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LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT

Capstone Project Report on Effects of Non-Banking Financial Corporations on Private
Sector Commercial Banks
Lovely Professional University

In partial fulfillment of the Requirements for the award of Degree of Master of Business
Administration

Submitted by:
SHANTUN BENIWAL (11209222)
SUDEEP BARATAULA (11209327)
ABOOZAR KARIMI (11209411)
DEBOJIT PHUKAN (11208782)


Submitted to
Vishal Goyal, Assistant Professor
Lovely Professional University


DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY JALANDHAR, NEW DELHI GT ROAD
PHAGWARA

PUNJAB





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ACKNOWLEDGMENT
A research project is a golden opportunity for learning and self-development. We consider
ourselves very lucky and honoured to have so many wonderful people who lead us through in
completion of this project.
We wish to express our indebted gratitude and special thanks to our Capstone Mentor-
"Mr. Vishal Goyal, Assistant Professor, Lovely Professional University" who in spite of being
extraordinarily busy with his duties, took time out to hear, guided and kept us on the correct path
and allowed us to carry out this research project work. A humble Thank you Sir. He inspired us
greatly to work for this project. His willingness to motivate us contributed tremendously to our
project. We would also like to thank him for sharing the valuable knowledge related to the topic
of the project
Aboozar
Shantun Beniwal
Sudeep Bartaula
Debojit Phukan














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DECLARATION

We hereby declare that the subject matter of this research project on title Effects of
NBFCs on Private Sector Commercial Banks, is the record of the work done by us and that
the contents of this research piece did not form the basis of award of any previous degrees or to
the best of our knowledge to anybody else, and that it has not been submitted by us for any
research or other degrees in any other university/institute.
This is being submitted to the Department of Management, Lovely Professional
University for the fulfillment of Master of Business Administration.
It is certified that this project has been prepared and submitted under my guidance.

Date: Mr. Vishal Goyal
Place: Lovely Professional University (Assistant Professor)
Lovely Professional University












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TABLE OF CONTENTS
Sr. No. Particular Page No.
1.
1.1
1.2
1.2.1
1.2.2
1.2.3
1.2.4
1.2.5
1.2.6
1.2.7
1.3
1.3.1
1.3.2
1.3.3
1.3.4
1.3.5
1.4
1.4.1
1.4.1.1
1.4.1.1.1
1.4.1.1.2
1.4.1.1.3
1.4.1.2
1.4.1.2.1
1.4.1.2.2

Introduction
NBFC an Introduction
Types of NBFC
Asset finance company
Investment company
Loan company
Infrastructure finance company
Systematically important core investment company
Infrastructure debt fund
NBFC-F
Functions of NBFC
Financial Intermediation
Economic basis of Financial Intermediation
Inducement to save
Mobilization of saving
Investment of funds
Commercial bank: an introduction
Functions of commercial bank
Primary function
Acceptance of deposits
Advancing of loans
Credit creation
Secondary functions
Agency functions
General utility service
6
7
7
7
8
8
8
8
9
9
10
10
10
11
11
11
12
12
12
12
14
17
18
18
19
2 Objectives of the study 23
3 Review of literature 23
4
4.1
4.2
4.3
Research methodology
Data source
Methods
Techniques of data collection and analysis
29
29
29
29
5
5.1
Scope of study
Expected outcomes
30
30
6. Common Services 31
7
7.1
7.2
7.3
7.3.1
7.3.2
7.3.3
Data analysis and presentation
Co-relation
T-Test
Comparison by ratio analysis
Financial structure
Profitability
Efficiency
31
31
32
35
35
36
38
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8 Recommendations 40
9 Limitation 41
10 Conclusion 42
11
11.1
11.2
Appendices
References
Financial statements

43
43
44

Table and Bar Charts
Sr. No. Particular Page No.
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
Lending of Banks and NBFCs Co-Relation
Deposits of banks and NBFCs Co-Relation
Deposit of banks and NBFCs data T-Test
T-Test Results on data
Lending of banks and NBFCs data T-Test
T-Test Results on data
Total Debt to Owners Fund
Return on Assets Including Revaluations
Net Profit Margin
Return on long term funds
32
32
33
33
34
34
35
36
37
38
2.1
2.2
2.3
2.4
Bar Chart Total Debt to Owners Fund
Bar Chart Return on Assets Including Revaluations
Bar Chart Net Profit Margin
Bar Chart Return on long term funds

35
36
37
38





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Effects of NBFCs on Private sector commercial banks in India

Introduction:
The financial system in India has been enlarged by variety of banks, financial institutions, capital
and money market institutions, non-banks and different indigenous banking and financial
institutions. Banks are the predominant and the most influential intermediaries in the country.
For the past few decades a large number of Non-banking financial companies have emerged in
India having many para banking activities which influence the profitability of banks in a great
extent, however the regulators still consider them as a step-child.
The banking system in India covers the commercial banks and co-operative banks, the first
which includes foreign banks, are the pre-dominant segment. Besides, government-owned post
offices mobilize deposits but they do not undertake any lending activity.
Banks play a critical role in development and prosperity of an economy by mobilizing funds
from public and investing in variety of projects which drives the machine of economy. Banks
ensures financial stability and liquidity in an economy by developing other financial
intermediaries and markets, proving finance to other corporate sectors and finally cater to the
needs of public savers from household sector, who prefer assured income and liquidity and
safety of funds.
Forms and activities of banks have changed over the years matching the needs of the economy
and adapting to the deregulation, technological innovation and globalization. As banks have been
expanding into para banking activities which were traditionally out of bounds for them, non-bank
intermediaries and NBFCs have begun to perform many of commercial activities which results
into market war and stiff competition between banks and NBFCs. Feeling this competition
important the researchers want to study the effect of NBFCs on commercial banks in depth in
Indian context.



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NBFC AN INTRODUCTION
A Non-Banking Financial Company (NBFC) is a company a) registered under the Companies
Act, 1956, b) its principal business is lending, investments in various types of
shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, chit
business, and c) its principal business is receiving deposits under any scheme or arrangement in
one lump sum or in installments. However, a Non-Banking Financial Company does not include
any institution whose principal business is agricultural activity, industrial activity, trading
activity or sale/purchase/construction of immovable property. (Section 45 I (c) of the RBI Act,
1934). One key aspect to be kept in view is that the financial activity of loans/advances as stated
in 45 I (c), should be for activity other than its own. In the absence of this provision, all
companies would have been NBFCs.
Traditionally Banks and NBFCs are rivals in fixed deposit mobilization and in lending. Most of
the NBFCs specialize in consumer lending and they have reported relatively low NPAs as
compared with banks. Recently a large number of foreign finance companies are entering the
market. Most of them are either merchant bankers or investment bankers. (Dr. Ajit, 2013).
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.
TYPES
NBFCs are categorized
a) In terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
b) Non deposit taking NBFCs by their size into systemically important and other non-deposit
holding companies (NBFC-NDSI and NBFC-ND)
c) By the kind of activity they conduct. Within this broad categorization the different types of
NBFCs are as follows:
Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying
on as its principal business the financing of physical assets supporting productive/economic
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activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material
handling equipment, moving on own power and general purpose industrial machines. Principal
business for this purpose is defined as aggregate of financing real/physical assets supporting
economic activity and income arising therefrom is not less than 60% of its total assets and total
income respectively.
Investment Company (IC) : IC means any company which is a financial institution carrying on
as its principal business the acquisition of securities,
Loan Company (LC) : LC means any company which is a financial institution carrying on as its
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 Asset Finance Company.
Infrastructure Finance Company (IFC) : IFC is a non-banking finance company a) which
deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net
Owned Funds of Rs. 300 crore, c) has a minimum credit rating of A or equivalent d) and a
CRAR of 15%.
Systemically Important Core Investment Company: It is an NBFC carrying on the business of
acquisition of shares and securities which satisfies the following conditions:-
a. it holds not less than 90% of its Total Assets in the form of investment in equity shares,
preference shares, debt or loans in group companies;
b. its investments in the equity shares (including instruments compulsorily convertible into
equity shares within a period not exceeding 10 years from the date of issue) in group
companies constitutes not less than 60% of its Total Assets;
c. it does not trade in its investments in shares, debt or loans in group companies except
through block sale for the purpose of dilution or disinvestment;
d. it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of
the RBI act, 1934 except investment in bank deposits, money market instruments,
government securities, loans to and investments in debt issuances of group companies or
guarantees issued on behalf of group companies.
e. Its asset size is Rs 100 crore or above and
f. It accepts public funds
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Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): IDF-NBFC is a
company registered as NBFC to facilitate the flow of long term debt into infrastructure projects.
IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5
year maturity. Only Infrastructure Finanace Companies (IFC) can sponsor IDF-NBFCs.
Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a
non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets
which satisfy the following criteria:
a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not
exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs.
1,20,000;
b. loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent
cycles;
c. total indebtedness of the borrower does not exceed Rs. 50,000;
d. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000
with prepayment without penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not less than 75 per cent of
the total loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the
borrower
Non-Banking Financial Company Factors (NBFC-Factors): NBFC-Factor is a non-deposit
taking NBFC engaged in the principal business of factoring. The financial assets in the factoring
business should constitute at least 75 percent of its total assets and its income derived from
factoring business should not be less than 75 percent of its gross income




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FUNCTIONS OF NBFCS
The role and importance of non-bank financial intermediaries is clear from the various functions
performed by these institutions. Major functions of the NBFIs are as follows:

1. Financial Intermediation:
The most important function of the non-bank financial intermediaries is the transfer of funds
from the savers to the investors.
Financial intermediation is economical and less expensive to both small businesses and small
savers,
(a) It provides funds to small businesses for which it is difficult to sell stocks and bonds because
of high transaction costs,
(b) It also benefits the small savers by pooling their funds and diversifying their investments.

2. Economic Basis of Financial Intermediation:
Handling of funds by financial intermediaries is more economical and more efficient than that by
the individual wealth owners because of the fact that financial intermediation is based on
(a) The law of large numbers, and
(b) Economies of scale in portfolio management.
(i) Law of Large Numbers:
Financial intermediaries operate on the basis of the statistical law of large numbers. According to
this law not all the creditors will withdraw their funds from these institutions. Moreover, if some
creditors are withdrawing cash, some others may be depositing cash. Again, the financial
intermediaries also receive regular interest payments on loans or investments made by them. All
these factors enable the financial intermediaries to keep in cash only a small fraction of the funds
provided by the creditors and lend or invest the rest.

(ii) Economies of Scale:
Large size of the asset portfolios enables the financial intermediaries to reap various economies
of scale in portfolio management. The main economies are:
(a) Reduction of risk through portfolio diversification:
(b) Employment of efficient and professional managers; and
(c) Low administrative cost of large loans and
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(d) Low costs of establishment, information and transactions.
3. Inducement to Save:
Non-bank financial intermediaries play an important role in promoting savings in the country.
Savers need stores of value to hold their savings in. These institutions provide a wide range of
financial assets as store of value and make available expert financial services to the savers. As
stores of value, the financial assets have certain special advantages over the tangible assets (such
as, physical capital, inventories of goods, etc.). They are easily storable, more liquid, more easily
divisible, and less risky. In fact, saving- income ratio is positively related to both financial
institutions and financial assets; financial progress Induces larger savings out of the same level of
real income.

4. Mobilization of Saving:
Mobilization of savings takes place when the savers hold savings in the form of currency, bank
deposits, post office savings deposits, life insurance policies, bills, bond's equity shares, etc.
NBFI provides highly efficient mechanism for mobilizing savings. There are two types of
NBFTs involved in the mobilization of savings;
(a) Depository Intermediaries, such as savings and loan associations, credit unions, mutual
saving banks etc. These institutions mobilize small savings and provide high liquidity of funds.
(b) Contractual Intermediaries, such as life insurance companies, public provident funds, pension
funds, etc. These institutions enter into contract with savers and provide them various types of
benefits over the long periods.
5. Investment of Funds:
The main objective of NBFIs is to earn profits by investing the mobilised savings. For this
purpose, these institutions follow different investment policies. For example, savings and loan
associations, mutual saving banks invest in mortgages, while insurance companies invest in
bonds and securities.





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COMMERCIAL BANK AN INTRODUCTION
The Reserve bank of India in the Banking and Regulation Act, 1949 {section 5(b)}, defines the
business of banking as, "accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdraw able, by cheques, draft,
order of otherwise." According to Section 5(c) of the BR Act, 'a banking company is a company
which transacts the business of banking in India.'

FUNCTIONS OF COMMERCIAL BANK
The commercial banks serve as the king pin of the financial system of the country. They render
many valuable services. The important functions of the Commercial banks can be explained with
the help of the following chart.

Primary Functions
The primary functions of the commercial banks include the following:
A. Acceptance of Deposits

1. Time Deposits:
These are deposits repayable after a certain fixed period. These deposits are not withdrawn able
by cheque, draft or by other means. It includes the following.

(a) Fixed Deposits:
The deposits can be withdrawn only after expiry of certain period say 3 years, 5 years or 10
years. The banker allows a higher rate of interest depending upon the amount and period of time.
Previously the rates of interest payable on fixed deposits were determined by Reserve Bank.
Presently banks are permitted to offer interest as determined by each bank. However, banks are
not permitted to offer different interest rates to different customers for deposits of same maturity
period, except in the case of deposits of Rs. 15 lakhs and above.
These days the banks accept deposits even for 15 days or one month etc. In times of urgent need
for money, the bank allows premature closure of fixed deposits by paying interest at reduced
rate. Depositors can also avail of loans against Fixed Deposits. The Fixed Deposit Receipt cannot
be transferred to other persons.
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(b) Recurring Deposits:
In recurring deposit, the customer opens an account and deposit a certain sum of money every
month. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount along
with interest is paid to the customer. It is very helpful to the middle and poor sections of the
people. The interest paid on such deposits is generally on cumulative basis. This deposit system
is a useful mechanism for regular savers of money.
(c) Cash Certificates:
Cash certificates are issued to the public for a longer period of time. It attracts the people because
its maturity value is in multiples of the sum invested. It is an attractive and high yielding
investment for those who can keep the funds for a long time.
It is a very useful account for meeting future financial requirements at the occasion of marriage,
education of children etc. Cash certificates are generally issued at discount to face value. It
means a cash certificate of Rs. 1, 00,000 payable after 10 years can be purchased now, say for
Rs. 20,000.
2. Demand Deposits:
These are the deposits which may be withdrawn by the depositor at any time without previous
notice. It is withdraw able by cheque/draft. It includes the following:
(a) Savings Deposits:
The savings deposit promotes thrift among people. The savings deposits can only be held by
individuals and non-profit institutions. The rate of interest paid on savings deposits is lower than
that of time deposits. The savings account holder gets the advantage of liquidity (as in current
a/c) and small income in the form of interests.
But there are some restrictions on withdrawals. Corporate bodies and business firms are not
allowed to open SB Accounts. Presently interest on SB Accounts is determined by RBI. It is 4.5
per cent per annum. Co-operative banks are allowed to pay an extra 0.5 per cent on its savings
bank deposits.
(b) Current Account Deposits:
These accounts are maintained by the people who need to have a liquid balance. Current account
offers high liquidity. No interest is paid on current deposits and there are no restrictions on
withdrawals from the current account.
These accounts are generally in the case of business firms, institutions and co-operative bodies.
Nowadays, banks are designing and offering various investment schemes for deposit of money.
These schemes vary from bank to bank.
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It may be stated that the banks are currently working out with different innovative schemes for
deposits. Such deposit accounts offer better interest rate and at the same time withdraw able
facility also. These schemes are mostly offered by foreign banks. In USA, Current Accounts are
known as 'Checking Accounts' as a cheque is equivalent to check in America.
B. Advancing of Loans
The commercial banks provide loans and advances in various forms. They are given below:
1. Overdraft:
This facility is given to holders of current accounts only. This is an arrangement with the bankers
thereby the customer is allowed to draw money over and above the balance in his/her account.
This facility of overdrawing his account is generally pre-arranged with the bank up to a certain
limit.
It is a short-term temporary fund facility from bank and the bank will charge interest over the
amount overdrawn. This facility is generally available to business firms and companies.
2. Cash Credit:
Cash credit is a form of working capital credit given to the business firms. Under this
arrangement, the customer opens an account and the sanctioned amount is credited with that
account. The customer can operate that account within the sanctioned limit as and when required.
It is made against security of goods, personal security etc. On the basis of operation, the period
of credit facility may be extended further. One advantage under this method is that bank charges
interest only on the amount utilized and not on total amount sanctioned or credited to the
account.
Reserve Bank discourages this type of facility to business firms as it imposes an uncertainty on
money supply. Hence this method of lending is slowly phased out from banks and replaced by
loan accounts. Cash credit system is not in use in developed countries.
3. Discounting of Bills:
Discounting of Bills may be another form of bank credit. The bank may purchase inland and
foreign bills before these are due for payment by the drawer debtors, at discounted values, i.e.,
values a little lower than the face values.
The Banker's discount is generally the interest on the full amount for the unexpired period of the
bill. The banks reserve the right of debiting the accounts of the customers in case the bills are
ultimately not paid, i.e., dishonored.
The bill passes to the Banker after endorsement. Discounting of bills by banks provide
immediate finance to sellers of goods. This helps them to carry on their business. Banks can
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discount only genuine commercial bills i.e., those drawn against sale of goods on Credit. Banks
will not discount Accommodation Bills.
4. Loans and Advances:
It includes both demand and term loans, direct loans and advances given to all type of customers
mainly to businessmen and investors against personal security or goods of movable or
immovable in nature. The loan amount is paid in cash or by credit to customer account which the
customer can draw at any time.
The interest is charged for the full amount whether he withdraws the money from his account or
not. Short-term loans are granted to meet the working capital requirements where as long-term
loans are granted to meet capital expenditure.
Previously interest on loan was also regulated by RBI. Currently, banks can determine the rate
themselves. Each bank is, however required to fix a minimum rate known as Prime Lending Rate
(PLR).
Classification of Loans and Advances
Loans and advances given by bankers can be classified broadly into the following categories:
(i) Advances which are given on the personal security of the debtor, and for which no tangible or
collateral security is taken; this type of advance is given either when the amount of the advance
is very small, or when the borrower is known to the Banker and the Banker has complete
confidence in him (Clean Advance).
(ii) Advances which are covered by tangible or collateral security. In this section of the study we
are concerned with this type of advance and with different types of securities which a Banker
may accept for such advances (Secured Advance).
(iii) Advances which are given against the personal security of the debtor but for which the
Banker also holds in addition the guarantee of one or more sureties. This type of advance is often
given by Banker to persons who are not known to them but whose surety is known to the Banker.
Bankers also often take the personal guarantee of the Directors of a company to whom they agree
to advance a clean or unsecured loan.
(iv) Loans are also given against the security of Fixed Deposit receipts.

5. Housing Finance:
Nowadays the commercial banks are competing among themselves in providing housing finance
facilities to their customers. It is mainly to increase the housing facilities in the country. State
Bank of India, Indian Bank, Canara Bank, Punjab National Bank, has formed housing
subsidiaries to provide housing finance.
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The other banks are also providing housing finances to the public. Government of India also
encourages banks to provide adequate housing finance.
Borrowers of housing finance get tax exemption benefits on interest paid. Further housing
finance up to Rs. 5 lakh is treated as priority sector advances for banks. The limit has been raised
to Rs. 10 lakhs per borrower in cities.
6. Educational Loan Scheme:
The Reserve Bank of India, from August, 1999 introduced a new Educational Loan Scheme for
students of full time graduate/post-graduate professional courses in private professional colleges.
Under the scheme all public sector banks have been directed to provide educational loan up to
Rs. 15,000 for free seat and Rs. 50,000 for payment seat student at interest not more than 12 per
cent per annum. This loan is on clean basis i.e., without calling for security.
This apart, some of the banks have other educational loan schemes against security etc., one can
check up the details with the banks.
7. Loans against Shares/Securities:
Commercial banks provide loans against the security of shares/debentures of reputed companies.
Loans are usually given only up to 50% value (Market Value) of the shares subject to a
maximum amount permissible as per RBI directives. Presently one can obtain a loan up to Rs.10
lakhs against the physical shares and up to Rs. 20 lakhs against dematerialized shares.
8. Loans against Savings Certificates:
Banks are also providing loans up to certain value of savings certificates like National Savings
Certificate, Fixed Deposit Receipt, Indira Vikas Patra, etc. The loan may be obtained for
personal or business purposes.
9. Consumer Loans and Advances:
One of the important areas for bank financing in recent years is towards purchase of consumer
durables like TV sets, Washing Machines, Micro Oven, etc. Banks also provide liberal Car
finance.
These days banks are competing with one another to lend money for these purposes as default of
payment is not high in these areas as the borrowers are usually salaried persons having regular
income? Further, bank's interest rate is also higher. Hence, banks improve their profit through
such profitable loans.


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10. Securitization of Loans:
Banks are recently trying to securities a part of their part of loan portfolio and sell it to another
investor. Under this method, banks will convert their business loans into a security or a
document and sell it to some Investment or Fund Manager for cash to enhance their liquidity
position.
It is a process of transferring credit risk from the banker to the buyer of securitized loans. It
involves a cost to the banker but it helps the bank to ensure proper recovery of loan.
Accordingly, securitization is the process of changing an illiquid asset into a liquid asset.
11. Others:
Commercial banks provide other types of advances such as venture capital advances, jewel
loans, etc.
1. Effective October 18, 1994 banks were free to determine their own prime lending rates (PLRs)
for credit limit over Rs. 2 lakh. Data relate to public sector banks.
2. The stipulation of minimum maturity period of term deposits was reduced from 30 days to 15
days, effective April 29, 1998. Data relate to public sector banks.
3. The change in the Bank Rate was made effective from the close of business of respective dates
of change except April 29, 1998.
4. Effective April 29, 1998.
C. Credit Creation
Credit creation is one of the primary functions of commercial banks. When a bank sanctions a
loan to the customer, it does not give cash to him. But, a deposit account is opened in his name
and the amount is credited to his account. He can withdraw the money whenever he needs.
Thus, whenever a bank sanctions a loan it creates a deposit. In this way the bank increases the
money supply of the economy. Such functions are known as credit creation.










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Secondary Functions
The secondary functions of the banks consist of agency functions and general utility functions.
A. Agency Functions
Agency functions include the following:
(i) Collection of cheques, dividends, and interests:
As an agent the bank collects cheques, drafts, promissory notes, interest, dividends etc., on
behalf of its customers and credit the amounts to their accounts.
Customers may furnish their bank details to corporate where investment is made in shares,
debentures, etc. As and when dividend, interest, is due, the companies directly send the
warrants/cheques to the bank for credit to customer account.
(ii) Payment of rent, insurance premiums:
The bank makes the payments such as rent, insurance premiums, subscriptions, on standing
instructions until further notice. Till the order is revoked, the bank will continue to make such
payments regularly by debiting the customer's account.
(iii) Dealing in foreign exchange:
As an agent the commercial banks purchase and sell foreign exchange as well for customers as
per RBI Exchange Control Regulations.
(iv) Purchase and sale of securities:
Commercial banks undertake the purchase and sale of different securities such as shares,
debentures, bonds etc., on behalf of their customers. They run a separate 'Portfolio Management
Scheme' for their big customers.
(v) Act as trustee, executor, attorney, etc:
The banks act as executors of Will, trustees and attorneys. It is safe to appoint a bank as a trustee
than to appoint an individual. Acting as attorneys of their customers, they receive payments and
sign transfer deeds of the properties of their customers.
(vi) Act as correspondent:
The commercial banks act as a correspondent of their customers. Small banks even get travel
tickets, book vehicles; receive letters etc. on behalf of the customers.


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(vii) Preparations of Income-Tax returns:
They prepare income-tax returns and provide advices on tax matters for their customers. For this
purpose, they employ tax experts and make their services, available to their customers.
B. General Utility Services
The General utility services include the following:
(i) Safety Locker facility:
Safekeeping of important documents, valuables like jewels are one of the oldest services
provided by commercial banks. 'Lockers' are small receptacles which are fitted in steel racks and
kept inside strong rooms known as vaults. These lockers are available on half-yearly or annual
rental basis.
The bank merely provides lockers and the key but the valuables are always under the control of
its users. Any customer cannot have access to vault.
Only customers of safety lockers after entering into a register his name account number and time
can enter into the vault. Because the vault is holding important valuables of customers in lockers,
it is also known as 'Strong Room'.
(ii) Payment Mechanism or Money Transfer:
Transfer of funds is one of the important functions performed by commercial banks. Cheques
and credit cards are two important payment mechanisms through banks. Despite an increase in
financial transactions, banks are managing the transfer of funds process very efficiently.
Cheques are also cleared through the banking system. Correspondent banking is another method
of transferring funds over long distance, usually from one country to another. Banks, these days
employ computers to speed up money transfer and to reduce cost of transferring funds.
Electronic Transfer of funds is also known as 'Cheque less banking' where funds are transferred
through computers and sophisticated electronic system by using code words. They offer Mail
Transfer, Telegraphic Transfer (TT) facility also.
(iii) Travelers' cheques:
Travelers Cheques are used by domestic travelers as well as by international travelers. However
the use of traveler's cheques is more common by international travelers because of their safety
and convenience. These can be also termed as a modified form of traveler's letter of credit.
A bank issuing travelers cheques usually have banking arrangement with many of the foreign
banks abroad, known as correspondent banks. The purchaser of traveler's cheques can encase the
cheques from all the overseas banks with whom the issuing bank has such an arrangement.
20

Thus traveler's cheques are not drawn on specific bank abroad. The cheques are issued in foreign
currency and in convenient denominations of ten, twenty, fifty, one hundred dollar, etc. The
signature of the buyer/traveler is written on the face of the cheques at the time of their purchase.
The cheques also provide blank space for the signature of the traveler to be signed at the time of
encashment of each cheque. A traveler has to sign in the blank space at the time of drawing
money and in the presence of the paying banker.
The paying banker will pay the money only when the signature of the traveler tallies with the
signature already available on the cheque.
A traveler should never sign the cheque except in the presence of paying banker and only when
the traveler desires to encash the cheque. Otherwise it may be misused. The cheques are also
accepted by hotels, restaurants, shops, airlines companies for respectable persons.
Encashment of a traveler cheque abroad is tantamount to a foreign exchange transaction as it
involves conversion of domestic currency into a foreign currency.
When a traveller cheque is lost or stolen, the buyer of the cheques has to give a notice to the
issuing bank so that stop order can be issued against such lost/stolen cheques to the banks where
they are permitted to be encased.
It is also difficult to the finder of the cheque to draw cash against it since the encasher has to sign
the cheque in the presence of the paying banker. Unused travellers cheques can be surrendered to
the issuing bank and balance of cash obtained.
The issuing bank levies certain commission depending upon the number and value of travellers
cheques issued.
(iv) Circular Notes or Circular Letters of Credit:
Under Circular Letters of Credit, the customer/traveller negotiates the drafts with any of the
various branches to which they are addressed. Thus the traveller can obtain funds from many of
the branches of banks instead only from a particular branch. Circular Letters of Credit are
therefore a more useful method for obtaining funds while travelling to many countries.
It may be noted that travellers letter of credit are usually paid for in advance. In other words, the
traveller first makes payments to the issuing bank before obtaining the Circular Notes.
(v) Issue "Travellers Cheques":
Banks issue travellers cheques to help carry money safely while travelling within India or
abroad. Thus, the customers can travel without fear, theft or loss of money


21

(vi) Letters of Credit:
Letter of Credit is a payment document provided by the buyer's banker in favour of seller. This
document guarantees payment to the seller upon production of document mentioned in the Letter
of Credit evidencing dispatch of goods to the buyer.
The Letter of Credit is an assurance of payment upon fulfilling conditions mentioned in the
Letter of Credit. The letter of credit is an important method of payment in international trade.
There are primarily 4 parties to a letter of credit.
The buyer or importer, the bank which issues the letter of credit, known as opening bank, the
person in whose favor the letter of credit is issued or opened (The seller or exporter, known as
'Beneficiary of Letter of Credit'), and the credit receiving/advising bank.
The Letter of Credit is generally advised/sent through the seller's bank, known as Negotiating or
Advising bank. This is done because the conditions mentioned in the Letter of Credit are, in the
first instance; have to be verified by the Negotiating Bank. It is mostly used in international
trade.
(vii) Acting as Referees:
The banks act as referees and supply information about the business transactions and financial
standing of their customers on enquiries made by third parties. This is done on the acceptance of
the customers and help to increase the business activity in general.
(viii) Provides Trade Information:
The commercial banks collect information on business and financial conditions etc., and make it
available to their customers to help plan their strategy. Trade information service is very useful
for those customers going for cross-border business. It will help traders to know the exact
business conditions, payment rules and buyers' financial status in other countries.
(ix) ATM facilities:
The banks today have ATM facilities. Under this system the customers can withdraw their
money easily and quickly and 24 hours a day. This is also known as 'Any Time Money'.
Customers under this system can withdraw funds i.e., currency notes with a help of certain
magnetic card issued by the bank and similarly deposit cash/cheque for credit to account.
(x) Credit cards:
Banks have introduced credit card system. Credit cards enable a customer to purchase goods and
services from certain specified retail and service establishments up to a limit without making
immediate payment. In other words, purchases can be made on credit basis on the strength of the
credit card.
22

The establishments like Hotels, Shops, Airline Companies, Railways etc., which sell the goods or
services on credit forward a monthly or fortnightly statements to the bank.
The amount is paid to these establishments by the bank. The bank subsequently collects the dues
from the customers by debit to their accounts. Usually, the bank receives certain service charges
for every credit card issued. Visa Card, BOB card are some examples of credit cards.

(xi) Gift Cheques:
The commercial banks offer Gift cheque facilities to the general public. These cheques received
a wider acceptance in India. Under this system by paying equivalent amount one can buy gift
cheque for presentation on occasions like Wedding, Birthday.
(xii) Accepting Bills:
On behalf of their customers, the banks accept bills drawn by third parties on its customers. This
resembles the letter of credit. While banks accept bills, they provide a better security for payment
to seller of goods or drawer of bills.
(xiii) Merchant Banking:
The commercial banks provide valuable services through their merchant banking divisions or
through their subsidiaries to the traders. This is the function of underwriting of securities. They
underwrite a portion of the Public issue of shares, Debentures and Bonds of Joint Stock
Companies.
Such underwriting ensures the expected minimum subscription and also convey to the investing
public about the quality of the company issuing the securities. Currently, this type of services can
be provided only by separate subsidiaries, known as Merchant Bankers as per SEBI regulations.
(xiv) Advice on Financial Matters:
The commercial banks also give advice to their customers on financial matters particularly on
investment decisions such as expansion, diversification, new ventures, rising of funds etc.
(xv) Factoring Service:
Today the commercial banks provide factoring service to their customers. It is very much helpful
in the development of trade and industry as immediate cash flow and administration of debtors'
accounts are taken care of by factors. This service is again provided only by a separate subsidiary
as per RBI regulations.

23

OBJECTIVES OF THE STUDY
1. To identify the common services between Non-banking financial corporations and
Private commercial Banks.
2. To compare the performance of NBFCS with Private Sector Commercial Banks on
banks on the basis of financial structure, profitability and efficiency
3. To determine whether NBFCS have impact on Private commercial banks.

Review of Literature:
1. F.No.17/7/2011-BO.II,Government of India, Ministry of Finance, Department of
Financial Services, and REPORT OF THE KEY ADVISORY GROUP (KAG) ON
THE NON-BANKING FINANCE COMPANIES (NBFCs), NBFCs have been playing
a complementary role to the other financial institutions including banks in meeting the
funding needs of the economy. They help fill the gaps in the availability of financial
services that otherwise occur in bank-dominated financial systems. The gaps are in
regards the product as well customer and geographical segments. The number of NBFCs
has decreased from 13,014 in FY06 to 12,409 in FY11 however the sector has grown by
2.6 times between FY06 and FY11 at a CAGR of 21%. It accounted for 10.8% in terms
of outstanding advances and 13% in terms of assets of the banking system in FY06. This
share has risen to 13.2% and 13.78% respectively in FY11. In terms of deposits the share
of public deposits held by NBFCs as compared to deposit base of banks has decreased
from 1.05% in FY06 to 0.22% in FY11.

2. Srinivasan Gumparthi SSn, International Journal of Trade, Economics and
Finance, Vol. 1, No. 1, June, 2010, 2010-023X, Risk Assessment Model for Assessing
NBFCs (Asset Financing) Customers, Non-banking financial companies (NBFCs) form
an integral part of the Indian financial system. The history of the NBFC Industry in India
is a story of under-regulation followed by over-regulation. Policy makers have swung
from one extreme position to another in their attempt to set controls and then restrain
them so that they do not curb the growth of the industry. This report covers the industry.
24

Most of this NBFCs are operating with high risk of lending and more often NBFCs lend
credit to Small and Medium size enterprises, which are categorized as high risk class of
Assets. To assess such high risk assets we need to have a comprehensive model. This
paper aim is to build Risk Assessment Model for NBFCs based both qualitative and
quantitative aspects of the client.



3. Viral V. Acharya, New York University Stern School of Business, NBER and CEPR,
Hemal Khandwala, Centre for Advanced Financial Research and Learning, Reserve
Bank of India And T. Sabri nc, Centre for Advanced Financial Research and
Learning, Reserve Bank of India, Studied the determinants of the growth of those non
deposit taking nonbank financial corporations (NBFCs) which are regarded by the
Reserve Bank of India as being systemically important and have grown substantially in
India over the past decade. They documented that bank lending to these NBFCs forms a
significant proportion of their liabilities, and fluctuates in line with bank allocation to
priority lending sectors. Bank lending to these NBFCs also appears to be greater for
banks that have lower branching in semiurban areas relative to metropolitan areas.
However, bank lending to these NBFCs is virtually nonexistent for the largest state
owned bank, State Bank of India (SBI), and its affiliates. Starting with the financial crisis
of fall 2008, bank lending to these NBFCs experienced a permanent contraction shock
that is related to the shift of term deposits towards SBI away from other banks. These
bankNBFC linkages are present primarily for those NBFCs that do loans or asset
financing and not for investment companies, and also affect the credit growth of these
NBFCs. Overall, the findings suggest that NBFCs represent a completeness of credit
allocation in nonmetropolitan areas of the Indian economy by banks with less than fully
developed branching networks, but that this role has been potentially constrained by
distortions in bank deposit base arising from a lack of levelplaying field in the perceived
government support of different banking groups. Investigated the rapid growth of the
nonbank finance corporations (NBFCs) in India as a laboratory to understand incentives
underlying the growth of shadow banking institutions in emerging markets.

25

4. International Business and Economics Research Journal September 2010 Volume
9, Planning And Pricing Of Financial Services: A Study On Perceptions And
Practices Of Non-Banking Finance Companies M. R. Shollapur, Siddaganga
Institute of Technology, India, The study aimed to fulfill the following objectives to
trace the unique features of financial products offered by NBFCs. NBFCs in India have
attached a considerable importance to safety and security of their funds as well as the
long-term growth of their customers. Product differentiation is more typical of the present
day financial service industry. NBFCs have tried to be distinct by offering personalized
services as well as improving service quality. They have adopted comprehensive
techniques such as opinion survey of existing customers and formal market research for
eliciting ideas on innovative products. Open suggestions are also invited on how can
these NBFCs perform in a satisfying manner. Interest as a form of price is popular with
NBFCs and the cost continues to strongly influence their pricing. They have also
considered the competitors price while determining the price of their financial products.
It is interesting to note that their commitment to customers satisfaction precedes the
objective of survival. A majority NBFCs has accepted the presence of large and
aggressive competitors in the financial service industry. They perceive price as an index
of image as well as a technique of product differentiation. The NBFCs believe in raising
funds at lower costs so as to achieve cost effectiveness in their operations. The reduction
in interest rates in the economy as a whole will help NBFCs to access the resources at
low costs.

5. C.S.Balasubramaniam, Professor, Babasaheb Gawde Institute of Management
Studies, Mumbai, VOLUME NO.1, ISSUE NO.7, ISSN 2277-1166, the Indian Banks
have overall demonstrated a trend of continued good performance and profitability
despite rising interest rates, increase in operating costs and the spillover effects of recent
global financial Crisil. This is reflected in higher credit growth deposit record, better
return on assets, and return on equities. (ROE) The capital position improved
significantly as the banks were able to mobilize substantial funds. Maintaining
profitability is a challenge to commercial banks especially in a highly competitive era and
opening up of banking business to NBFC and foreign banks in general. This assumes
26

significance in a period of rising interest rates and operating costs of borrowers in
general.


6. Zohra Bi and Shyam Lal Dev Pandey; COMPARISON OF PERFORMANCE OF
MICROFINANCE INSTITUTIONS WITH COMMERCIAL BANKS IN INDIA,
Australian Journal of Business and Management Research Vol.1 No.6 [110-120],
September-2011. The paper aims to study the performance and efficiency of
microfinance institutions. The researchers have made extensive use of secondary data,
research papers and journals to measure and compare the performance of MFIs with the
commercial banks. The study uses tools like ratio analysis and one way Annova to
measure and analyze the performance. The various parameters used for comparison of
performance between banks and MFIs include: financial structure, profitability and
efficiency. The researchers come to the conclusion that microfinance institutions have
been playing an important role as a tool for poverty alleviation by serving the population
who have been considered un-bankable or are excluded by the commercial banking
activities. Although these 24 MFIs show an impressive growth, they suffer from
inadequacy of capital to expand their outreach and services compared to commercial
banks.

7. Alain de CROMBRUGGHE, Michel TENIKUE and Julie SUREDA,
PERFORMANCE ANALYSIS FOR A SAMPLE OF MICROFINANCE
INSTITUTIONS IN INDIA, Annals of Public and Cooperative Economics 79:2
2008,The researchers objective is to analyze the sustainability and outreach of the MFIs.
The researcher paper uses regression analysis to study the determinants of self-
sustainability of a sample of microfinance institutions in India. The sample institutions
have been taken on the basis of their ability and willingness to report financial and
operational data to Sa Dhan. Sa Dhan is common know-how sharing organization. The
study focuses on three variables of sustainability: cost coverage by revenue, repayment of
loans and cost-control. They have come to the conclusion that the challenge of covering
costs on small and partly unsecured loans can indeed be met, without necessarily
increasing the size of the loans or raising the monitoring cost. The analysis suggests other
27

ways to improve the financial results. They further explain by giving examples like a
better targeting of the interest rate policy or increasing the number of borrowers per field
officer especially in collective delivery models.

8. Rajarshi Ghosh, Microfinance in India: A critique, the researcher relates to NBFCs
as the tool for poverty alleviation and women empowerment. She uses field survey,
longitudinal surveys to examine how powerful microfinance as a tool for inclusive
finance in India is. She also raises questions on the viability of Microfinance institutions.
The survey results revealed that they are unable to expand their outreach, have limited
access to funding, capital and investments and require continuous support from
government and other agencies. Their operating expenses are higher than that of
commercial banks and at the same time strengthen the bond between MFIs and formal
financial system.

9. Pankaj K. Agarwal and S.K. Sinha, FINANCIAL PERFORMANCE OF MICRO
FINANCE INSTITUTIONS OF INDIA, A CROSS-SECTIONAL STUDY, Delhi
Business Review X Vol. 11, No. 2 (July - December 2010), the researchers consider five
star rated 22 MFIs for the purpose of study. The data on MFIs are very difficult to find,
therefore the paper takes data from MIXMARKET as the only reliable source of data.
The rating is based on the basis of their level of disclosure, vintage, quality of disclosure,
financial parameters etc. The researchers have chosen six parameters of financial
performance, VIZ.financial structure, revenue, expenses, efficiency, productivity and
risk. Overall performance is measured on three ratios viz. Return on Assets, Return on
Equity and Operational Efficiency. Data analysis is done on the basis of these ratios. The
researchers conclude that best performing MFIs are following different business models,
i.e. 13 out of 22. The MFIs rely on time tested models that have been sustained for years.
Each organization have its difference on managerial capacity based on its learning curve.



28

10. Jonathan Morduch, The Microfinance Promise, Journal of Economic Literature,
Vol. XXXVII (December 1999), pp. 15691614. Morduch in his research paper
explores various literature on Microfinance from its history to the present context of
financial soundness of this system. The author considers theoretical perspectives, the
financial sustainability, and issues surrounding the benefits and cost of subsidization, the
econometric evaluations of impacts and finally saving. The paper concludes with impact
of micro finance on broader economic development. The study stresses on various
literatures around the globe entailing the pioneers of microfinance and financial inclusion
to the un-bankable thus challenging the status quo of the traditional banks many of which
are adopting the models to integrate microfinance with traditional banking services. In the
Monetary Policy Statement 2013-14, it was announced that the Reserve Bank will review
the extant banking structure in India and prepare a policy Discussion Paper keeping in
view the recommendations of, inter alia, the Committee on Banking Sector Reforms,
1998 (Chairman:Shri M. Narasimham), the Committee on Financial Sector Reforms,
2009 (Chairman: Shri Raghuram Rajan) and a few other relevant viewpoints. The
Discussion Paper has since been released for starting a public debate


















29

Research Methodology:

Data Source
The data collected for the purpose of the study are secondary data the researchers have
used research papers, journals articles, interviews, annual reports of the company and
mined data from various sources like the website of RBI, the micro finance information
exchange, money control, and Rediff.

Methods
The Researchers have used extensive collection of secondary data from research articles
and journal to determine the methodology to be used for comparison of performance
between NBFCS and Private Commercial Banks in India
The secondary data thus collected is further analyzed to draw upon the various statistical
tools to be used, thus are the result obtained and conclusions drawn
The researchers have taken 10 Banks and 10 NBFCS for the purpose of the study, these
samples have been taken on the basis of the market capitalization.

Techniques of data collection and analysis
The statistical tools and techniques used are two sample T-Test, Co-Relation and various
ratio analysis
1. The two sample T-Test helps the researcher to compare the differences between the
mean of the variables. Thus it will help to compare the performance of NBFCS over
the banks
2. The ratio analysis is financial tools that are most commonly used to compare the
financial performance of various organizations
3. The Co-Relation test compares shows the measure of the strength and direction of
linear relationship between variables.it is a measure to explain how well a statistical
tool fits observations.



30

SCOPE OF STUDY

The scope of the research is limited to the deposit taking non-banking financial corporations and
Private Commercial Banks in India.
The sample have been taken on the basis of market capitalization only based on this sample the
impact of NBFCS on the private commercial Banks in India is analyzed and measured.
The study does not take into account the NBFCS and Commercial Banks whose market
capitalization is smaller, similarly the study also does not take into account various NBFCS
whose data and information are not publicly available.
Expected outcomes
The various parameters are calculated over a period of 10 years which help us to analyze the
growth of NBFCS in comparison with Private Commercial banks in India.
The performance are analyzed based on certain parameters like
a. Financial structure
b. Profitability
c. Efficiency
The results obtained would help the researchers identify if there exist a significant difference
between the NBFCS and commercial banks based on above parameters.






31

Common Services of NBFCs and Banks
LOANS AND ADVANCES DEPOSITS
Two wheeler loan Savings Account
Personal Loan Current account
Home Loan

Fixed Deposits
Loans for working
professionals Sweep - In / Out Deposit
Vehicle Loans Young Saver Deposit
Loan for Business
Senior Citizen Scheme
Educational Loan
Regular Recurring
Deposit
Agricultural finance Flexi Recurring Deposit
Craft finance

Safety deposits locker
NRI Housing loans Institutional Accounts
NRI Car loans Gift Cheque Scheme
NRI Gold loans Priority Banking
Loan against securities Preferred Banking
Loan against property
Demat Account
Construction Equipment loan Term Deposits
Loan against shares Debit Cards
Forex Services
Corporate Salary
Accounts



DATA ANALYSIS AND PRESENTATION

Co-Relation
This test measures the degree of association between two variables
Analysis
1. Here the coefficient of co-relation lies in between +1 and -1

32

No. of
Years
Lending of
Banks
Lending of
NBFCs

No. of
Years
Deposits of
Banks
Deposits of
NBFCs
2004 13964.93778 497.746

2004 18112.929 231.456
2005 17927.03 824.191

2005 24032.503 345.687
2006 26069.736 1460.38

2006 34506.574 642.204
2007 35581.792 2021.15

2007 46229.092 991.295
2008 44433.471 2937.812

2008 56478.585 1514.281
2009 51054.562 3335.098

2009 63136.688 2088.942
2010 55235.187 4164.513

2010 70268.897 2160.304
2011 70317.535 5428.937

2011 86864.158 2422.474
2012 84875.556 7937.08

2012 101602.918 2483.081
2013 100493.376 10377.624

2013 120672 3157.993

Column 1 Column 2

Column 1 Column 2
Column
1 1

Column
1 1
Column
2 0.9852025 1
Column
2 0.97250307 1
Table 1.1 Table 1.2
Here the correlation coefficient between lending of banks and Nbfcs is 0.98 and between
deposits of banks and Nbfcs is 0.97. This indicates that there is a strong positive co-relation
between lending of banks and Nbfcs. Similarly there is also a strong positive co-relation
between deposits of banks and Nbfcs. The data therefore illustrates that in the span of 10 years
both lending and deposits of banks and Nbfcs growth has been increasing.

T-Test
Since the sample is small and samples are independent and at the same time the population
standard deviation is unknown, the T statistic can be used to test hypothesis for the difference
between two variable means (Bajpayi 2012).
Hypothesis:

H0: There is no significant difference between the means of NBFCs and private commercial
banks
.
H1: There is significant difference between the means of NBFCs and private commercial banks.
33


















Table 1.4
The T statistic is computed as 5.71. This value is greater than the critical value of T statistic
(+1.83). Hence the null hypothesis is rejected and the alternate hypothesis is accepted.
Hence we can conclude that there is a significant difference between the means of NBFCs and
private commercial banks. This suggests that the deposits of NBFCs have effect on the deposits
of private commercial banks.





No. of Years Deposits of banks Deposits of NBFCs
2004 18112.929 231.456
2005 24032.503 345.687
2006 34506.574 642.204
2007 46229.092 991.295
2008 56478.585 1514.281
2009 63136.688 2088.942
2010 70268.897 2160.304
2011 86864.158 2422.474
2012 101602.918 2483.081
2013 120672 3157.993
Table 1.3

Variable 1 Variable 2
Mean 62190.4344 1603.7717
Variance 1122336331 1019772.978
Observations 10 10
Hypothesized Mean
Difference 0
Df 9
t Stat 5.716343343
P(T<=t) one-tail 0.000144142
t Critical one-tail 1.833112933
P(T<=t) two-tail 0.000288285
t Critical two-tail 2.262157163

34

Hypothesis:

H0: There is no significant difference between the means of NBFCs and private commercial
banks
.
H1: There is significant difference between the means of NBFCs and private commercial banks.

No. of Years Lending of Banks Lending of NBFCs
2004 13965 498
2005 17927 824
2006 26070 1460
2007 35582 2021
2008 44433 2938
2009 51055 3335
2010 55235 4165
2011 70318 5429
2012 84876 7937
2013 100493 10378
Table 1.5

Variable 1 Variable 2
Mean 49995.32 3898.4531
Variance 8.16E+08 10269766.17
Observations 10 10
Hypothesized Mean
Difference 0
Df 9
t Stat 5.070537
P(T<=t) one-tail 0.000336
t Critical one-tail 1.833113
P(T<=t) two-tail 0.000671
t Critical two-tail 2.262157
Table 1.6
The T statistic is computed as 5.07. This value is greater than the critical value of the T statistic
(+1.83). Hence null hypothesis is rejected and alternative hypothesis is accepted.
Hence we can conclude that there is a significant difference between the means of NBFCs and
private commercial banks. Therefore the lending of NBFCs has effect on the lending of banks

35

Comparison by ratio analysis
1. Financial Structure
Total debt to owners fund
It is measurement of companys financial leverage. Debt includes all short term
and long term obligations. Total capital includes companys debt and
shareholders equity.
(Total debt / Total shareholder equity + debt)
Total Debt to
Owners Fund '13

'12

'11

'10

'09

'08 '07

'06

'05 '04
Banks (Average) 8.75 8.9 9.2 9 10 11 12 12 12 13.2
NBFCs (Average) 2.39 2.6 3.5 3 3 3.4 3.5 3.5 3.7 3.79
Table 1.7

Bar chart 2.1 Total Debt to Owners Fund
Higher the debt equity ratio implies a risky investment because higher the debt higher the interest
has to be paid by the company.
From the graph it can be seen that the NBFCs have lower debt to owner fund ratios compared to
banks. This might be basically because NBFCs are socially oriented micro finance institutions
that depend upon grant and donations. They do not have much access to capital whereas with
increased competition banks have intensified both their capacity to leverage and at the same time
0
2
4
6
8
10
12
14
'13 '12 '11 '10 '09 '08 07 '06 '05 '04
Banks (Average)
NBFCs (Average)
36

gained access to the funds from the public. Hence NBFCs have lower debt to equity in compared
to private commercial banks.
2. Profitability
Return on assets
It indicates how effectively a management can generate earning from the
investments made. The ratio tells us how profitable a company is related to its
total assets. It is expressed as a percentage, it is also known as return on
investments.
Return on Assets
Including
Revaluations '13 '12 '11 '10

'09 '08 '07 '06 05 '04
Banks (Average) 380 321 318 297 ## 219 158 168 188 211
NBFCs (Average) 213 189 152 126 ## 114 96 81 66 54.5
Table 1.8

Bar chart 2.2 Return on Assets Including Revaluations
The above graph suggests that at an average the return on assets for both NBFCs and Private
Commercial banks have grown significantly in the past ten years. There is a significant
difference between the ROA of NBFCs and private commercial banks.
0
50
100
150
200
250
300
350
400
'13 '12 '11 '10 '09 '08 '07 '06 05 '04
Banks (Average)
NBFCs (Average)
37

High ROA and ROE is required to attract P/E funds, Private capital so that the NBFCs could be
more financially inclusive for the un-bankable who are excluded from services by traditional
banks.
This is basically because the NBFCs have small asset base that impacts their profitability where
as private commercial banks asset based and outreach has led to this significant difference.
Therefore the above data suggest that the NBFCs are still lagging behind in terms of profitability.

Net profit margin
It indicates the companys effectiveness in converting its revenue into actual
profits; it is an indication of how effective is company at its cost control and the
margin is calculated by dividing the net income by revenue or by dividing the net
profit by sales, it is expressed as a percentage.
Net Profit Margin(%) '13

'12

'11

'10

'09

'08

'07

'06

'05 04
Banks (Average) 14.1 14 15 14 11 11 11 11 10 15.7
NBFCs (Average) 18.6 19 23 20 5 19 21 24 22 21.1
Table 1.9

Bar Chart 2.3 Net Profit Margin
The net profit margin of NBFCs have reported higher compared to the private commercial
banks, it is basically attributed to the higher interest rates charged by NBFC.
0
5
10
15
20
25
30
'13 '12 '11 '10 '09 '08 '07 '06 '05 04
Banks (Average)
NBFCs (Average)
38

The graph also shows that during the year 2009 the net profit margin of NBFCs was significantly
lower than private commercial banks. This could be due to the economic crisis that started in
2008, which led to divestment of investor interest to various macroeconomic factors.
3. Efficiency
Return on long term funds
It is amount of long term debt on companys balance sheet for the promise to
return those funds in the future for a price known as interest, interest here is also
known as cost of debt. Organizations that are able to generate higher return at a
lower cost are termed as more efficient.
Return on Long Term
Funds(%) 13

'12

'11

'10

'09

'08

'07

'06

'05 '04
Banks (Average) 89.7 88 74 74 93 88 87 74 73 105
NBFCs (Average) 19.6 17 13 13 14 13 13 14 13 13.1
Table 1.10

Bar Chart 2.4 Return on Long Term Funds (%)

The graph shows that banks have higher return on long term funds in comparison to NBFCs.
This is generally because banks can mobilize huge amount of public deposits as borrowings and
at the same time diversify its risk. More over banks lend after explicitly carrying out the
feasibility on return and risk for any specific investments. On the other hand the NBFCs have a
0
20
40
60
80
100
120
13 '12 '11 '10 '09 '08 '07 '06 '05 '04
Banks (Average)
NBFCs (Average)
39

limited function of deposit and lending. The gestation period for NBFCs is very high, which
increases their cost of capital. The risk of default, non-payment of interest is equally high for
NBFCs. NBFCs lend small amounts to economically backward individuals which indicate that
compared to the loans mobilized the cost for mobilizing the loan is very high. Therefore banks
have higher return on long term funds in comparison to NBFCs.



















40

RECOMMENDATIONS
NBFCs have been viewed as an important tool for financial inclusiveness to the population at the
bottom of the economic pyramid. On the other hand, Private commercial banks have been
viewed as pillar of economic development. The increasing number of NBFCs and other micro-
finance institutions in the past several years have challenged the concept of traditional banking.
The concept of para banking, shadow banking emerged making the traditional commercial banks
apply more social thinking to go beyond the bankable, credit worthy mass to cater to the poor.
The researchers therefore have tried to study how the growth of NBFCs, that are accepting
deposits in India are impacting the private commercial banks.
The different accounting standards of NBFCs from the private commercial banks posed various
challenges to the researches. The availability of data is the biggest hurdle for such a research.
However, the researchers have come up with various tools and techniques both quantitative and
qualitative to determine whether there is impact of NBFCs over private commercial banks or not.
The Correlation test suggested that over the period of ten years both NBFCs and
private commercial banks have shown positive growth in terms of their lending
and deposits. This might be the result of economic growth, growth in the market,
investments and increasing outreach and access to capital. The Indian economy is
often termed as a saving economy.
The T-test suggested that there is significant difference in the mean between
variables of the banks and NBFCs. Therefore, there must be some effect of
NBFCs over the private commercial banks over the period of ten years. This
might be because major chunk of population are still deprived from the traditional
banking services. In the past ten years, NBFCs have helped in the process of
financial inclusion by catering to those unbankable mass. Thus their direct reach
to the poor led to greater mobilization of deposits and lending in NBFCs.
Similarly, the ratio analysis compared the performance of private commercial
banks against the NBFCs on various financial indicators. These indicators were
divided into three parameters viz. financial structure, profitability and efficiency.
41

The ratio analysis could explicitly probe into various qualitative research papers
to identify the possible causes of what the ratio analysis showed to the
researchers. Thus the cause, effect and the probable consequences were identified.
Most researchers have done works to explore the sustainability and profitability of
the NBFCs in the due course of time. The various models of NBFCs used around
the globe have not only stirred hope among the population at the bottom of the
economic pyramid, they have brought change in rules and regulations in various
nations enforcing traditional banks to go beyond serving the rich masses. Thus a
new school of thought swept the world and various further researches have been
done around the globe on socially sustainable businesses empowered by the role
played by NBFCs and MFIs.
The Private commercial banks have a great outreach in comparison to NBFCs,
and because of that they incurring less cost of funds.

Limitations of study:

1. The research is limited to the geographical region of India only.
2. The study is limited to the deposit taking NBFCs and the private commercial banks in
India only.
3. The researchers have taken a sample of ten NBFCs and ten Private Commercial Banks
only.
4. The Research is restricted by unavailability of enough research studies in the field.
Moreover, the different accounting standards and reporting mechanism led to
unavailability of data of NBFCs and on the topic. Therefore, the researchers have to limit
much of their studies to the qualitative research.




42

CONCLUSION
Although the microfinance sector has reported an impressive growth, with the ordinances passed
by the government, there is a lack of capital for some of the NBFCs in the country. Therefore,
continuous efforts are required to diversify the sources of funding available for the NBFCs in
order to attract foreign investments for well-established NBFCs in order to serve the rural low
income population, increase efficiency of staff members, alleviate poverty and also make them
profitable.
The large ten NBFCs dominating the sector, the other small NBFCs can adopt their business
models, policies and practices in order to increase their outreach and to operate on a sustainable
basis. The awareness in promoting the NBF sector and to incorporate financial inclusion, many
banks have become committed in providing their service. The government has also taken an
increasing interest in promoting the sector.
The NGO-MFIs transforming themselves into NBFC-MFIs are on the increase. There are a lot of
innovations in the NBF sector so as to overcome the issues faced by them. The government plays
a major role in the development of the NBF sector. Macroeconomic stability, liberalized interest
rates, alternate funding options, mobilization of savings, opportunities for institutionalization are
some of the issues which require government attention. The government is required to develop
legal and regulatory framework for the sector in order to promote its growth and in turn achieve
the objective of poverty alleviation and thus contributing to the development of the country.
Though the performance of NBFCs have improved significantly over the past years, sufficient
regulatory and governance would help achieve the goal of poverty alleviation and financial
inclusion and this could be achieved with the combined cooperation of banks, government and
other players in the country. Thus with development of effective strategies and with the
combined effort of all players in the society such as donors, government, banks, corporations,
NGOs, etc. the long term goal of the government to achieve financial inclusion and poverty
alleviation would be attained.


43

Appendices
References
1. F.No.17/7/2011-BO.II,Government of India, Ministry of Finance, Department of
Financial Services, and REPORT OF THE KEY ADVISORY GROUP (KAG) ON THE
NON-BANKING FINANCE COMPANIES (NBFCs)
2. Srinivasan Gumparthi SSn, International Journal of Trade, Economics and Finance, Vol.
1, No. 1, June, 2010, 2010-023X
3. Viral V. Acharya, New York University Stern School of Business, NBER and CEPR,
Hemal Khandwala, Centre for Advanced Financial Research and Learning, Reserve Bank
of India And T. Sabri nc, Centre for Advanced Financial Research and Learning,
Reserve Bank of India
4. International Business & Economics Research Journal September 2010 Volume 9,
Planning And Pricing Of Financial Services: A Study On Perceptions And Practices Of
Non-Banking Finance Companies M. R. Shollapur, Siddaganga Institute of Technology,
India
5. C.S.Balasubramaniam, Professor, Babasaheb Gawde Institute of Management Studies,
Mumbai, VOLUME NO.1, ISSUE NO.7, ISSN 2277-1166
6. Zohra Bi and Shyam Lal Dev Pandey; COMPARISON OF PERFORMANCE OF
MICROFINANCE INSTITUTIONS WITH COMMERCIAL BANKS IN INDIA,
Australian Journal of Business and Management Research Vol.1 No.6 [110-120],
September-2011
7. Alain de CROMBRUGGHE, Michel TENIKUE and Julie SUREDA, PERFORMANCE
ANALYSIS FOR A SAMPLE OF MICROFINANCE INSTITUTIONS IN INDIA,
Annals of Public and Cooperative Economics 79:2 2008
8. Jonathan Morduch, The Microfinance Promise, Journal of Economic Literature, Vol.
XXXVII (December 1999), pp. 15691614