NON-BANKING FINANCIAL COMPANIES

NON-BANKING FINANCIAL COMPANIES August 2013, Volume: II, Issue: VIII 1 A.Perumal, Ph.D. Research Scholar in Commerce, Manonmaniam Sundaranar University, Tirunelveli. 2 Dr.L. Satheeskumar, Assistant Professor in Commerce, DDE., Commerce Wing, Annamalai University. A study of NBFCs faces serious definitional and data difficulties. The number of such companies at work is very large, and it runs into thousands. But only a small proportion of them reports to/files return with the RBI. 1 There has also been a blurring of categories due to the emergence of many multi-service companies. The RBI (Amendment) Act 1997 defined NBFC as an institution or company whose principal business is to accept deposits under any scheme or arrangement or in any other manner, and to lend in any manner. As a result of this new definition, a number of loan and investment companies registered under the Companies Act by business houses for the purpose of making investment in group companies are now included as NBFCs. In the past, the definition of NBFC was not so extensive and the categorization of such institutions used to be somewhat different from the one officially followed at present. A residuary non-banking company is a company which receives any deposit under any scheme of arrangement, by whatever name called, in one lump sum or in installments or in any other manner and which is not an equipment leasing company, hire purchase company, a housing finance company, an insurance company, an investment company, a loan company, mutual benefits financial company or a miscellaneous non-banking company. SCOPE OF THE STUDY The NBFCs not accepting or holding public deposits will be regulated in a limited manner. These companies are exempted from all the provisions of directions relating to acceptance of public deposits and the requirements of capital adequacy as also credit/concentration norms. However, in order to avail of the exemptions from the regulations, these NBFCs are required to get a resolution passed by their board of directors to the effect that they would not accept any public deposits. The board resolution in the case of investment companies not accepting public deposits and which have acquired shares of not less than 90 per cent of their assets in their group or holding or subsidiary companies will also specifically include the names of their group or holding or subsidiary companies whose shares and securities they hold or propose to invest during the ensuing year. Under these circumstances, the study on the performance of Non-Banking Financial Companies has greater scope in various areas. 1 Govt. of India, Report of Banking Commission, 1970, pp.413-35 128

129 August 2013, Volume: II, Issue: VIII STATEMENT OF PROBLEMS The present study deals with the performance of the sample study units namely Sundaram Finance Ltd. and Lakshmi General Finance Ltd. The study deals with the analysis of Balance sheets and income statements of the sample companies. Further an analysis of the sample respondents is also made to bring out the perception of respondents about various NBFCs of similar nature. OBJECTIVES OF THE STUDY The study approaches the performance evaluation of sample non-banking financial companies and customers satisfaction towards the service offered by those agencies. For this purpose, the following objectives are framed: 1. To document the growth and development of Non-Banking Financial Companies. 2. To evaluate the performance of Sundaram Finance Limited and Lakshmi General Finance Limited; 3. To bring to light the perceptions of the sample customers about the functioning of NBFCs. 4. To offer concrete suggestions to tide over such problems of NBFCs and customers. METHODOLOGY The research design of this study is descriptive, analytical and conclusive. In 1990s there was a widespread crisis in the history of NBFCs. Since the second half of 90s was found to be the normal period for NBFCs, the present study concentrates on this period which is from 2007 to 2012. The present study pertains to A Study on NBFCs in Tamilnadu only. Among the NBFCs registered with the Registrar of Companies, Chennai, Tamilnadu, the NBFCs, - Sundaram Finance Limited and Lakshmi General Finance Limited which are having a rating of MAAA by ICRA, spread wideover in the State of Tamilnadu with more number of branches and wide and strong customer base are selected. The study comprises both primary and secondary data. The secondary data pertaining to the study are gathered from annual reports of NBFCs, journals, magazines, survey of Indian Industry 2012, academic literatures etc. Secondary data are also collected from various libraries of Tamil Nadu, university libraries and Government libraries. Published and unpublished data are also referred for this study purpose. For the purpose of collection of primary data, a structured interview schedule has been prepared and used to get the opinion of the respondents. The pre tested schedule is used to discuss the opinion of the concerned respondents. The primary data are collected from the respondents of urban and rural areas of the Tiruchirappalli district. SAMPLE SIZE OF CUSTOMERS The sample size for this study has been restricted to 80 permenant customers, by selecting 40 customers from Sundaram Finance Limited and 40 customers from Lakshmi General Finance Limited. A sample 80 from the population is drawn by convenient sampling

August 2013, Volume: II, Issue: VIII technique and thus 40 customers have been selected from among the Sundaram Finance Customers and 40 from among the Lakshmi General Finance customers. STATISTICAL TOOLS USED For the purpose of analyzing the performance and perceptions in the present study, various statistical techniques such as averages, standard deviation, co-efficient of variation, trend, index numbers etc. are used. Advanced tools such as regression models and Chi-square test are also used. Percentage analysis has also been done. STUDY AREA Tiruchirappalli District in the State of Tamil Nadu is taken for the purpose of evaluating the performance of selected sample non-banking financial companies and perception of sample respondents. HYPOTHESES In the light of the objectives, the following hypotheses are framed and tested in this study: 1. There is no significant relationship between personal factors of respondents such as age, sex, educational qualification etc. and the choice of selection of non-banking finance companies. 2. There is no significant relationship between perception of respondents towards deposits, lending rates, services and choice of selection of intermediary. ANALYSIS OF THE PERCEPTION OF SAMPLE RESPONDENTS GENERAL OPINION ABOUT NBFCs TABLE 1 OPINION OF THE SAFETY OF INVESTMENT SAFETY OF Sundaram Percent Lakshmi Percent Total Percent INVESTMENT Very high 5 12.50 3 7.50 8 10.00 High 8 20.00 12 30.00 20 25.00 Normal 12 30.00 8 20.00 20 25.00 Poor 10 25.00 10 25.00 20 25.00 Very poor 5 12.50 7 17.50 12 15.00 Total 40 100.00 40 100.00 80 CH-2.44 Source: Primary Data Analysis of table 1 shows safety of the investment in both the Sundaram and Lakshmi General Finance. 10 per cent of the respondents have opinion that it is of very high safety, 25 per cent of the respondent feels it is high. 25 per cent of the respondents feel normal. Another 25 per cent of the respondents feel it is poor. 15 per cent of the respondents are feeling it is very poor. Since the calculated value of chi-square is (2.44) is less than the table value (9.89) at 5 per cent level of significance for degree of freedom 4, there is no significant relationship between 130

131 August 2013, Volume: II, Issue: VIII opinion of the safety investment and the choice of the selection of non banking finance companies. Table 2 depicts the risk elements in the sample institutions. TABLE 2 RISK ELEMENTS RISK Sundaram Percent Lakshmi Percent TOTAL Percent ELEMENTS Very high 7 17.50 5 12.50 12 15.00 High 10 25.00 8 20.00 18 22.50 No opinion 5 12.50 3 7.50 8 10.00 Low 8 20.00 12 30.00 20 25.00 Very low 10 25.00 12 30.00 22 27.50 Total 40 100.00 40 100.00 80 100.00 CHI-2.04 Source: Primary Data According to table 2, 15 per cent of the respondents feel that risk elements are very high, 22.50 per cent of the respondents feel that risk elements are high, 10 per cent of the respondents have given no opinion about the risk elements. 25 per cent of the respondents feel it is low, 27.50 per cent of the respondents i.e. major number of respondents feels that it is very low. Since the calculated value of chi-square is (2.04) less than the table value (9.89) at 5 per cent level of significance for degree of freedom 4, there is no significant relationship between the risk elements and the choice of the selection of non banking finance companies. Table 3 shows the growth prospects of the sample institutions. TABLE 3 GROWTH PROSPECTS GROWTH Sundaram Percent Lakshmi Percent TOTAL Percent PROSPECTS Very high 3 7.50 7 17.50 10 12.50 High 5 12.50 8 20.00 13 16.25 Normal 8 20.00 11 27.50 19 23.75 Low 18 45.00 10 25.00 28 35.00 Very Low 6 15.00 4 10.00 10 12.50 Total 40 100.00 40 100.00 80 100.00 CHI-5.46 Source: Primary Data Growth prospects of these institutions are presented in the table 3, which shows that 7.50 per cent of the respondents of Sundaram Finance feel that it has very high growth, 12.5 per cent of them feel high growth, 20 per cent of the respondents opinion is normal growth. 45 per cent of the respondents feel it is low and 15 per cent of the respondents feel it is very low that means major number of respondents of Sundaram Finance has no positive opinion about the growth prospects of Sundaram Finance Limited.

August 2013, Volume: II, Issue: VIII In case of Lakshmi General Finance, 17.50 per cent and 20.00 per cent of the respondents feel high and very high growth respectively. 27.50 per cent of the respondents feel it is normal growth. 25 per cent and 10 per cent of the respondents feel it is low and very low growth. FINDINGS 1. In Lakshmi General Finance 30 per cent of the respondents feel that it is very simple, 25 per cent and 17.50 per cent of the respondents feel that it is simple and normal, finally 22.50 per cent and 5 per cent of the respondents feel that it is hard and very hard. Since the calculated value of chi-square is (3.38) less than the table value (9.89) at 5 per cent level of significance for degree of freedom 4, there is no significant relationship between investment procedure and the choice of selection of non banking finance companies. 2. As far as Sundaram Finance is concerned 32.50 per cent of the respondents feel that stability of interest payment is very high, 30 per cent and 10 per cent of the respondents feel that it is high and normal, and 20 per cent and 7.50 per cent feel that it is low and very low respectively. 3. As far as Lakshmi General Finance is concerned, 42.50 per cent of the total respondents feel that it is very high, 12.50 per cent and 15 per cent of the respondents feel that it is high and normal respectively, and 7.50 per cent and 22.50 per cent of the respondents feel that it is low and very low respectively. Since the calculated value of Chi-square is (9.08) less than the table value (9.89) at 5 per cent level of significance for degree of freedom 4, there is no significance relationship between stability of interest payments and the choice of the selection of the non banking finance companies. 4. As far as Sundaram Finance is concerned 30 per cent and 27.50 per cent of the respondents feel the stability in principal repayment is very high. 20 per cent and 12.50 per cent of the respondents feel that it is normal and low respectively. 10 per cent of the respondents feel that very low stability. Maximum numbers of respondents feel positively about this institution. 5. With regard to Lakshmi General Finance, 32.50 per cent and 22.50 per cent of the respondents feel that it is very high and high stability. 12.50 per cent and 10 per cent of the respondents feel that it is normal and low stability respectively. 22.50 per cent of the respondents feel that it is very low. Here also the majority of respondents feel positive about stability in principal repayment. Since the calculated the value of chi-square is (2.96) less than the table value (9.89) at 5 per cent level of significance for degree of freedom 4, there is no significant relationship between stability in principal repayment and the choice of selection of the non banking finance companies. 6. Regarding Sundaram finance 27.50 per cent and 20 per cent of the respondents say support of officials is highly satisfied and satisfied, 22.50 per cent of the respondents and 7.50 per cent of the respondents say that it is normal and not satisfied respectively, 22.50 per cent of the respondents feel that the support of the officials is not at all satisfied. For Lakshmi General Finance 37.50 per cent and15 per cent of the respondents feel that there are highly satisfied and satisfied, 20 per cent and 22.50 per cent of the respondents feel 132

133 August 2013, Volume: II, Issue: VIII normal and not satisfied, only 5 per cent of the respondents feel that they are not at all satisfied. 7. Since the calculated value of chi-square is (8.42) less than the table value at 5 per cent level of significance for degree of freedom 4, there is no significant relationship between support of official and the choice of the selection of non banking finance companies. 8. The pre-closure methods of investment shows that 20 per cent and 17.50 per cent of the respondents feel that they are highly satisfied and satisfied. 12.50 per cent and 30 per cent of the respondents feel normal and not satisfied respectively. 20 per cent of the respondents feel that they are not at all satisfied. As far as Lakshmi General Finance is concerned, 15 per cent and 10 per cent of the respondents are of the opinion that they are highly satisfied and satisfied. 12.50 per cent and 30 per cent of the respondents opt for normal and not satisfied respectively. 32.50 per cent of the respondents feel that they are not at all satisfied. Since the calculated value of chi-square is (8.42) less than the table value at 5 per cent level of significance for degree of freedom 4, there is no significant relationship between pre-closure methods and the choice of the selection of non banking finance companies. 9. About 13.75 per cent of the respondents regarding pre-closure of penalty have the opinion of very high level, 23.75 per cent of the respondents feel it is high, 22.50 per cent of the respondents feel normal. Remaining 16.25 per cent of the respondents feel it is not high and 23.75 per cent of the respondents feel that they penalty is not very high. Since the calculated value of chi-square is (2.58) less than the table value (9.89) at 5 per cent level of significance for degree of freedom 4, there is no significant relationship between pre-closure penalty and the choice of the selection of the non banking finance companies. 10. For providing information by the sample institutions 7.50 per cent of the respondents feel very high. 16.25 per cent of them have given opinion of high and 21.25 per cent of the respondents are of normal. 25 per cent of the respondents feel low and 30 per cent of the respondents opined that it is very low. Since the calculated value of chi-square is (3.94) less than the table value (9.89) at 5 per cent level of significance for degree of freedom 4, there is no significance relationship between information provided by the sample respondents and the choice of the selection of non banking finance companies. SUGGESTIONS: 1. To provide legal strength to the order of such authority, the order could be transmitted by this authority to the principal civil court of the District in which the registered office of the company is situated or to such competent principal civil court as desired by the depositor and such an order would be enforceable as a decree of such principal court. 2. Till such time as the amendments for setting up depositors grievances redressal authorities are carried out, it is essential that the Company Law Board (CLB) tightens its procedures for dealing with complaints of depositors and puts in place a mechanism for speedy disposal of these complaints. The regional offices of the RBI and the regional offices of the CLB should set up a coordination mechanism to ensure that defaulting companies are speedily dealt with for violation of any regulatory/statutory requirements.

August 2013, Volume: II, Issue: VIII 3. State Governments may set up cells at the state and district level to help disseminate information relating to procedure for redressal of depositors grievances. 4. The procedure for the liquidation of NBFCs should be substantially on line with those available for banks, so that these proceedings can quickly be brought to completion and the claims of various depositors and other creditors are settled as early as possible. 5. There is an imperative need for reviewing the particulars given in advertisements. Dues from the group companies, the business ventures in which the directors are interested and the amount of exposure including the non-fund based facilities provided to such entities should also be included in the advertisement. 6. Whenever the RBI has reasons to believe that the management of an NBFC is likely to indulge in fraudulent activities to the detriment of the company or its depositors, the RBI may notify such company and on notification, the assets of the company shall stand attached and the management of the assets be vested with a custodian to be appointed by the RBI. The assets may then be disposed off under the orders of a special court or of a High Court to be notified as a special court for this purpose. Suitable amendments may be made in the RBI Act to put in place such an arrangement. 7. The amendment to the RBI act in 1997 is a steep in the right direction and allowing access to deposits from individuals to such entities exposes the depositors to grave risks. However, there is a case for allowing them to have access to loans other than public deposits. They could be permitted to access loans from bodies with a corporate identity, including NBFCs. 8. Deposits taking by unregistered NBFCs or NBFCs whose applications for certificate of registration have been rejected or whose registration has been cancelled or who have been prohibited from accepting deposits should be made a cognizable offence. State Governments should set up special investigation wings for enforcing these provisions. 9. The offence of unauthorized deposit taking by unincorporated financial intermediaries should be made cognizable. State Governments should also expeditiously consider enacting legislation on the lines of the legislation enacted by Tamilnadu Legislature on this issue. 10. There should be a ban on issue of advertisements soliciting deposits by all unincorporated bodies. CONCLUSION The concept of Non Banking Financial Companies is not new to India. Several factors have contributed to the rapid growth of these companies. There are regulations of the banking system on the one hand and some left outs are there in the other hand in relation to NBFCs. The contribution of NBFCs to economic development is highly significant and there is need to integrate it with the mainstream financial system. Reserve Bank of India is taking steps from time to time for the regulation of NBFCs. Experience over the last three decades has shown that the earlier regulations covered only the deposit taking activities without adequately covering the functional diversities of these companies. There should be an appropriate regulatory framework 134

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