Finance Companies

Presented by:Rupesh nyaupane

MBA apex college

IntroductionFinance Companies are licensed by Nepal Rastra Bank in

‘Class C’.   Finance companies are those intermediaries, which link

the savers and users of capital. They collect small and scattered saving of the individuals and mobilize it in the productive sectors in the form of investment or loan.

Finance company engaged in making loan to individuals or businesses unlike a bank, it does not receive deposits but rather obtains its financing from banks, institutions, and other money market sources.

Types of finance company’s1. Consumer finance companies:

Consumer finance companies provide financing for customers of retail stores or wholesalers.

consumer finance companies also provide personal loans directly to individuals to finance purchases

of large household items. Some consumer finance companies also provide mortgage loans.

2. Business finance companies: Business finance companies offer loans to small businesses. Business finance companies also provide financing in the form of credit cards that are used by a business's employees for travel or for making purchases on behalf of the business.

3. Captive finance subsidiaries:Primary purpose is to finance sales of the parent company's products and services, provide wholesale financing to distributors of the parent company's products, and purchases receivables of parent company.

Sources of funds

Loan from banksFinance companies commonly borrow from commercial banks and can consistently renew the loans over time.

Commercial papercommercial paper is available only for short term financing, Only the most well-known finance companies have traditionally been able to issue commercial paper to attract funds, because unsecured commercial paper exposes investors to the risk of default.

DepositsUnder certain conditions, some states allow finance companies to attract fund by offering customer deposits similar to those of the depository institutions.

Cont….BondsFinance companies in need of long term funds

can issue bonds.Capital

Finance companies can build their capital base by retaining earnings or by issuing stock. Like other financial institutions, finance companies maintain a low level of capital as a percentage of total assets.

Uses of finance company funds

1. Consumer loansFinance companies extend consumer loans in the form of personal loans

automobile loanfinance companies offer personal loans for

home improvement, mobile homes, and a variety of other personal expenses

Cont…. 2.Business loans and leasing Companies commonly obtain these loans from the time they purchase

raw materials until cash is generated from sales of the finished goods.Such loans are short term but may be renewedfinance companies provide financing is by leasing.3. Real estate loans Finance companies offer real estate loans in the form of mortgages on

commercial estate and second mortgages on residential real estate. These mortgages are typically secured and historically have a

relatively low default rate

Issues of finance companies The total number of finance companies

decreased to 53 in Mid - July 2014 from 59 in Mid - July 2013. The decrease in significant number of finance company is observed due to the merger and up gradation.

Development Banks

1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

90

100Growth of DBs.

Growth of DBs.

2009|10 2010|11 2011|12 2012|13 2013|140

50

100

150

200

250

300

Total assets of DBs (Mid July 2014)

Total assets of DBs (Mid July 2014)

Rs. In Bil-lion

ISSUES AND CHALLENGES

Urban concentration: Most of the development banks are concentrated in urban areas such as Kathmandu, Pokhara, Chitwan and Butwal. Eg. . Karnali, a zone with no branch even of a single development bank stands as a testimony to this fact.

Corporate Governance: The corporate governance has been considered as a vital factor to maintain institutional discipline and compliance, issues such as formulation and adoption of internal policies, lack of strategic plan and a business plan, lack of independence of audit function, lack of board of directors oversight banks operational activities, lack of successor plan, Inadequate MIS system and unprofessional decisions of Board and Senior management, insider lending and ever greening of loans remain the broad governance issues.

Multiple Banking: Borrowers enjoy different credit facilities from multiple institutions.