Macro Factors for Stock Investing
Case Study – Non-Banking Financial Companies (NBFCs)
Now that we have learned- Porters' five force theory & how it can be helpful to make industry analysis. Let's do a case study on the NBFC sector applying the same theory.
NBFCs are financial companies that offer loans to individuals and corporations. NBFCs cannot take deposits, they are not a part of the payment and settlement system and they do not fall under the deposit insurance scheme. They fall mainly under three main categories that are Asset Finance Company (AFC), Investment Company (IC) and Loan Company (LC).
In addition, NBFCs provides –
- Asset Management: Fund management and portfolio management
- Insurance: Life insurance and General Insurance
- Broking: Securities FX and GTC contracts
- Finance: Mortgages, Personal Loans, Business loans and Vehicle Loans
- Others: Institutional Brokerage and Private Equity
Analysis of Porter's five forces:
Threat of New Entrants: The sector is dominated by few large companies and it requires high capital to operate at pan India level. Government regulations are also high and Brand equity is important for trust. So, we can say threat of new entrants is low but the influx of foreign companies is imminent as the regulation eases and it is easy for small players to enter the market place.
Bargaining power of customers: Bargaining power is high as switching from one supplier to another is relatively easy depending on product i.e., insurance, loan etc. A number of suppliers in the market place are offering a wide variety of products.
Bargaining power of suppliers: Bargaining power is high as the suppliers have many choices where to invest their money.
Threat of substitutes: There are certain products which cannot be replaced but there are various investment products such as gold, land, assets and cash. Increased consumption demand may lead to less savings and thus less investment.
Rivalry among competitors: The number of people aware of investment products offered by NBFC is very low, so there is a possibility of large expansion with development of new products. Some companies have significant customer loyalty due to branding. Many of the companies are following similar strategies for expansion and this is the reason a large number of similar products are available to customers.