NBFC in Inda
Transcript of NBFC in Inda
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A Report on NBFCs in India
A REPORT ON NBFCs IN INDIA
Mr. Sankar Rajan
Summer Intern, April- June
2010
Amrita School of Business,
Coimbatore
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TABLE OF CONTENTS
Executive Summary ................................................................................................ 3
Non-Banking Financial Institutions (NBFIs) ............................................................5
Non-Banking Financial Company (NBFC) .............................................................. 6
NBFCs: Why are they required? .............................................................................6
Re-classification of NBFCs ..................................................................................... 7
NBFCs are different from Banks .............................................................................9
Residuary Non-Banking Companies (RNBCs) ....................................................11
Ceiling on RNBCs taking Deposits .......................................................................11
Interest Payment on Deposits ...............................................................................11
Eligibility Criteria for Starting NBFC ......................................................................12
Capital Requirement............................................................................................. 14
Net Owned Fund ...................................................................................................14
Classification of NBFCs according to RBI............................................................14
Regulations on NBFCs taking Deposits ............................................................... 15
Ceiling on NBFC-D (Taking Public deposits) ....................................................... 16
Ongoing Regulations: NBFCs-D (Holding Public Deposits) .................................18
Other Regulations: NBFCs-ND (Not Holding Public Deposits) ............................18
Directions given to NBFCs and its Auditors by RBI.............................................. 20
A Special Mention : FDI in NBFC sector .............................................................. 21
References ............................................................................................................23
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Executive Summary
India growth story is most talked about and why not? The countrys
GDP is pegged to grow at a rate of more than 7.5%. Indias Stock
market has given the best returns in the last 6-8 months of more than
60%. The household savings continues to be as high as 35% inspite of
slowdown and recessionary pressures. Forex reserves have increased
by more than 10billion $ in the 1st quarter and the total reserves are
up, to 262 billion $. Current Budget focuses on reducing fiscal deficit
by the measures of disinvestments and improving the infrastructure of
the country. Overall the country is all set to grow at a rapid pace and
the government has laid a strong foundation for this. Having realized
this, one can strongly say that sufficient liquidity has to be maintained
in the system to enhance credit and economic growth.
NFBIs (Non Banking Financial Institutions) play an important role in
realizing the economic growth. They have access to larger markets and
provide financing for almost all activities.
Think of buying an automobile, and one will find financing companies
that provide EMIs at the doorstep. Think of buying any electronics, one
would be amazed the number of financing companies that one can
approach to make a deal. Thus the competitiveness of the companies
combined with fierce penetration across the length of the country
enables NBFIs to grow at a rapid pace.
In the following document, NBFIs in India are discussed with a focus on
NBFCs. The total assets managed by NBFCs amount to 95,727 crore as
on June 2009. This accounts for around 9.1 % of assets of the total
financial system [1]. Hence the business carried out by NBFCs is of great
importance for overall development of the country. Thus RBI is
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implementing various schemes and policies for maintaining enough
liquidity for funding requirements. Also various regulations are levied
on NBFCs for making the overall system robust.
[1].Source: RBI
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Non-Banking Financial Institutions (NBFIs)
Non-Banking Financial Institutions (NBFIs) play an important role in the
Indian financial
system given their unique position of providing complimentary and
competitiveness to banks. They score over the traditional banks by
providing enhanced equity and risk-based products.
Fig1.The Hierarchy of NBFCs in India
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EquipmentLeasing
DevelopmentFinanceInstitutions (DFIs)
Non-bankingfinancialcompanies(NBFCs)
Insurancecompanies
NBFIs
Primarydealers(PDs)
MutualFunds
HirePurchaseLeasing
LoanCompany
InvestmentCompany
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Non-Banking Financial Company (NBFC)
Non-Banking Financial Company (NBFC) is a company registered under
the Companies Act, 1956. It is engaged in the business of loans,
securities, insurance, chit funds etc
They also provide products/services that includes margin funding,
leasing and hire purchase, corporate loans, investment in non-
convertible debentures, IPO funding, small ticket loans, venture capital
etc.
As in the diagram, NBFCs are classified into four categories
1. Hire- Purchase Leasing
2. Loan Company
3. Investment Company
4. Equipment Leasing Company
Some of the prominent NBFCs in India are
Infrastructure Development Finance Corporation (IDFC)
Rural Electric Corporation ( REC)
Industrial Finance corporation of India (IFCI )
GE Capital
Till March 2009 there were 12,739 NBFCs out of which 336 NBFCs were
permitted to accept public deposits [2]
[2]Source: RBI Annual Report 2008-2009
NBFCs: Why are they required?
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NBFCs are required as they have a greater reach to various markets
and have great efficiency in mobilizing funds. Generally banks to
reduce their operational costs establish NBFC. NBFC enjoys many
liberal policies by RBI in comparison with the commercial banks.
However this scenario is changing. RBI now has strict measures for
NBFCs also.
Re-classification of NBFCs
From December 6, 2006 NBFCs registered with RBI have been
reclassified as
1. Asset Finance Company (AFC)
2. Investment Company (IC)
3. Loan Company (LC)
Asset finance Companies (AFC)
AFC are financial institutions whose principal business is of financing
physical assets such as automobiles, tractors, construction equipments
material handling equipments and other machines.
Eg: Bajaj Auto Finance corp. , Fullerton India etc
Investment Companies (IC)
ICs generally are involved in the business of shares, stocks, bonds,
debentures issued by government or local authority that are
marketable in nature
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Eg: Stock Broking Companies, Gilt firms
Loan Companies (LC)LCs are loan giving companies which operate in the business of
providing loans. These can be housing loans, gold loans etc
Eg: Mannapuram Gold Finance, HDFC
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NBFCs are different from Banks
NBFCs cannot accept demand deposits ( Demand deposits are
funds deposited in an institution, that are payable immediately
on demand e.g.: Savings account, Current account etc)
A NBFC cannot issue cheques, to their customers and is not a
part of the payment and settlement system
Deposit insurance facility of Deposit Insurance Credit
Guarantee Corporation (DICGC) is not available for NBFC
depositors
They are allowed to accept/renew public deposits for a
minimum period of 12 months and maximum period of 60
months.
They cannot offer interest rates higher than the ceiling rate
prescribed by RBI from time to time. (Currently the ceiling rate
is 12.5%)
They cannot offer gifts/incentives or any other additional
benefit to the depositors.
They should have minimum investment grade credit rating,
from the credit rating agencies
Fig2:
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Pulic Deposits in NBFCs & RNBCs
0
5000
10000
15000
20000
25000
30000
35000
1998
2000
2002
2004
2006
2008
2010
Year
INR
(Crores)
Public Deposits
Expon. (Public
Deposits)
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Source:RBI, Note: The figures for 2009 & 2010 are estimated figures
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Residuary Non-Banking Companies (RNBCs)
They form a part of NBFCs however their functioning is different from
the regular NBFCs Residuary Non-Banking Company is a class of NBFC
whose principal business is receiving of deposits, under any scheme or
arrangement. The deposits received do not involve investment, asset
financing, or loans.
These companies are required to maintain investments as per
directions of RBI, in addition to liquid assets. 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 Sahara Mutual Fund was the first RNBC started in India.
Ceiling on RNBCs taking Deposits
There is no ceiling on raising of deposits by RNBCs but every
RNBC has to ensure that the amounts deposited and investments
made by the company are not less that the aggregate amount of
liabilities to the depositors
To ensure the safely of public investments RNBCs are required to
invest in a portfolio comprising of highly liquid and secured
instruments viz. Central/State Government securities, fixed
deposit of scheduled commercial banks (SCB), Certificate of
deposits of SCB/FIs, units of Mutual Funds, etc
Interest Payment on Deposits
The amount payable by way of interest, premium, bonus or other
advantage, by a RNBC in respect of deposits received shall not
be less than 5% (to be compounded annually) on the amount
deposited in lump sum or at monthly or longer intervals; and at
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the rate of 3.5% (to be compounded annually) on the amount
deposited under daily deposit scheme.
Further, an RNBC can accept deposits for a minimum period of
12 months and maximum period of 84 months from the date of
receipt of such deposit. They cannot accept deposits repayable
on demand.
Eligibility Criteria for Starting NBFC
Initial Procedure
The Start up NBFC should be incorporated under the CompaniesAct, 1956
It should be registered with RBI, under Section 45-I of the RBI
Act, 1934
The company is required to submit the application for
registration in the prescribed format along with necessary
documents for RBI's consideration. RBI then issues certificate of
registration after satisfying itself that the conditions as
enumerated in Section 45-IA of the RBI Act, 1934 are satisfied
For registration with RBI, the company is required to fill the
application, which can be downloaded from
www.rbi.org.in/scripts/BS/viewforms.aspx.
After downloading the EXCEL based application form, data should
be keyed in, it can be uploaded in the RBI's Secure website
https://secweb.rbi.org.in. Once uploaded, the company will get a
CoR (Company Application Reference Number). Subsequently,
the company should take the hard copy of the same with the
supported documents and submit it to the concerned regional
office.
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NOTE: Certain category of NBFCs like Venture Capital Fund/Merchant
Banking Companies/Stock Broking Companies etc need not be
registered with RBI they are governed by SEBI. Insurance companies
holding a valid certificate of registration are regulated by IRDA,
Housing finance companies regulated by National Housing Bank.
Nature of Business
The company should not have its principal business as
(a) Agricultural operations
(b) Industrial activity
(b) The purchase or sale of any goods (other than securities) or the
providing of any services
(c) The purchase, construction or sale of immovable property,
Moreover no portion of the income should be derived from the
financing of purchases, constructions or sales of immovable property
by other persons
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Capital Requirement
The start up company should have a minimum net owned fund (NOF)
of Rs 25 lakh which is raised to Rs 200 lakh from April 21, 1999.
Net Owned Fund
Paid-up capital and free reserves, minus accumulated losses, deferred
revenue expenditure and other intangible assets
Less,
(i) Investments in shares of subsidiaries/companies in the same group/
all other NBFCs
(ii) The book value of debentures/bonds/ outstanding loans and
advances, including hire purchase and lease finance made to, anddeposits with, subsidiaries/ companies in the same group, in excess of
10% of the owned funds.
Note: NBFCs that were in existence who had previously NOF of Rs25
Lakhs (before the act) are given a time period of 3 years to attain a
NOF of 200 Lakhs. However RBI can still extend this time period for an
additional 3 years subject to the condition that such NBFCs should
intimate the RBI about attaining the NOF within 3 months from the
date of attainment
Classification of NBFCs according to RBI
NBFCs are classified into two categories
(i) NBFC accepting deposits from customers
(ii) NBFC which does not take deposits from customers
NBFCs taking deposits from public are referred to as NBFC-D
and those who dont take public deposits are referred to as
NBFC- ND
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Those NBFCs NBFCs-ND with an asset size of Rs.100 crore and
above (as per the last audited balance sheet) are designated as
systemically important NBFCs- ND (NBFCs-ND-SI)
NBFCs-ND-SI are advised to attain minimum CRAR of 12 per cent
by March 31, 2010 and 15 per cent by March 31, 2011
Regulations on NBFCs taking Deposits
1. All NBFCs are not entitled to accept public deposits. Only those
NBFCs holding a valid certificate of registration with
authorization to accept public deposits can accept/hold public
deposits
2. New NBFCs are not allowed to raise public deposits for period of
two years from the date of registration. After completion of two
years, detailed review is taken of the company by the regulator
3. The NBFCs are allowed to accept/renew public deposits for a
minimum period of 12 months and maximum period of 60
months. They cannot accept deposits repayable on demand
4. NBFCs cannot offer interest rates higher than the ceiling rate
prescribed by RBI from time to time. The present ceiling is 12.5
per cent per annum. The interest may be paid or compounded at
rests not shorter than monthly rests.
5. NBFCs cannot accept deposits from NRI except deposits by debit
to NRO account of NRI provided such amount do not represent
inward remittance or transfer from NRE/FCNR account.
6. NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with
or without credit rating) are not entitled to accept public deposits
7. Evaluation of the quality of management in respect of the
promoters/directors is taken into consideration while giving
allowance for taking public deposits
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Minimum Investment Level Credit Rating:
The symbols of minimum investment grade rating of the Credit rating
agencies are:
Name of rating agencies Level of minimum investment
grade credit rating (MIGR)CRISIL FA- (FA MINUS)ICRA MA- (MA MINUS)CARE CARE BBB (FD)FITCH Ratings India Pvt. Ltd tA-(ind)(FD)
Ceiling on NBFC-D (Taking Public deposits)
(i) NBFCs having Net Owned Fund (NOF) of more than 200 Lakhs
Category of NBFC Ceiling on public deposits
AFCs maintaining CRAR of 15%
without credit rating
1.5 times of NOF or Rs 10 crore
whichever is less
AFCs with CRAR of 12% and
having minimum investment
grade credit rating
4 times of NOF
LC/IC with CRAR of 15% and
having minimum investment
grade credit rating
1.5 times of NOF
AFC= Asset Finance Company
LC/IC= Loan Company/ Investment Company
(ii) NBFCs having NOF more than 25 lakhs but less than 200Lakhs
Category of NBFC Ceiling on public deposits
AFCs maintaining CRAR of 15%
without credit ratingEqual to NOF (1xNOF)
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AFCs with CRAR of 12% and
having minimum investment
grade credit rating
1.5 times of NOF
LC/IC with CRAR of 15% and
having minimum investment
grade credit rating
Equal to NOF( 1xNOF)
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Ongoing Regulations: NBFCs-D (Holding Public Deposits).
The NBFCs accepting public deposits should furnish to RBI:
Audited balance sheet of each financial year and an audited
profit and loss account in respect of that year as passed in the
general meeting together with a copy of the report of the Board
of Directors and a copy of the report and the notes on accounts
furnished by its Auditors
Statutory Annual Return on deposits - NBS 1
Certificate from the Auditors that the company is in a position to
repay the deposits as and when the claims arise
Quarterly Return on liquid assets Half-yearly Return on prudential norms
Half-yearly ALM (Asset Liability Management) Returns by
companies having public deposits of Rs 20 crore and above or
with assets of Rs 100 crore and above irrespective of the size of
deposits
Monthly return on exposure to capital market by companies
having public deposits of Rs 50 crore and above
A copy of the Credit Rating obtained once a year along with one
of the Half-yearly returns on prudential norms
Other Regulations: NBFCs-ND (Not Holding Public Deposits)
The NBFCs-ND having assets size of Rs 100 crore are required to
submit a Monthly Return on important financial parameters of
the company
Board resolution to be passed to the effect that the company
have neither accepted public deposit nor would accept any
public deposit during the year
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General Norms: RBI
Maintenance of Liquid Assets:
Minimum level of liquid asset to be maintained by NBFCs is 15 % of
public deposits outstanding as on the last working day of the second
preceding quarter .Of the 15%, NBFCs are required to invest not
less than 10% in approved securities and the remaining 5% can be
in unencumbered term deposits with any scheduled commercial
bank.. Thus, the liquid assets may consist of government securities,
government guaranteed bonds and term deposits with any
scheduled commercial bank.
Creation and Maintenance of Reserve fund:
All NBFCs are required to create a reserve fund and transfer not less
than 20% of their net profit (before declaration of dividend) to the
fund
Submission of Certificate:
All NBFCs should submit a certificate from their Statutory Auditors
every year to the effect that they continue to undertake the
business of NBFI requiring holding of CoR (Company Application
Reference Number) under Section 45-IA of the RBI Act, 1934.
Information Exchange:
NBFCs are required to furnish the information in respect of any
change in the composition of its board of directors, address of the
company and its directors and the name/s and official designations
of its principal officers and the name and office address of its
auditors.
Prudential Norms
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NBFCs should comply with RBIs policies and directions regarding
prudential norms and Deployment of funds
o Income Reconition
o Accounting Standards
o Classification of Assets
o Provision for NPA (Non Performing assets)
o Capital Adequacy
o Declaration of Purpose, Quantum & Advances of Loan
Directions given to NBFCs and its Auditors by RBI
RBI is empowered to give directions to NBFCs and their auditors
in matters related to
1) Profit and Loss account
2) Balance Sheet
3) Books of Accounts
4) Disclosure of liabilities
5) Any other matters or queries
Special Audits can be done by the RBI of any NBFC and also
appoint auditors for the same
RBI can prohibit any NBFC for taking public deposit for violation
of any provisions of RBI act
Nomination facility for deposits held by a NBFC is introduced. It is
on the lines of bank deposits
If an NBFC is downgraded to below minimum investment grade
rating, it has to stop accepting public deposit, report the position
within fifteen working days to the RBI.
Once downgraded, within 3 years It has to reduce the amount of
excess public deposit to nil or to the appropriate extent
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permissible under paragraph 4(4) of Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1998
A Special Mention : FDI in NBFC sectorFDI/NRI investments allowed in the following 19 NBFC activities shall
be as per levels indicated below:
Merchant banking Credit Reference Agencies
Underwriting Credit rating Agencies
Portfolio Management
ServicesLeasing & Finance
Investment Advisory
ServicesHousing Finance
Financial Consultancy Forex Broking
Stock Broking Credit card business
Asset Management Money changing Business
Venture Capital Micro Credit
Custodial Services Rural Credit
Factoring
Regulations for FDI in NBFCs
Minimum Capitalization Norms for Fund based NBFCs:
For FDI up to 51% - US$ 0.5 million should be brought upfront For FDI above 51% and up to 75% - US $ 5 million should be
brought upfront
For FDI above 75% and up to 100% - US $ 50 million out of which
US $ 7.5 million should be brought upfront and the balance in 24
months
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Minimum capitalization norms for Non-fund based activities:
Minimum capitalization norm of US $ 0.5 million is applicable in
respect of all permitted non- fund based NBFCs with foreign
investment
Foreign investors to set up 100% operating subsidiaries without
the condition to disinvest a minimum of 25% of its equity to
Indian entities, subject to bringing in US$ 50 million as per
minimum capitalization norms above (without any restriction on
number of operating subsidiaries without bringing in additional
capital)
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Joint Venture operating NBFCs which have 75% or less than 75%
foreign investment will also be allowed to set up subsidiaries for
undertaking other NBFC activities, subject to the subsidiaries
also complying with the applicable minimum capital inflow
FDI in the NBFC sector is put on automatic route subject to
compliance with guidelines of the Reserve Bank of India.
References
Web References www.rbi.org.in, accessed from 19th April to 23rd April 2010
nbfc.rbi.org.in , accessed from 19th April to 23rd April 2010
www.economywatch.com, accessed from 19th April to 23rd April
2010
Publications
Statutory guide for Non Banking Financial Companies-
Taxmanns Publications
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Non Banking Financial Companies orNBFC in India are registered companies
conducting business activities similar to regular banks. Their banking operations include
making loans and advances available to consumers and businesses, acquisition of
marketable securities, leasing of hard assets like automobiles, hire-purchase and
insurance business.
Though they are similar to banks, they differ in a couple of ways. NBFCs cannot accept
demand deposits (deposits that can be withdrawn at immediate notice), they cannot issue
checks to customers and the deposits with them are not insured by the DICGC (the India
equivalent of FDIC in the US system). Either the RBI (Reserve Bank of India) or the
SEBI (Securities and Exchange Board of India) or both regulate NBFCs.
Though the NBFCs have been around for a long time, they have recently gained
popularity amongst institutional investors, since they facilitate access to credit for semi-
rural and rural India where the reach of traditional banks has traditionally been poor.
NBFCs have also had a major impact in developing small business in rural India through
local presence and strong customer relationships. Usually the loan officers in such
NBFCs know the end customer or have a strong informal understanding of the
credibility of the borrower and are able to structure their loans appropriately.
With the next wave of growth in India expected to come from the semi-rural and rural
sector, the unique access of NBFCs to these sector puts them in a great position to
benefit from this growth. As evidence of their attractiveness, Goldman Sachs bought a
20% stake in Sriram Credit for 75 mUSD in Q1 2008. Credit Suisse is planning to take a
majority stake in Bokdia Marketing and Finance (as reported in May 2008). Foreign
Institutional Investors (FII) are also setting up their own NBFCs in India to offer
corporate banking and private banking operations. As an example, Societe Generale got
approval for its NBFC launch in the country in October 2007. The French financial
services group plans to strengthen its brand in India though NBFCs.
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There are three categories of NBFCs,
a. Asset Financing Companies (AFC)
b. Loan Companies (LC)
c. Investment Companies (IC)
In our current post, we will focus on two NBFC sectors of Microfinance and
Infrastructure finance which fall under the category of AFC and LC. In a future post, we
would focus on consumer finance with specific focus on the automobile sector.
Microfinance Sector (very attractive)
There is a huge need for credit in the rural sector in India. Roughly 245 million people
need 52 bUSD of microfinance credit. This includes small and marginal farmers, landless
labourers, micro entrepreneurs in the rural and semi-urban areas. NBFCs constitute
almost 66% of the microfinance (MF) sector. The customer base covered by
microfinance is expected to reach 49 million people by 2012 growing at a CAGR of 43%
with an expected loan portfolio of 6 bUSD. (Source: Recent report on microfinance by
Intellecap, a research firm specializing in microfinance).
The key growth drivers in the microfinance sector are:
a. Need for broader suite of products: Products such as investment products,
insurance products, retirement planning can be offered to the customer base
b. Regional diversification: The NBFCs in this space are mostly concentrated in
South India. I expect this to grow in other regions.
c. Market consolidation and entry of FII: The smaller NBFCs will get acquired
and large FIIs (such as Fullerton) will come in and build franchising models
to accelerate the quality and penetration of MF in rural areas.
On the flip side, there are some constraints in the microfinance sector such as lack of
regulatory rules which are still evolving, lack of standardization, ability to attract quality
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human resources and an industry attitude that it is still a social enterprise versus for profit
professional enterprises.
Lastly, in terms of recent investment activity, SKS microfinance (37.3 mUSD), Share
Microfin (27.5 mUSD) and Spandana (12 mUSD) were financed in the last year.
Additional NBFCs such as Bandhan, Cashpor and Grameen Koota are looking actively
for investments.
Infrastructure Finance Sector (very attractive)
During the economic boom of the 1990s, the Govt. implemented many policies for
infrastructure development with focus on roads, telecommunications, ports, and power.
Special purpose vehicles (SPV) were formed to facilitate the credit demands of variousprojects. A majority of these were setup as NBFCs. The Govt. also implemented public
private partnerships (PPP).
As a perspective, during the period 1990-2006, 233 PPP projects were completed with
total investment of 69 bUSD. The PPP investments grew from 0.6 bUSD in 1991 to 17.1
bUSD by 2006 representing a CAGR of 25%.
During the period 2007-2017 the levels of investment is expected to further accelerate
fueled by the economic growth and the need to catchup on infrastructure to facilitate this
growth. During this period investment of roughly 1500 bUSD (Source: Govt. website,
World Bank and E&Y report) would be needed on power, roads and telecommunications.
The Govt. is setting up favorable policies to attract at least 50% of this investment from
the private sector.