Indian Investment & Finance Industry Report - Investment & Finance Sector Research & Analysis in India - Equitymaster

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Investment & Finance Sector Analysis Report 

[Key Points | Financial Year '14 | Prospects | Sector Do's and dont's]

  • The major Non Banking Financial Companies (NBFCs) in India have their relative specializations, for e.g. HDFC (mortgage loans), IDFC (infrastructure loans), Mahindra Finance, Power Finance Corporation (power financer) & Shriram Transport Finance (auto loans). The trend of segmental monopoly is changing as banks are entering long-term finance and FIs also meeting the medium and short – term needs of the business masses
  • NBFCs' growth had been constrained due to lack of adequate capital. Going forward, we believe capital infusion and leverage thereupon would catapult NBFCs' growth in size and scale. A number of NBFCs have been issuing non-convertible debentures (NCDs) in order to increase their balance sheet liquidity. Also to address this purpose, especially in the infrastructure financing space, a new category of NBFCs was formed called Infrastructure financing companies (IFCs).
  • NBFCs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is also not applicable for them. While this is to their advantage, they do not have access to low-cost demand deposits. As a result their cost of funds is always high, resulting in thinner interest spread. However, the regulatory arbitrage may soon change between the two entities with the help of the Usha Thorat committee recommendations, which call for stricter regulations in the space.

How to Research the Investment & Finance Sector (Key Points)

  • Supply
  • Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs.
  • Demand
  • India is a growing economy, demand for long-term loans, especially infrastructure and personal finance is high
  • Barriers to entry
  • Licensing requirement, investment in technology, skills required for project finance, distribution reach, minimum capital requirements, etc.
  • Bargaining power of suppliers
  • Providers of funds could be more demanding, base rate requirements are applicable. As quality of services provided with minimum time matters a lot.
  • Bargaining power of customers
  • High, as banks have also forayed into long-term finance and consumer finance.
  • Competition
  • High. There are public sector, private sector and foreign banks along with non-banking finance companies competing in similar markets.

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Financial Year '14

  • FY14 proved to be a challenging year. The uneven political climate led to stagnant economical scenario – thereby leading to lower infusion of investments in to infrastructure and core industries – also leading to lower capital expenditure and less job creation. The inflation remained on the higher side, thereby reducing the disposable income and leading to lower consumer spends.
  • It was also the most challenging year for the Indian commercial vehicles sector. India's cycle-prone commercial vehicle industry is not new to downturns. Thus the vehicle financiers too faced enormous challenges during the year.
  • Despite the overall slowdown in the economy, the demand for individual home loans continued to remain strong. The demand for affordable housing remained robust with increased growth coming from tier II and tier III cities. In an endeavor to further support home loans, the Finance Act, 2013 provided a one-time benefit of additional interest deduction up to Rs 1 lakh for first-time home buyers, provided the loan amount and property cost did not exceed Rs 25 lakhs and Rs 40 lakhs respectively. This, coupled with the other fiscal benefits available on home loans has helped reduce the effective rate of interest payable on a home loan. Thus, overall, FY14 turned out to be a strong year in terms of home loan disbursements for housing financiers.
  • During FY14 India continued to show a deceleration in growth with the GDP growth rate at lower than 5 percent. The macroeconomic scenario was difficult with a slowdown in the investment cycle, persistently high headline inflation and a volatile currency and interest rates. The trend of declining private investment in Infrastructure continued during the year. The issues faced by the infrastructure sector are well known and the Government initiated some steps to reduce the bottlenecks faced in project execution. And FY14 proved to be an equally turbulent year for infrastructure financiers.
  • The Reserve Bank of India granted branch licenses to two NBFCs; namely, IDFC and Bandhan Financial services to set bank in the private space.
  • The retail focused NBFCs witnessed a surge in asset quality issues during the fiscal ended March and the troubles are likely to continue in FY15 as well. The agency stated delinquencies due for over 180 days, after which the asset turns bad as per the existing reporting guidelines, for the retail focused NBFCs increased to 1.9% for FY14 from 1.3% at the end of FY13. Going by the 90-day due rule, which qualifies an asset as bad for commercial banks, delinquencies increased to 4.5% as of March 2014 as against 3.6% in the year-ago period.
  • The credit growth registered by retail focused NBFCs also declined massively during the fiscal with such NBFCs reporting only 8% growth in advances as against 19% rise in advances in the previous fiscal. A significant part of the slowdown was due to de-growth in the commercial vehicle, construction equipments and gold loan segments as reported by the agency.

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  • The economy has been seeing early signs of improvement in various macroeconomic parameters. These events are expected to give further boost to the economic growth of the nation.
  • Factors like higher industrial growth and clearance of stalled projects are likely to reduce cyclical pressure on major non-bank finance companies from the second half of the next fiscal.
  • While in FY15 delinquency level for retail NBFCs could remain at elevated levels a possible pick-up in industrial activity could result in some easing, although the same is expected only towards the latter part of the year.
  • The gross non-performing loan (gross NPL) ratio of NBFCs to reach 4.2% by the end of March 2015 from 2.5% during the end of fiscal year ended March 2013.
  • As the large exposure regime for the banks will come into effect by 2018, NBFCs will have more room to operate in big corporates financing segment in the medium term. With the development in the equity and corporate bond markets in future, investment companies are likely to have better prospects in future.

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