAN COMPANY
HIRE PURCHASE COMPANY
INVESTMENT COMPANY
MUTUAL BENEFIT COMPANY
MISCELLANEOUS NON-BANKING FINANCIAL COMPANY-CHIT FUNDS
RESIDUARY FINANCE COMPANY
HOUSING FINANCE COMPANY
EQUIPMENT LEASING COMPANY

Another and recent way of categorizing NBFCs is as under-

ASSET FINANCING COMPANY(AFC)
INVESTMENT COMPANY(IC)
LOAN COMPANY(LC)
(ðhis is with effect from december,2006)
Loan company means a company which is a financial institution
carrying on as it¶s principal business the providing of finance
whether by making loans or advances or otherwise for any activity
other than its own but does not include an equipment leasing
company or a hire-purchase finance company.
Hire purchase (frequently abbreviated to O ) is the legal
term for a contract developed in the United Kingdom.
In cases where a
buyer cannot afford to pay the asked price for an
item of property as a lump sum
But,
can afford to pay a percentage as a deposit,
a hire-purchase contract allows the buyer to hire the
goods for a monthly rent.
‡When sum equal to the original full price plus interest
has been paid in equal installments
‡the buyer may then exercise an option to buy the
goods at a predetermined price (usually a nominal
sum) or return the goods to the owner.
Investment Company is a company which is a financial institution
carrying on as it¶s principal business the acquisition of securities.

An investment company is a company

whose main business is holding
securities of other companies purely for
investment purposes. ðhe investment
company invests money on behalf of its
shareholders who in turn share in the
profits and losses.
 Mutual Benefit Financial Company
means a company which is a financial institution
notified by ðhe Central Government under ðhe
Companies Act 1956.
‡A mutual fund is a professionally managed
type of collective investment scheme in which
money is pooled from many investors and invests
it in many kinds of securities by a fund manager.
‡Currently, the worldwide value of all mutual
funds totals more than $(
—
‡Mutual funds can invest in many kinds of
securities.
CHIð means a transaction whether called chit, chit fund, chitty, kury
or by any other name or under which a person enters into an
agreement with a specified number of persons that every one of them
shall subscribe a certain sum of money by way of periodical
installments over a definite period and that each such subscriber
shall, in his turn, as determined by lot or by auction or by tender or
in such other manner as may be specified in the chit agreement, be
entitled to the prize amount.

Good source of finance-for all

sections of society
Good means of savings for
any contingency
Serves all persons-whether the
desire is for savings or for
contingency or for some
expense
Residuary Non-Banking Company-class of NBFC-
principal business the receiving of deposits,
under any scheme or arrangement or in any
other manner and not being investment, asset
financing, loan company.

 Investments as per directions of RBI, in addition

to liquid assets.

 ðhe functioning of these companies is

different from those of NBFCs in terms of method
of mobilization of deposits and requirement of
deployment of depositors' funds.
Indian Real Estate-on its way to donning the image of
an organized industry-global standards-as
fragmentation, disorganization, poor governance and
inefficient infrastructure; take a backseat.

Most financial institutions- home loans to

both Indian and NRI customers- floating and
fixed rate of interest or blended ones-
customized packages- purposes of
constructing/ buying a new house, vacant
plot or extension and even home
improvement.

BRIEF BACKGROUND
Housing Finance has accumulated expert experience spanning over 40 years in
construction/project finance with emphasis in multiple housing developments.
Means a company which is a financial institution carrying on as it¶s
principal business, the activity of leasing of equipment. EQUIPMENT
LEASE - An agreement that specifies the rights and obligations
between a lessor (who owns equipment) and a lessee (to whom the
lease gives certain rights to possess and use the equipment).
Obtaining the use of machinery, vehicles or other equipment on a rental
basis. ðhis avoids the need to invest capital in equipment. Ownership
rests in the hands of the financial institution or leasing company,
while the business has the actual use of it.
BANKS-financial institutions-reached the major section of every country of
the world
 still there were some rural, under-privileged and under-served sections
in each of the nations
 Requirement of the services of some
financial institution which could cater to
their needs.
Lead to the creation of the NON-
BANKING FINANCIAL COMPANIES or
simply NBFCs.

UNTOUCHED AREAS

IMPORTANT ROLE TO BE PLAYED

NEED OF BETTER FINANCIAL SERVICES
UNDER-SERVICED SEGMENTS
It makes a study of what special is there in NBFCs that provide them
an edge over the Banking sector.
If the NBFCs can prosper and flourish in the future or would it be subsided
due to the Banking sector?
Banks-covered major section of the nation-but still some under-served
sections exist -need for financial institutions for them-NBFCs CAME INðO
PICðURE.
BANKS-focus on the MEðRO-BASED MODEL-but NBFCs¶ concern
NON-METRO-FOCUSSED MODEL.
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 IMPORðANð ROLE IN MACRO
ECONOMICS PERSPECðI E
REACH ðHE UNDER-
DE ELOPED SECðOR
AREAS UNðOUCHED B
BANKS-LEASING, LOANS, EðC.
HIGH QUALIð CUSðOMER
SER ICE ðO REðAIL
CUSðOMERS.
FINANCING COMMERCIAL
EHICLES AND E EN SMALL
BUSINESSES.
Non-bank institutions frequently acts
as:-

  Suppliers of loans and credit.

 Supporting investments in
property

  ðrading money market instruments

  Funding private education,

  Wealth management.

  Underwrite stock and shares.

  Retirement planning

  Advisory functions.

  Discounting services.
For 3 different periods the statistics for the TSR for the NBFCs and BANKS has been
shown below-

TSR for 00 -0 (%)-

‡ PSU BANKS-
‡ PRI AðE SECðOR BANKS- . (average)
‡ NBFCs-8

TSR for 00 -07(%)-

‡ PSU BANKS-
‡ PRI AðE SECðOR BANKS- 0. (average)
‡ NBFCs-8

TSR for 007- 008(%)-

‡ PSU BANKS- 7
‡ PRI AðE SECðOR BANKS- 8. (average)
‡ NBFCs-8
‡ Banks have started looking at NBFCs as competitors.
‡ High-yielding segments such as consumer durables, two-wheelers and pre-
owned C s, where NBFCs have registered strong growth, still offer potential
to grow.
ðhe views of the market players about the FUðURE of NBFCs are-
A.C. SHAH-
³A shakeout in the non-banking finance sector is likely in the near future.´
ðhe public is not willing to park its funds with NBFCs due to the low rate of
interest offered by them for deposits.
Credit Rating and Information Services of India Ltd (CRISIL)-
³Concern over the weak financial fundamentals of non-banking finance
companies (NBFCs).´
RBI-
³ðhe NBFCs have been declared to be the weakest link in the entire financial
services sector.´
ROOPA KUDVA, managing director and chief executive officer, Crisil-
"ðhe decline in business volume will mean a further marginalisation of the
sector, a trend that has been accelerating over the past few years as banks
have taken over the traditional NBFC stronghold of retail lending.³
HEMANT KANORIA, CMD, SREI Infrastructure Finance Ltd-
³Over the last 3-4 months, it had become extremely difficult for NBFCs to
raise money in the domestic market. We have been awaiting the
government¶s and the RBI¶s approval for access to the ECB market.´
R RAVI, executive director of the Mumbai-based Alpic Finance-
"ðhe future belongs to strong financial service factories.³
R. VAIDYANATH-
³NBFCs ² creditable but unrecognized role.´
ðhe future of the NON-BANKING SECðOR cannot be easily predicted for the long
run because it has seen through many ups and downs in it¶s entire journey.

ËA merger between BANKS and NBFCs on the overall global front.

Ë NBFC¶s would convert into BANKS.

Here we would be faced with two of the ER IMPORðANð QUESðIONS and

those are-

DILL THE MERGERS AND CONVERSION OF NBFCs INTO BANKS DOULD

LEAD TO ENLARGEMENT OF THE NON-BANKING FINANCIAL COMPANIES?

OR,

DILL IT CAUSE THE NBFCs TO BECOME JUST A SMALL SECTOR TO THE

BANKING INDUSTRY?
Traditionally, the NBFCs have dominated the market for retail finance.
Dith such new areas as insurance being opened up, top-rung NBFCs
are presented with an opportunity to grow.

There have been occurring mergers between the NBFCs and BANKS
but apart from mergers, other options waiting for NBFCs are to change
the tracks and explore new areas.

They have to extend their product portfolio to include asset

management companies, housing finance firms and to venture into
newly opened insurance sector for private participation.

There are some areas where the NBFCs can expand themselves due to
either the need of healthy customer service, or as they need to be
explored or even due to the expertise of the NBFCs in those areas.
 ENTRY INTO
Retail finance
Housing loans
Insurance business
Deb-based services
High yielding segments
Personal loans & Credit cards
Portfolio-management services
Sale of products of other financial intermediaries

ðhese are the areas that either haven¶t been touched at all or still offer
huge potential to grow.
Future Capital

Ashok Leyland Finance

Reliance Capital

ABN Amro Bank

Future Capital, the financial arm of Future Group, will soon start rolling out
Money Bazaars
across the country. ðhis one stop-shop would be providing numerous
services like-

‡ Housing loans
‡ Personal loans
‡ Insurance
‡ MFs
‡ Credit cards
ðraditionally, ALF has depended on commercial vehicle financing for a significant
proportion of its revenue. However, recently the company initiated steps to
broadbase its revenue stream by entering new areas of finance.
‡ The other segment they are concentrating on is passenger cars.

‡ The other segment they have is multi-utility vehicles (MUVs). It is more

or less on the pattern of commercial vehicles vis-à-vis risk. There we
certainly have considerable scope.
‡ The other segment is construction equipment...will take time for others
to get in.
‡ They are also at an advanced stage of developing a loan portal by which
they will have the capability to distribute loan products of other
intermediaries.
‡ The move of Ashok Leyland Finance to launch a finance portal that would
be used to sell products of other financial intermediaries and to use its
skill in collection to derive a pure service income.
Reliance Capital, an arm of the Anil Dhirubhai Ambani Group, will
set up a separate housing financial subsidiary and non-banking
financial company (NBFC) for the consumer finance sector.
Ambani said his company is also planning to selectively expand
its

‡ asset management
‡ life insurance, and
‡ broking operations

in emerging markets across Asia, Africa and

the Middle East.
Ms Meera Sanyal, Country Executive-ABN Amro Bank, India.

XABN Amro Bank will use its NBFC to

complement its retail distribution business.´
 ðhe future of the Non-Banking Financial Companies would depend
largely on their performance in the present slowdown. It will be a
deciding factor for their future scope and role in the emerging global
financial markets.

In the PRESENð SCENARIO, it is very essential for them to come up

with best of customer services round-the-world because this is the
basic strength of this sector.

ðhey need to explore all possible opportunities but also need to

strengthen their BASICS too!!!
 ð


l PRESENðAðION B-