NBFC

Housing Finance

NBFC or Non-Banking Financial Company

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
• engaged in the business of loans and advances,
• acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase

Mohandas Pai- Aarin Capital( Klever kid)

Azim Premji-Myntra & Snap Deal

Yuvraj Singh- YouWeCan

Ratan Tata- Urban Ladder,Ola, Snapdeal,Car dekho.com, Paytm

Services provided by NBFC' s

Venture Capital

Type of Services provided by NBFCs:

NBFCs provide range of financial services to their clients. Types of services under non-banking finance services include the following:

1. Hire Purchase Services

2. Leasing Services

3. Housing Finance Services

4. Asset Management Services

5. Venture Capital Services

6. Mutual Benefit Finance Services (Nidhi) banks.

7.Underwriting

8.Stock Broking

9.Merchant Banking

10.Portfolio Management Service

11.Foreign exchange related business

12.Factoring and leasing related business

13.Credit Cards services

14.Giving Credit Rating to other companies

• A venture capital company is defined as “a financing institutions which joins an entrepreneur as a co-promoter in a project and shares the risks and rewards of the enterprise.”
• long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth

Types of NBFC's

Features

1. Non-Banking Financial Companies (NBFCs)

2. Residuary Non-banking Finance companies(RNBCs).

3. Miscellaneous Non-Banking Finance Companies (MNBCs)

Residuary Non-Banking Company

• a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Leasing, Hire-Purchase, Loan Company.
• The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds.
• Miscellaneous Non-Banking Financial Companies are another type of NBFCs and MNBC means a company carrying on all or any of the types of business as collecting, managing, conducting or supervising as a promoter or in any other capacity, conducting any other form of chit .

Types of Venture Capitalists

Generally, there are three types of organized or institutional

venture capital funds -

i. Venture capital funds set up by angel investors, that is, high

network individual investors

ii. Venture capital subsidiaries of corporations - these are

established by major corporations; commercial bank

holding companies and other financial institutions

iii. Private capital firms/funds-The primary institutional source

of venture capital is a venture capital firm venture capitalists

take high risks by investing in an early stage company with

little or no history and they expect a higher return for their

high-risk equity investments in the venture.

Factoring

• High Degree of Risk's
• Equity Participation
• Long Term Investment
• Participation in management
• Achieving Social Objective
• Investment is Liquid

• Process of selling trade debts of a company to a financial institution
• Short-term cash advance arrangement
• Factoring is not a loan and there is no need to pass a credit check to qualify for it
• Factoring companies charge a small fee for invoice factoring. A typical charge may be anywhere between three and ten percent of the total invoice value

Functions of a Factor

Forfaiting

Benefits

• Predictable cash flows linked directly to performed sales
• Readily convert credit receivables to cash, pre-payment is available immediately
• Incremental cash flow planning and management
• Credit assessment on customers, new or existing
• Account Receivable reporting, sales ledger administration and debtor follow-up
• No additional debt created on the clients balance sheet.
• "Credit line" grows as the business expands. Extremely scalable form of leverage.
• Outsourcing receivables collections process, enabling the client to focus on core businesses .

• Purchase and Collection of Debts
• Sales Ledger Management- Monthly sales analysis , Overdue invoice analysis and Credit analysis
• Credit Investigation and Undertaking of Credit Risk- monitoring the financial position of the customer
• Provision of Finance- Nearly 80% of the credit sales as payment to the client
• Rendering Consultancy Services- About business opportunities to the client, profile of customers

• Forfaiting means giving up the right of exporter to the forfaitor to receive payment in future from the importer.
• ‘without recourse’ basis.
• The Association of Trade & Forfaiting in the Americas, Inc. (ATFA) and The International Forfaiting Association (IFA) may be useful in locating forfaiters willing to finance exports.
• The cost of forfaiting is determined by the rate of discount based on the aggregate of the LIBOR (London Inter Bank Offered Rate) rates for the tenor of the receivables and a margin reflecting the risk being sold

Feature's

1.It is 100% financing without recourse to the exporter.

2.The importer’s obligation is normally supported by a local bank guarantee .

3. Receivables are usually evidenced by bills of exchange, promissory notes or letters of credit.

4. Finance can be arranged on a fixed or floating rate basis.

5. Forfaiting is suitable for high value exports such as capital goods, consumer durables, vehicles, construction contracts, project exports etc.

6. Exporter receives cash upon presentation of necessary documents, shortly after shipment.

Features

1.Immediate possession

2. Hire Charges

3. Property in goods

4. Down payment

5. Repossession

6. Return of goods

7. Depreciation

Factoring

Factoring v/s Forfaiting

Leasing

• Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments.
• Two parties - Lessor & Lessee
• The important feature of a lease contract is separation of the ownership of the asset from its usage.
• The first leasing company of India, named First Leasing Company of India Ltd. was set up in that year by Farouk Irani, with industrialist A C Muthia.

Hire Purchase

• Regulated by the Hire Purchase Act 1972
• Hire purchase (HP) or leasing is a type of asset finance that allows firms or individuals to possess and control an asset during an agreed term, while paying rent or installments covering depreciation of the asset, and interest to cover capital cost.
• The use of HP or leasing is particularly common in industries where expensive machinery is required, such as construction, manufacturing, plant hire, printing, road freight, transport, engineering and professional services.
• finance other capital requirements of a business, for example:
• smaller items
• cars
• photocopiers.

NBFC

Types of Lease

Financial Lease

Advantages of HP

• Long-term, non-cancellable lease contracts are known as Financial lease/Capital lease
• It contains a condition/option whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost.
• The lease agreement is irrevocable.
• Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs.
• In India, financial leases are very popular with high-cost and high technology equipment.

(a) Financial lease

(b) Operating lease.

(c) Sale and lease back

(d) Leveraged leasing and

(e) Cross Border Leasing

(f) Direct Leasing

Operating Lease

Problems of Leasing in India

• Unhealthy Competition
• Lack of qualified personnel
• Tax Consideration
• Stamp Duty
• Delayed payment and bad debt

• Gives the lessee only a limited right to use the asset.
• not given any uplift to purchase the asset at the end of the lease period.
• The lessor is responsible for the upkeep and maintenance of the asset.
• lease is for a short period and even otherwise is revocable at a short notice.
• Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets.

• Interest-free credit (economic slump)
• Economical for customers
• Debt Solutions
• Greater Purchasing Power

Other types.....

Sale and Lease Back

• Full Payout Lease: A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.
• Guideline Lease:A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.
• Net Lease:A lease wherein payments to the lessor does not include insurance and maintenance, which are paid separately by the lessee.
• Open-end Lease:The open-end lease put the lessee responsible for the residual value, i.e. the lessee guarantees a value on the vehicle at the end of its use

• Is a transaction where the owner of the property (seller-lessee)
• sells the property and
• immediately leases back part or all of it back from the new owner (buyer-lessor)
• SELLER -LESSEE undertakes the transaction due to-
• Cash flow/ financing problems
• Tax advantages in the lessee's jurisdiction
• NO PHYSICAL TRANSFER OF PROPERTY
• Substitute for mortgage financing

Leveraged Leasing

• Under leveraged leasing arrangement, a third party is involved beside lessor and lessee.
• The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan.
• The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor.
• The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset.

Direct leasing

• Under direct leasing, a firm acquires the right to use an asset from the manufacture directly.
• The ownership of the asset leased out remains with the manufacturer itself.
• The major types of direct lessors include
• manufacturers
• finance companies
• independent lease companies
• special purpose leasing companies