A PROJECT ON

NBFC DETAILS ON LOAN

AGAINST GOLD AND
MUTHOOT FINANCE
 Acknowledgement

One of the most pleasant aspects of writing an acknowledgement is the opportunity to

thank all those who have contributed to it. Unfortunately, the list of expression of
gratitude- no matter how extensive – is always incomplete and inadequate. This
acknowledgement is no exception.
First and foremost I’d like to thanks my advisor, Professor Dr. Geeta Singh for all the
stimulating advices and consistently strong support. It has been great pleasure of mine to
work with and learn from these extraordinary individuals.
I owe my deepest thanks to my family- my mother and father who have always
stood by me and guided me through my career, and have pulled me through against
impossible odds at times.

It is impossible to remember all, and I apologize to those I have inadvertently left out.
Lastly, thank you all and thank God!

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 INTRODUCTION:

We studied about banks, apart from banks the Indian Financial System has a
large number of privately owned, decentralised and small sized financial
institutions known as Non-banking financial companies. In recent times, the
non-financial companies (NBFCs) have contributed to the Indian economic
growth by providing deposit facilities and specialized credit to certain segments
of the society such as unorganized sector and small borrowers. In the Indian
Financial System, the NBFCs play a very important role in converting services
and provide credit to the unorganized sector and small borrowers.

NBFCs provide financial services like hire-purchase, leasing, loans,

investments, chit- fund companies etc. NBFCs can be classified into deposit
accepting companies and non- deposit accepting companies. NBFCs are small
in size and are owned privately. The NBFCs have grown rapidly since 1990.
They offer attractive rate of return. They are fund based as well as service
oriented companies. Their main companies are banks and financial institutions.
According to RBI Act 1934, it is compulsory to register the NBFCs with the
Reserve Bank of India.

The NBFCs in advanced countries have grown significantly and are now coming
up in a very large way in developing countries like Brazil, India, and Malaysia
etc. The non- banking companies when compared with commercial and co-
operative banks are a heterogeneous (varied) group of finance companies.
NBFCs are heterogeneous group of finance companies means all NBFCs
provide different types of financial services.

Non-Banking Financial Companies constitute an important segment of the

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financial system. NBFCs are the intermediaries engaged in the business of
accepting deposits and delivering credit. They play very crucial role in
channelizing the scare financial resources to capital formation.

NBFCs supplement the role of the banking sector in meeting the increasing
financial need of the corporate sector, delivering credit to the unorganized
sector and to small local borrowers. NBFCs have more flexible structure than
banks. As compared to banks, they can take quick decisions, assume greater
risks and tailor-make their services and charge according to the needs of the
clients. Their flexible structure helps in broadening the market by providing
the saver and investor a bundle of services on a competitive basis.

Non Banking Finance Companies (NBFCs) are a constituent of the

institutional structure of the organized financial system in India. The Financial
System of any country consists of financial Markets, financial intermediation and
financial instruments or financial products. All these Items facilitate transfer of
funds and are not always mutually exclusive. Inter-relationships Between
these are parts of the system e.g. Financial Institutions operate in financial
markets and are, therefore, a part of such markets.

NBFCs at present providing financial services partly fee based and partly fund
based. Their fee based services include portfolio management, issue
management, loan syndication, merger and acquisition, credit rating etc. their
asset based activities include venture capital financing, housing finance,
equipment leasing, hire purchase financing factoring etc. In short they are now
providing variety of services. NBFCs differ widely in their ownership: Some are
subsidiaries of large Manufacturers (e.g., T.V. Motors T.V. Finances and
Services Ltd). Many others are owned by banks such as ICICI Banks, ICICI
Securities Ltd, SBI Capital Market Ltd, Muthq oot Bankers Muthoot Financial

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Services

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Ltd a key player in Kerala financial services. Other financial institutions are
IFCIs IFCI Financial Services Ltd or IFCI Custodial Services Ltd .
Non-banking Financial Institutions carry out financing activities but their
resources are
not directly obtained from the savers as debt. Instead, these Institutions
mobilize the public savings for rendering other financial services including
investment. All such Institutions are financial intermediaries and when they
lend, they are known as Non- Banking Financial Intermediaries (NBFIs) or
Investment Institutions.

The term “Finance” is often understood as being equivalent to “money”.

However, final exactly is not money; it is the source of providing funds for a
particular activity. The word system, in the term financial system, implies a set
of complex and closely connected or inter-linked Institutions, agents, practices,
markets, transactions, claims, and liabilities in the Economy. The financial
system is concerned about money, credit and finance. The three terms are
intimately related yet are somewhat different from each other:

 Money refers to the current medium of exchange or means of payment.

 Credit or loans is a sum of money to be returned, normally with interest;
it refers to a debt
 Finance is monetary resources comprising debt and ownership funds of
the state, company or person.

HISTORICAL BACKGROUND.

The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by
the Reserve Bank Amendment Act, 1963 to include provisions relating to
non-banking institutions receiving deposits and financial institutions. It was
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observed that the existing legislative and regulatory framework required further
refinement and improvement because of the rising number of defaulting
NBFCs and the need for an efficient and quick system for Redressal of
grievances of individual depositors. Given the need for continued existence
and growth of NBFCs, the need to develop a framework of prudential
legislations and a supervisory system was felt especially to encourage the
growth of healthy NBFCs and weed out the inefficient ones. With a view to
review the existing framework and address these shortcomings, various
committees were formed and reports were submitted by them. Some of the
committees and its recommendations are given hereunder:

1. James Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank of India in 1974.
After studying the various money circulation schemes which were floated in
the country during that time and taking into consideration the impact of such
schemes on the economy, the Committee after extensive research and analysis
had suggested for a ban on Prize chit and other schemes which were causing a
great loss to the economy. Based on these suggestions, the Prize Chits and
Money Circulation Schemes (Banning) Act, 1978 was enacted

2. Dr.A.C.Shah Committee (1992):

The Working Group on Financial Companies constituted in April 1992 i.e. the
Shah Committee set out the agenda for reforms in the NBFC sector. This
committee made wide ranging recommendations covering, inter-alia entry
point norms, compulsory registration of large sized NBFCs, prescription of
prudential norms for NBFCs on the lines of banks, stipulation of credit rating
for acceptance of public deposits and more statutory powers to Reserve Bank
for better regulation of NBFCs.
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3. Khan Committee ( 1995)

This Group was set up with the objective of designing a comprehensive and
effective supervisory framework for the non-banking companies segment of the
financial system. The important recommendations of this committee are as
follows:
i. Introduction of a supervisory rating system for the registered NBFCs. The
ratings
assigned to NBFCs would primarily be the tool for triggering on-site
inspections at various intervals.
ii. Supervisory attention and focus of the Reserve Bank to be directed in a
comprehensive manner only to those NBFCs having net owned funds of
Rs.100 laths and above.
iii. Supervision over unregistered NBFCs to be exercised through the off-
site surveillance mechanism and their on-site inspection to be conducted
selectively as deemed necessary depending on circumstances.
iv. Need to devise a suitable system for co-coordinating the on-site
inspection of the NBFCs by the Reserve Bank in tandem with other
regulatory authorities so that they were subjected to one-shot examination
by different regulatory authorities.

v. Some of the non-banking non-financial companies like

industrial/manufacturing units were also undertaking financial activities
including acceptance of deposits, investment operations, leasing etc to a
great extent. The committee stressed the need for identifying an
appropriate authority to regulate the activities of these companies,
including plantation and animal husbandry companies not falling under
the regulatory control of Either Department of Company Affairs or the
Reserve Bank, as far as their mobilization of public deposit was
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 concerned.

vi. Introduction of a system whereby the names of the NBFCs which had not
complied with the regulatory framework / directions of the Bank or had
failed to submit the prescribed returns consecutively for two years could
be published in regional newspapers.

4. Narasimhan Committee (1991)

This committee was formed to examine all aspects relating

to the structure, organization & functioning of the financial system.

.
NON-BANKING FINANCIAL COMPANY (NBFC)

-MEANING

Non-Banking Financial Companies (NBFCs) play a vital role in the context of

Indian Economy. They are indispensible part in the Indian financial system
because they supplement the activities of banks in terms of deposit
mobilization and lending. They play a very important role by providing
finance to activities which are not served by the organized banking sector. So,
most the committees, appointed to investigate into the activities, have
recognized their role and have recognized the need for a well- established and
healthy non-banking financial sector.

Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 1956 and is engaged in the business of loans and
advances, acquisition of shares/stock/bonds/debentures/securities issued by
Government or local authority or other securities of like marketable nature,

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leasing, hire-purchase, insurance business, chit business but does not include
any institution whose principal business is that of agriculture activity,
industrial activity, sale/purchase/construction of immovable property.

Non-banking institution which is a company and which has its principal

business of receiving deposits under any scheme of arrangement or any other
manner, or lending in any manner is also a non- banking financial company.
DEFINITIONS OF NBFC.

Non-Banking Financial Company has been defined as:

(i) A non-banking institution, which is a company and which has its

principal business the receiving of deposits under any scheme or lending
in any manner.

(ii) Such other non-banking institutions, as the bank may with the previous
approval of the central government and by notification in the official
gazette, specify.

NBFCS provide a range of services such as hire purchase finance, equipment

lease finance, loans, and investments. NBFCS have raised large amount of
resources through deposits from public, shareholders, directors, and other
companies and borrowing by issue of non-convertible debentures, and so on.

Non-banking Financial Institutions carry out financing activities but their

resources are not directly obtained from the savers as debt. Instead, these
Institutions mobilize the public savings for rendering other financial services
including investment. All such Institutions are financial intermediaries and
when they lend, they are known as Non- Banking Financial Intermediaries
(NBFIs) or Investment Institutions:

 UNIT TRUST OF INDIA.

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 LIFE INSURANCE CORPORATION (LIC).
 GENERAL INSURANCE CORPORATION (GIC).

Factors contributing to the Growth of NBFCs:

According to A.C. Shah Committee, a number of factors have contributed to the

growth of NBFCs. Comprehensive regulation of the banking system and
absence or relatively lower degree of regulation over NBFCs has been one of the
main reasons for their growth. During recent years regulation over their activities
has been strengthened, as see a little later.

The merit of non-banking finance companies lies in the higher level of their
customer orientation. They involve lesser pre or post-sanction requirements,
their services are marked with simplicity and speed and they provide tailor-made
services to their clients. NBFCs cater to the needs of those borrowers who
remain outside the purview of the commercial banks as a result of the monetary
and credit policy of RBI. In addition, marginally higher rates of interest on
deposits offered by NBFCs also attract a large number of depositors

Regulation of NBFCs

In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing

directions to the maximum amount of deposits, the period of deposits and rate of
interest they could offer on the deposits accepted. Norms were laid down
regarding maintenance of certain percentage of liquid assets, creation of reserve
funds, and transfer thereto every year a certain percentage of profit, and so on.
These directions and norms were revised and amended from time to time.

In 1997, the RBI Act was amended and the Reserve Bank was given
comprehensive powers to regulate NBFCs. The amended Act made it mandatory
for every NBFC to obtain a certificate of registration and have minimum net
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owned funds. Ceilings were prescribed for acceptance of deposits, capital
adequacy, credit rating and net-owned funds. The Reserve Bank also developed
a comprehensive system to supervise NBFCs accepting/ holding public deposits.
Directions were also issued to the statutory auditors to report non-compliance
with the RBI Act and regulations to the RBI, Board of Directors and
shareholders of the NBFCs.
CLASSIFICATION OF NBFCs:
This classification is in addition to the present classification of NBFCs into
deposit- taking and Non-deposit-taking NBFCs. Depending on the nature their
major activity, the non-banking financial companies can be classified into the
following categories, they are:

(1) Equipment leasing companies.

(2) Hire-purchase finance companies.
(3) Housing finance-companies.
(4) Investments companies.
(5) Loan companies.
(6) Mutual Fund Benefit Companies.
(7) Chit fund companies.
(8) Residuary companies.

 Equipment Leasing Company:

(a) Equipment leasing company means any company which is carrying on the
activity of leasing of equipment, as its main business, or the financing of
such activity.
(b) The leasing business takes place of a contract between the lessor (lessor
means the leasing company) and the lessee (lessee means a borrower).
(c) Under leasing of equipment business a lessee is allowed to use particular
capital equipment, as a hire, against a payments of a monthly rent.
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(d) Hence, the lessee does not purchase the capital equipment, but he buys
the right to use it.
(e) There are two types of leasing arrangements, they are:
(i) Operating leasing: In operating leasing the producer of capital equipment
offers his product directly to the lessee on a monthly rent basis. There is
no middleman in operating leasing.
(ii) Finance leasing: In finance leasing, the producer of the capital
equipment sells the equipment to the leasing company, then the leasing
company leases it to the final user of the equipment. Hence, there are
three parties in finance leasing. The leasing company acts as a
middleman between the producer of equipment and the user of
equipment.

 Benefits/Advantages of Leasing:

(1) 100% finance:

They borrower in the equipment can get up to 100% finance for the use
of capital through leasing arrangement in the sense, that the leasing
company provides the equipment immediately and the borrower need
not pay the full amount at once. Hence, the borrower can use the
amount for fulfilling other needs such as expansion development, etc.
(2) Payment is easier:
Leasing finance is costlier. However, the borrower finds it convenient
(easy) as he has to pay in installments out of the return from the
investment in the equipment. Hence, the borrower does not feel the
burden of payment.
(3) Tax concessions:
The borrower can get tax concessions in case of leasing equipments. The

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 total amounts of rent paid on leased equipment are deducted from the
gross income. In case of immediate purchase, interest on the loan and the
depreciation are deducted from the taxable income.

 Hire-purchase Finance Companies:

(a) Hire purchase finance company means any company which is carrying
on the main business of financing, physical assets through the system of
hire-purchase.
(b) In hire-purchase, the owner of the goods hires them to another party for a
certain period and for a payment of certain installment until the other party
owns it.
(c) The main feature of hire-purchase is that the ownership of the goods
remains
with the owner until the last installment is paid to him. The ownership of
goods passes to the user only after he pays the last installment of goods.
(d) Hire-purchase is needed by farmers, professionals and transport group
people to
buy equipment on the basis of hire purchase.
(e) It is a less risky business because the goods purchased on hire purchase
basis serve as securities till the installment on the loan is paid.
(f) Generally, automobile industry needs lot hire-purchase finance.
(g) The problem of recovery of loans does not occur in most cases, as the
borrower is able to pay back the loan out of future earnings through the
regular generation of funds out of the asset purchased.
(h) In India, there are many individuals and partnership firms doing this
business. Even commercial banks, hire-purchase companies and state
financial corporations provide hire-purchase credit.
 Housing Finance Companies:

(a) A housing finance company means any company which is carrying on

its main business of financing the construction or acquisition of houses or
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 development of land for housing purposes.
(b) Housing finance companies also accept the deposits and lend money
only for housing purposes.
(c) Even though there is a heavy demand for housing finance, these companies
have
not made much progress and as on 31st March, 1990 on 17 such
companies here reported to the RBI.
(d) The ICICI and the Canara Bank took the lead to sponsor housing finance
companies, namely, Housing Development Corporation Ltd. and the
Canfin Homes Ltd.
(e) All the information about the Housing finance companies is available
with the National Housing Bank. Housing finance companies also have to
compulsorily to register themselves with the Reserve Bank of India.
(f) National Housing bank is the apex institution in the field of housing. It
promotes housing finance institutions, both on regional and local levels.

 Investment Companies:
(a) Investment company means any company which is carrying on the main
business of securities.
(b) Investment companies in India can be broadly classified into two types:

(1) Holding Companies:

(i) In case of large industrial groups, there are holding companies which buy
shares mainly for the purpose of taking control over another institution.
(ii) They normally purchase the shares of the institution with the
aim of controlling it rather than purchasing shares of different
companies.
(iii) Such companies are set up as private limited companies.

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(2) Other Investment Companies:
(i) Investment companies are also known as Investment trusts.
(ii) Investment companies collect the deposits from the public and invest
them in securities.
(iii) The main aim of investment companies is to protect small investor
by collecting their small savings and investing than in different securities
so that the risk can be spread.
(iv) An individual investor cannot do all this on his own, due to lack of
expertise in investing. Hence, investing companies are formed
for collective investing. Companies are formed for collective
investments of money, mainly of small investors.
(v) Another benefit of an investment company is that it offers trained,
experienced and specialised management of funds.

(vi) It helps the investors to select a financially sound and liquid security.
Liquid security means a security which can be easily converted into
cash.
(vii) In India investment trusts are very popular. They help in putting the
savings of people into productive investments.
(viii) Some of the investment trusts also do underwriting, promoting and
holding company business besides financing.
(ix) These investments trusts help in the survival of business in the economy
by keeping the capital market alive, active and busy.

 Loan company:

(a) A loan company means any company whose main business is to provide
finance through loans and advances.
(b) It does not include a hire purchase finance company or an equipment
leasing
company or a housing finance company.
(c) Loan company is also known as a “Finance Company".

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(d) Loan companies have very little capital, so they depend upon public
deposits as their main source of funds. Hence, they attract deposits by
offering high rates of interest.
(e) Normally, the loan companies provide loans to wholesalers, retailers, small-
scale industries, self-employed people, etc.
(f) Most of their loans are given without any security. Hence, they are risky.
(g) Due to this reason, the loan company charges high rate of interest on its
loans. Loans are generally given for short period of time but they can be
renewed.
 Mutual Benefit Financial Company:
(a) They are the oldest form of non-banking financial companies.

(b) A mutual benefit financial company means any company which is notified
under section 620A of the Companies Act, 1956.
(c) It is popularly known as "Nidhis".
(d) Usually, it is registered with only very small number of shares. The value
of the shares is often Rs. 1 only
(e) It accepts deposits from its members and lends only to its members against
tangible securities.

 Chit-fund Companies:
 History:

The chit fund schemes have a long history in the southern states of India. Rural
unorganized chit funds may still be spotted in many southern villages.
However, organized chit fund companies are now prevalent all over India. The
word is Hindi and refers to a small note or piece of something. The word passed
into the British colonial “lexicon” and is still used to refer to a small piece of
paper, a child or small girl

 How Chit Fund Help?

Chit Funds have the advantage both for serving a need and as an investment.

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Money can be readily drawn in an emergency or could be continued as an
investment.
Interest rate is determined by the subscribers themselves, based on mutual
decisions
and varies from auction to auction.
The money that you borrow is against your own future contributions.
The amount is given on personal sureties too; unlike in banks and other
financial institutions which demand a tangible security.
Chit funds can be relied upon to satisfy personal needs. Unlike other
financial institutions, you can draw upon your chit fund for any purpose -
marriages, religious functions, medical expenses, just anything... Cost of
intermediation is the lowest.

(a) Chit funds companies are one of the oldest forms of local non-banking
financial institution in India.
(b) They are also known as "kuries".
(c) These institutions have originated from south India and are very popular
over there.
(d) A chit fund organisation is an organisation of a number of people who
join together and subscribe (contribute) amounts monthly so that any
members who is in need of funds can draw the amount less expenses for
conducting the chit. It is an organisation run on co-operative basis for the
benefit of the members who contribute money, the funds are used by
them as and when a particular member needs it.
(e) It helps the persons who save money regularly to invest their savings with
good
chances of profit.
(f) Chit funds have many defects as the rate of return given to each member
is not the same.
(g) It differs from person to person, this leads in improper distribution of gains
and
losses.
(h) Also, the promoters of these funds do everything for their own benefit to
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 get maximum income.
(I) Hence, the banking commission has made suggestions to pass uniform chit
funds laws for the whole of India.

 Residuary Non-banking Companies:

(a) The term "residue" means a small part of something that remains. As
the meaning of the term shows, a residuary company is one which does not
fall in any of the above categories.
(b) It generally accepts deposits by operating different schemes similar to
recurring deposit schemes of banks.
(c) Deposits are collected from a large number of people by promising them
that
their money would be invested in banks and government securities
(d) The collection of deposits is done at the doorsteps of depositors through
bank staff, who is paid commission.
(e) These companies get the funds at low cost for longer terms, at they invest
them
in investments which generates good amount of return.
(f) Many of these companies operate with very small amount of capital.
(g) They have some adverse (bad) features, such as:
(ii) Some do not submit periodic returns to the regulatory authority.
(iii) Some of them do not appoint banks, etc.

ROLE OF NON- BANKING FINANCIAL COMPANIES.

(1) Promoters Utilization of Savings:

Non- Banking Financial Companies play an important role in promoting the

utilization of savings among public. NBFC’s are able to reach certain deposit
segments such as unorganized sector and small borrowers were commercial
bank cannot reach. These companies encourage savings and promote careful
spending of money without much wastage. They offer attractive schemes to
suit needs of various sections of the society. They also attract idle money by
offering attractive rates of interest. Idle money means the money which public
keep aside, but which is not used. It is surplus money.

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(2) Provides easy, timely and unusual credit:
NBFC’s provide easy and timely credit to those who need it. The formalities
and procedures in case of NBFC’s are also very less. NBFC’s also provides
unusual credit means the credit which is not usually provided by banks such as
credit for marriage expenses, religious functions, etc. The NBFC’s are open to
all. Every one whether rich or poor can use them according to their needs.

(3) Financial Supermarket:

NBFC’s play an important role of a financial supermarket. NBFC’s create a

financial supermarket for customers by offering a variety of services. Now,
NBFC’s are providing a variety of services such as mutual funds, counseling,
merchant banking, etc. apart from their traditional services. Most of the NBFC’s
reduce their risks by expanding their range of products and activities.
(4) Investing funds in productive purposes:

NBFC’s invest the small savings in productive purposes. Productive purposes

mean they invest the savings of people in businesses which have the ability to
earn good amount of returns. For example – In case of leasing companies lease
equipment to industrialists, the industrialists can carry on their production with
less capital and the leasing company can also earn good amount of profit.

(5) Provide Housing Finance:

NBFC’s, mainly the Housing Finance companies provide housing finance on

easy term and conditions. They play an important role in fulfilling the basic
human need of housing finance. Housing Finance is generally needed by middle
class and lower middle class people. Hence, NBFC’s are blessing for them.

(6) Provide Investment Advice:

NBFC’s, mainly investment companies provide advice relating to wise

investment of funds as well as how to spread the risk by investing in different
securities. They protect the small investors by investing their funds in different
securities. They provide valuable services to investors by choosing the right kind
of securities which will help them in gaining maximum rate of returns. Hence,
NBFC’s plays an important role by providing sound and wise investment advice.

(7) Increase the Standard of living:

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NBFC’s play an important role in increasing the standard of living in India.
People with lesser means are not able to take the benefit of various goods
which were once considered as luxury but now necessity, such as consumer
durables like Television, Refrigerators, Air Conditioners, Kitchen equipment’s,
etc. NBFC’s increase the Standard of living by providing consumer goods on easy
installment basis. NBFC’s also facilitate the improvement in transport facilities
through hire- purchase finance, etc. Improved and increased transport facilities
help in movement of goods from one place to another and availability of goods
increase the standard of living of the society.

(8) Accept Deposits in Various Forms:

NBFC’s accept deposits forms convenient to public. Generally, they receive
deposits from public by way of depositor a loaner in any form. In turn the
NBFC’s issue debentures, units’ certificates, savings certificates, units, etc. to
the public.

(9) Promote Economic Growth:

NBFC’s play a very important role in the economic growth of the country.
They increase the rate of growth of the financial market and provide a wide
variety of investors. They work on the principle of providing a good rate of
return on saving, while reducing the risk to the maximum possible extent.
Hence, they help in the survival of business in the economy by keeping the
capital market active and busy. They also encourage the growth of well-
organized business enterprises by investing their funds in efficient and
financially sound business enterprises only. One major benefit of NBFC’s
speculative business means investing in risky activities. The investing companies
are interested in price stability and hence NBFC’s, have a good influence on the
stock- market. NBFC’s play a very positive and active role in the development
of our country.

Functions of Non- Banking Financial Companies:

(1) Receiving benefits:

The primary function of nbfcs is receive deposits from the public in various
20
ways such as issue of debentures, savings certificates, subscription, unit
certification, etc. thus, the deposits of nbfcs are made up of money received
from public by way of deposit or loan or investment or any other form.

(2) Lending money:

Another important function of nbfcs is lending money to public. Non- banking

financial companies provide financial assistance through.

(a) Hire purchase finance:

Hire purchase finance is given by nbfcs to help small important

operators, professionals, and middle income group people to buy the
equipment on the basis on Hire purchase. After the last installment of
Hire purchase paid by the buyer, the ownership of the equipment passes
to the buyer.

(b) Leasing Finance:

In leasing finance, the borrower of the capital equipment is allowed to

use it, as a hire, against the payment of a monthly rent. The borrower
need not purchase the capital equipment but he buys the right to use it.

(c) Housing Finance:

NBFC’s provide housing finance to the public, they finance for

construction of houses, development of plots, land, etc.

(d) Other types of finance provided by NBFCs include :

Consumption finance, finance for religious ceremonies, marriages, social

activities, paying off old debts, etc. NBFCs provide easy and timely
finance and generally those customers which are not able to get finance
by banks approach these companies.

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INTRODUCTION:
The Muthoot Group is an 123-year-old business house based in India.It
has interesting Financial Services, Information Technology,Media, Healthcare,
Education, Power generation, Infrast ructure, Plantations, Precious Metals and
Hospitality. The Muthoot Group operates in 21 states in India, and has a
customer base of over 25 million. It is wholly owned and managed by the
Muthoot Family.
The Group takes its name from the Muthoot Family based in Kerala. The
Company was set up by Muthoot Ninan Mathai in 1887 at Kozhencherry, a
small town in the erstwhile Kingdom of Travancore (Kerala). It was then
later taken over by his son M George Muthoot who incorporated the Finance
division of the group which was till then primarily involved in wholesale of
grains. The company is now managed by the third and fourth generation of its
family members.

FINANCE
Muthoot Finance a subsidiary of Muthoot Group was established in 1939,
and is primarily involved in the Financial sector of the country. Muthoot
Finance falls under the category of Non-Banking Financial Company (NBFCs)
of the RBI guidelines. The company has more than 2038 branches spread
across 23 states of the country and is the largest gold loan company in India..
Muthoot Finance, according to the IMaCS Research & Analytics Industry
Reports [Gold Loans Market in India, 2009 (“IMaCS Industry Report 2009”)
and the 2010 update to the IMaCS IndustryReport 2009 (“IMaCS Industry
Report (2010 Update)”)], is the largest Gold Loan NBFC and has the largest
network of branches for a Gold Loan NBFC in India.. Muthoot Finance is also
the highest credit rated Gold Loan company in India, with a credit rating of
AA- (CRISIL) for its Long Term Debts and P1+ (CRISIL) & A1+ (ICRA) for its
Short Term Debt Instruments.
‘Muthoot Gold Power’ is the lifestyle product of Muthoot Finance aimed at
mobilizing the Household gold in India which is estimated to be more than
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15000 tonnes. Muthoot Finance according to its company website has "the
largest gold loan portfolio in the country". Muthoot also provides various
financial services such as Insurance distribution, Wealth Management, Foreign
Exchange, Money Transfer and Vehicle & Asset Finance. Muthoot Finance
was selected as one of the Top 10 Finance companies to work for in India by
Naukri.com[7] Muthoot Finance privately placed 4% of its paid up capital to
Private Equity players - Barings India and Matrix Partners India for Rs.1.57
billion, hence valuing the earlier privately held company at over $1 billion.
INFORMATION TECHNOLOGY
Emsyne, the information technology wing of the group develops products for
the service, education and healthcare industry. Emsyne offers on site and
offshore services, whether project-based outsourcing / assignments, or based on
time and materials. The Core Products of Emsyne are Edge - Educational
Institutions Management System Finex

- Innovative Banking Automation System

SECURITIES
Muthoot Securities offers broking services in cash and derivatives segments at
the National Stock Exchange and Bombay Stock Exchange. It has a network of
more than 100 branches. Muthoot Securities launched its portfolio
management services on 20 August 2009.

MEDIA
Chennai Live 104.8 is India's first talk radio FM station. The station would be
focusing on knowledge centric and local content and will be targeting the
information and entertainment needs of Chennai's intelligent community.

HEALTHCARE
The Group operates several Diagnostic & Scan centers throughout Kerala and 2
multi- specialty hospitals in Kozhencherry and Pathanamthitta.
HOTELS & HOSPITALITY
Muthoot Hotels operates a 4 star resort in Thekkady (Kerala) and also operates
12 houseboats in the backwaters of Kerala under the brand Muthoot River
Escapes. Kaapi Club is a chain of South Indian coffee outlets managed by
Muthoot Hotels. Muthoot Hotels is in the process of constructing a 5 star
luxury hotel in the city of Kochi and 5 star beach resort in Mararikulam.
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HOUSING & INFRA-STRUCTURE
The projects of Muthoot Builders are primarily situated in central and south
Kerala, Muthoot has a track record of more than 30 completed projects
including commercial and residential spaces.

OTHER DIVISION
Muthoot has interests in Power Generation through windmill farms in the state
of Tamil Nadu. The group also manages a school in New Delhi and 2 Nursing
Colleges in Kerala. In the year 2008 the group re-entered the plantation
business, the group has acquired 1000 acres of land in Sawantvadi,
Maharashtra as a pilot planting of rubber.

FINANCIAL SERVICE IN INDIA

The financial services sector contributed 15 per cent to India's GDP in FY09,
and is the second-largest component after trade, hotels, transport and
communication all combined together, as per the Banking & Finance Journal,
released by an industry body in August 2010.
Share of Financial services, banking, insurance and real estate sectors is
expected to enhance by 9.7 per cent for the year 2009-10 to 17.2 per cent of GDP
(at factor cost).
Data sourced from SEBI shows that the number of registered FIIs stood at
1,738 and number of registered sub-accounts rose to 5,592 as of November 10,
2010. Overseas funds infused into Indian capital market in 2010 stood at US$
39 billion. According to data released by Securities and Exchange Board of India
(SEBI), stocks and debt securities over worth US$ 17.28 billion were purchased by
the foreign institutional investors (FIIs) from the Indian capital market in
January 2011.
According to data available with SEBI, FIIs have made investments worth
US$ 4.11billion in equities and invested US$ 667.71 million into the debt market.
The average assets under management of the mutual fund industry stood at US$
147.99 billion for the quarter ended December 2010, according to the data
released by Association of Mutual Funds in India (AMFI).
As on January 21, 2011, India's foreign exchange reserves totaled US$ 299.39
billion, according to the Reserve Bank of India's (RBI) Weekly Statistical
Supplement.
According to Venture Intelligence, a research firm, private equity firms
invested US$ 7,974 million over 325 deals in India during 2010, as against US$
4,068 million (over 290 deals) in 2009. The largest investment reported during
the year was the US$ 425 million raised by power generation firm Asian Genco
from investors including General Atlantic, Goldman Sachs, Morgan Stanley,
Ever stone and Norwest.
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According to a global consultancy firm Ernst & Young (E&Y), sectors such as
power and transportation, consumer and branded products, infrastructure
ancillaries, education and financial services, and healthcare are likely to
witness increased PE activity in 2011.

Financial Inclusion
 Financial Inclusion is (A) Ensuring access to financial services (B)
Timely and adequate credit (C) Vulnerable groups (D) Affordable Cost.
 India is ranked 50th in the first ever index of financial inclusion.
 Out of the more than 6,00,000 rural habitations, only about 32,000 have a
commercial branch.
 Just over 40% of the population have bank accounts.
 Immense benefits for government (A) Route the social welfare schemes
directly
(B) Reduce leakage (C) Reduction in time taken for the impact of benefit
to be visible (D) Substantial savings in transaction cost.
How does Gold Benefit this?
 A 27% fall over the period of 2 years due to recession.
 India accounts for 18% of the global gold jewelry consumption.
 Consumers demand trends for individual countries for 2009 show that
India is still the top consumer, thanks to a 57% consumption growth.
The Debt Trap faced by Middle-Class & Poors.
 Borrowing by rural India as earnings not stable.
 Absence of Banks drives them to Moneylenders.
 High Interest Charged.
 Cycle of defaults and rollovers at even higher rates.
 Eventually title to the property is transferred to Moneylenders.

Advantages of Gold Loans

 Avoid debt trap.
 Simple procedure, fast disbursal.
 No depreciation of underlying asset.
 No questions asked.
 Suited for unorganised sector.
 Gains for wider economy.

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 Rise of Gold Loan Markets.
 Wanning resistance among Indian midlle and upper middle class
towards gold loans.
 Rise in price of yellow metal.
 Disappearance of social stigma attached to gold loans.
 Lower interest rate- purer the gold, lower the interest rate.
 Simple process.
 Loans dispersed for amounts ranging from 10,000 to 4,00,000 for NBFC
and 25,000 to 1,00,000.

Process for Obtaining Gold Loan.

 Approach Bank/NBFC for Loan Against Gold.
 Evaluation of purity of Gold.
 Paperwork for Mortgage
 Disbursal of loan
 On repayment of the Loan, you get your gold back from the Lender.

Gold loan market- Spectacular Growth.

 CAGR of 38% over a period of last 7 years.
 Expected to grow annually 35-40% over next 3 years.
 Gold loan market has grown from 25 billion in FY-2002 to 250 billion in
FY- 2009.
 Loans dispersed at an average interest of 13%, banks charge PLR+200-
400bps.
 15% Y-o-Y increase in number of people taking gold loans and 28%
increase in dispersals during the same period.
 Muthoot has seen 75% growth in number of persons availing gold loans
and 81% increase in dispersals.
 HDFC bank has clocked 60% growth.

Muthoot Finance – Quick Stats.

 Maximum per gram rates- 1600/gram for standard 99.9% purity of gold.
 0% processing fee and no hidden cost.
 Rates of interest starting from 1% per month.
 8 different schemes suiting all categories.
 Only identity proof required.
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  Any person- Number of account required.
 Interest only for actual number of days.
 100% insured and gold kept in strong rooms only.
 Anytime redemption facility without penalty.
 Special rewards points for M-Power card holders.

Road Ahead

 Potential vehicle for social transformation.

 65% of gold stock with rural household.
 75% of the gold loan market is still in unorganized sector.
 Government needs to encourage growth.
 Separate classification needed, needed to separate it from unscrupulous
money- lenders, distinction between NBFC lending and loan against
gold.
 Gold monetization process will open up the sector and enable the
circulation of 18,000 tonnes of gold (worth approx 30,00,000 crore) back
into the economy.

Gold Loans- Personal loan against gold: A financing option for short term
needs

For Indians, gold is considered as an essential investment from a cultural,

emotional and safety perspective. One bought, is a dead investment. It tends to
lie in the locker not earning you any money. Why not make use of it in your
time of need? You can monetize this idle asset to help you tide over your
financial need. So if ever you find yourself in need of money, consider gold
loans as an option. Gold loans also known as gold deposits are loans given by
banks/ NBFCs by taking gold as a security.

Gold loans are not new to the Indian market. It existed but in the unorganised
sector where money lenders used gold as a security for providing loans. Now
banks have entered this space in a big way because the market is very large
considering the fact that most Indians tend to have sufficient investment in
gold. More importantly, with more and more women working in the family,
people have become broadminded. So the social stigma that was once attached
to taking a loan on gold is gradually being eliminated.
Off late, this product has become popular because of the substantial rise in gold
prices. The quantum of loan that one can get by giving gold as security has
increased tremendously making it an attractive loan proposition.

What is the process to be followed to obtain a gold loan?

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You offer your jewelry to the lender who can be a bank or an NBFC. The lender
will evaluate the purity of the jewelry. The charge for evaluation is generally
borne by the borrower. Once the evaluation is done, the paper work for the
mortgage is done. Banks will ask you to produce personal documents such as
Pan Card, address proof among other things. The lender will give you a loan
which in most cases can be up to a maximum of 80% of the value of the
jewelry. After having repaid the loan, you get your gold back from the lender.

Features
Secured Loan: Gold loan is essentially borrowings against the security i.e.
gold. Thus this loan should be taken only if you’re absolutely sure that you
will be able to repay the loan else you may end up losing your gold.

Tenure: Gold loans are typically for duration of 3 to 12 months. They are
thus best used to fund short term monetary requirements.

No end use restrictions: The loan can be taken for any purpose so long as the
money is not being used for speculative purposes

Loan amount: In most cases, the maximum loan value is not more than 80%
of the value of gold. Most banks deal in relatively higher loan amounts. NBFCs
on the other hand, deal in small value loans

Interest Rate: The interest rate charged by banks can be in the range of 11.5%
and 15%. Banks usually charge a processing fee while NBFCs may not charge
the same. The rate of interest charged by NBFCs is much higher as compared to
banks.

Repayment: The loan can be foreclosed at any time without any penalty. In
case of irregular payment of EMIs, a penal interest of up to 2% is charged by
banks.

Market risk: The lender retains the exposure to the market risk arising from
movements in the market price of gold

Advantages

Quick processing: Gold loans require minimum documentation and hence it can
be resorted to in times of urgent need. Banks maintain that it takes a few hours
to get a gold loan and in NBFCs like MANAPPURAM FINANCE (GOLD
LOAN SUPER COMPANY) it takes only a few minutes.

More attractive than a personal loan: The rate of interest charged on gold loans
tends to be much lower than that of a personal loan. Therefore, it may be
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worthwhile putting you asset to work and thus reducing your cost of loan.

Emotional attachment will ensure timely payment: Most families have an

emotional attachment to gold and that will make you morally responsible to
repay the loan in time so that you can get back the gold that you had
placed as a security

Cash flow management: In a typical loan against gold transaction, only interest
needs to be paid during the tenure of the loan and the principal amount has to
be repaid at the end of the tenure. This allows customers the borrower to
manage cash flows better.

Gold loan become better option than personal loan

As a substitute of taking on a personal loan at exorbitant rates of interest, it’s
worthwhile to check out loans against gold being offered by banks. Loans with
gold as security come at a very low interest rate of around 12 %, compared with
upwards of 17% on unsecured personal loans. Several banks have already
begun to lend against gold. It’s also a period when the gold loans business is
expected to be a focus area for several banks because it offers lenders an
opportunity to tap the individual loans segment without getting involved in
risky unsecured personal loans. Leading Gold Loan NBFC , Manappuram
Finance, is planning to aggressively grow its gold loan portfolio with easy
processing methods and competitive interest rates. Manappuram ’s gold loan
portfolio has been growing at over 60 % for the past two years with two
products -- the gold overdraft facility offered at 14 to 15 % and gold loans at
12.5 %. The most active players lending against gold are non-banking financial
companies such as Manappuram Finance which lends at 12% and offers a loan
as high as Rs 1,725 per gm, which is very close to the market price.
“With the opportunity being vast, we will continue to look to grow this
portfolio. We plan to increase the number of branches offering gold loans from
1150 to 2500 over the course of next year, said, by one of the top official. The
World Gold Council estimates that the gold monetization process will open up
the sector and enable the circulation of 18,000 tones of gold (worth
approximately Rs 30,00,000 crore) back into the economy

Ajay Mitra, managing director India, West Asia and Turkey, World Gold
Council, said, “Acceptance of gold for loans by banks and financial institutions
is an important development that will infuse greater confidence in gold as an
asset class.”
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