12.

Industry Analysis: Michel Porters Five Force Model

NBFC

12.1 BARGANING POWER OF BUYERS:

No. of Alternatives

Low switching costs

Market Growth Rate

Undifferentiated Services

Full information of about the market

The individual doesn't pose much of a threat to the NBFC industry, but one major factor
affecting the power of buyers is relatively high switching costs. If a person has one financial

A Study on Non Banking Financial Companies in India

service that services their financial needs, mortgage, specializes equipment, operating lease,
etc, it can be a huge hassle for that person to switch to another financial companies.

To try and convince customers to switch to their financial companies they will often times
lower the price of switching, though most people still prefer to stick with their current
financial companies? The internet has greatly increased the power of the consumer in the
NBFC industry.

Bargaining Power of Buyers

Factors

High

High to

Moderate

Moderate

Low

(5)

Moderate (4)

(3)

to Low (2)

(1)

No. of alternatives

Switching costs
Market growth rate

Undifferentiated services

Full information about the

market
Total Score

10

Number of Factors

Sum of factor value

20

Average

Conclusion: High to Moderate

As banks has also forayed into long-term finance and consumer finance. Many
alternatives: The consumers have got many alternatives for availing credit.

Large number of NBFCs: The consumers have a large spectrum to choose from.

12.2 BARGANING POWER OF SUPPLIERS:

Many alternatives: The suppliers in this case are the depositors or the NBFCs funds.
Suppliers have lots of alternatives to put their money. With the risk they can invest their
money. E.g. Low Risks: Banks, Bonds etc. High Risk: Stocks, Investment
A Study on Non Banking Financial Companies in India

RBI rules and regulations: RBI rules and regulations are not as stringent as of Banks.
NBFCs are governed by many bodies. E.g. RBI, FIDC, NHB etc. Capital is the primary
resource on any financial companies and there are many major suppliers (various other
suppliers contribute to a lesser degree) of capital in the industry.

Funding of commercial vehicles

Funding of infrastructure assets

Retail financing

Loan against shares

Funding of plant and machinery

Small and Medium Enterprises Financing

Financing of specialized equipment

Operating leases of cars, etc.

By utilizing these many major suppliers, the financial companies can be sure that they have
the necessary resources required to service their customers' borrowing needs while
maintaining enough capital to meet withdrawal expectations.
The power of the suppliers is largely based on the market, their power is often considered to
fluctuate between medium to high.

Bargaining Power Of Suppliers

Factors

High

High to

Moderate

Moderate

Low

(5)

Moderate (4)

(3)

to Low (2)

(1)

Alternatives
RBI rules and regulations

Number of substitute inputs

Competition among supplier

Concentration of supplier

Diverse Distribution Channel

Impact on cost

Switching Cost
Total Score

Number of Factors

27

Sum of factor value

Average

16

3.38
A Study on Non Banking Financial Companies in India

Conclusion: High to Moderate,

Providers of funds could be more demanding, base rate requirements are

applicable.

As quality of services provided with minimum time matters a lot.

Many alternatives: The suppliers in this case are the depositors or the NBFCs
funds. The suppliers have many alternatives at their disposal to invest their
money depending on their risk appetite. Eg: High risk: stocks, low risk: banks

12.3 THREAT OF NEW ENTRANTS:

Product differentiation is very difficult: As most of the NBFCs offer similar types of loans
which caters to same market. Innovation of a product plays a very important role in the
market.

Licensing requirement: There are already 13000 registered NBFC. So, the licensing
requirement is also low. The regulations are not that stringent as that of a Bank.

Reserve Bank of India has laid out a stagnant rules and regulation for new entrant in NBFC
Industry. Hence, the industry is less porn of new competitor. Barriers to an entry in NBFC
industry no longer exist. So lots of privet and foreign financial services are entering in the
market. Competitors can come from an industry to disinter mediate financial product
differentiation is very difficult for NBFC and exit is difficult. So every financial service
strives to survive in highly competitive market so we see intense competitive can mergers and
acquisitions. Government policies are supportive to start new financial companies. There is
less statutory requirement needed to start a new venture? Every bank to tries to achieve
economies of scale through use of technology and selecting and training manpower .There
are public sector banks, private sector and foreign banks along with non-banking finance
companies competing in similar business segments.

A Study on Non Banking Financial Companies in India

Threat Of New Entrants

Factors

High

High to

Moderate

Moderate

Low

(5)

Moderate (4)

(3)

to Low (2)

(1)

Product differentiation is
difficult

Licensing requirement

Distribution Network Required

Capital Requirement

Economies of scale
Sunk Cost

Technology Required

Switching cost of customer

Entry Barrier
Brand Name

Total Score

15

Number of Factors

38

Sum of factor value

10

Average

3.8

20

Conclusion: High to Moderate

There are public sector, private sector and foreign banks along with nonbanking finance companies competing in similar markets.

Licensing requirement, investment in technology, skills required for project

finance,

distribution

reach,

minimum

capital

requirements,

etc.

Undifferentiated services: The service offerings by NBFCs are almost the

same. Thus there is a low level of service differentiation.

12.4 THREAT OF SUBSTITUTE PRODUCTS:

Banks: Banks are important substitutes as they are leaders in the markets. They have a quite
strong brand presence and a good credit appraisal method also.

A Study on Non Banking Financial Companies in India

Money Lenders: Small NBFCs catter to the rural areas where there is already a very strong
presence. They dominate the market in the rural areas and its mostly the unorganized market
they tap in.
Every day there is one or the other new product in financial sector. Financial companies are
not limited to tradition financial services which just offer deposit and lending. In
addition, today NBFC offers loans for all products, derivatives, For Ex, Insurance, Mutual
Fund, Demit account to name a few. The wide range of choices and needs give a sufficient
room for new product development and product enhancement. Substitute products or services
are those, which are different but satisfy the same set of customers.

Threat Of Substitute Products

Factors

High

High to

Moderate

Moderate

Low

(5)

Moderate (4)

(3)

to Low (2)

(1)

Money Lenders

Banks

Inferior Service

Service Differentiation

Cost of switching to Substitute

Number of Substitute
Total Score

Number of Factors

Sum of factor value

19

3.17

Average

Conclusion: Moderate

There are public sector, private sector and foreign banks along with nonbanking finance companies competing in similar markets.

Banks: NBFCs were actually created by the government of India as it felt the
need to provide banking facilities to the poor and underprivileged who could
not get access to banks. Thus banks are a perfect substitute for NBFCs.

Unorganized money lenders: The unorganized money lenders have a strong

presence in the rural markets. They pose a big threat to the NBFCs in the rural
areas
A Study on Non Banking Financial Companies in India

12.5 RIVALRY AMONG EXISTING COMPETITORS:

The services NBFCs offer is more of homogeneous which makes the Company to offer the
same service at a lower rate and eat their competitor markets share. Market Players use all
sorts of aggressive selling strategies and activities from intensive advertisement campaigns to
promotional stuff. Even consumer switch from one bank to another, if there is a wide spread
in the interest. Hence the intensity of rivalry is very high. The no of factors has contributed to
increase rivalry those are.

A large no of NBFC serving similar loan products: There is so many NBFCs and
nonfinancial institution fighting for same pie, which has intensified competition.

High market growth rate: India is seen as one of the biggest market place and growth rate
in Indian financial industry is also very high. This has ignited the competition.

Homogeneous product and services: The services banks offer is more of homogeneous
which makes the company to offer the same service at a lower rate and eat their competitor
markets share.

Undifferentiated services: Almost every NBFC provides similar services. Every bank tries
to copy each other services and technology which increase level of competition.

High exit barriers: High exit barriers humiliate banks to earn profit and retain customers by
providing world class services.

Rivalry among existing Competitors

Factors

No. of NBFC serving similar loan

High

High to

Moderate

Moderate

Low

(5)

Moderate (4)

(3)

to Low (2)

(1)

products
Market growth rate

A Study on Non Banking Financial Companies in India

Homogeneous

product

and

services

Undifferentiated services

Exit barriers
Total Score

Number of Factors

Sum of factor value

18

Average

3.6

12

Conclusion: High to Moderate

Market Players use all sorts of aggressive selling strategies and activities from
intensive advertisement campaigns to promotional stuff.

Marketing strategies: Due to the increased rivalry among the NBFCs, there has
been use of aggressive selling & intensive marketing strategies by the
companies to gain the market share.

A Study on Non Banking Financial Companies in India