38293475 project on nbfc

“Non Banking Financial Companies”

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.

T.Y.B.B. & I.


Non-Banking Financial Companies constitute an important segment of the

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

T.Y.B.B. & I.


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, Muthoot Bankers Muthoot Financial Services Ltd a key player in

Kerala financial services. Other financial institutions are IFCIs IFCI Financial

Services Ltd or IFCI Custodial Services Ltd (Devdas, 2005).

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.

T.Y.B.B. & I.


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 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

T.Y.B.B. & I.


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.

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

T.Y.B.B. & I.


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 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.

These were the committee’s which founded non- banking financial companies.

T.Y.B.B. & I.


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, 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.

T.Y.B.B. & I.


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.

LIFE INSURANCE CORPORATION (LIC).

GENERAL INSURANCE CORPORATION (GIC).

T.Y.B.B. & I.


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

owned funds. Ceilings were prescribed for acceptance of deposits, capital

T.Y.B.B. & I.


adequacy, credit rating and net-owned funds. T he 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:

T.Y.B.B. & I.


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.

(d) Hence, the lessee does not purchase the capital equipment, but he buys the

T.Y.B.B. & I.


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.

T.Y.B.B. & I.


(3) Tax concessions:

The borrower can get tax concessions in case of leasing equipments. The

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

T.Y.B.B. & I.


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

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 only 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:

T.Y.B.B. & I.


(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.

(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 investors 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.

T.Y.B.B. & I.


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".

(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

T.Y.B.B. & I.


(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.

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.

T.Y.B.B. & I.


(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 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:

T.Y.B.B. & I.


(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:

T.Y.B.B. & I.


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.

(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:

T.Y.B.B. & I.


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:

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 equipments, 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-

T.Y.B.B. & I.


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:

T.Y.B.B. & I.


The primary function of nbfcs is receive deposits from the public in various 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:

T.Y.B.B. & I.


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.

(e) Investment of surplus money:

NBFCs invest their surplus money in various profitable areas.

Commercial Bank versus (v/s) Non-banking Financial Companies

T.Y.B.B. & I.


While commercial banks and non-banking financial companies are both financial

intermediaries (middleman) receiving deposits from public and lending them.

Commercial bank is called as “Big brother” while the “NBFC” is called as the

“Small brother. But there are some important differences between both of them,

they are as follows:

No. Commercial Banks. Non Bank Financial companies.

1 Issue of cheques:

In case of commercial banks, a

cheque can be issued against bank

deposits.

In case of NBFC’s there is no

facility to issue cheques against

bank deposits.

2 Rate of interest:

Commercial bank offer lesser rate

of interest on deposits and charge

less rate of interest on loans as

compared to NBFC’s.

NBFC’s offer higher rate of

interest on deposits and charge

higher rate of interest on loans as

compared to Commercial banks.

3 Facilities provided by them:

Commercial banks can enjoy the

benefit of certain facilities like

deposit insurance cover facilities,

refinancing facilities, etc.

NBFC’s are not given such facilities.

4 Law which governs them:

NBFC’s are regulated by different

T.Y.B.B. & I.


Commercial banks are regulated by

Banking Regulation Act 1949 and

RBI.

regulation such as SEBI, Companies

Act, National Housing Bank, Unit

Fund Act and RBI.

5 Types of assets:

commercial banks hold a variety of

assets in the form of loans, cash

credit, bill of exchange, overdraft

etc.

NBFC’s specialize in one types of

asset. For e.g.: Hire purchase

companies specialize in consumer

loans while Housing Finance

Companies specialize in housing

finance only.

RBI Guidelines for Asset-Liability Management (ALM)

system in NBFCs.

T.Y.B.B. & I.


This note lays down broad guidelines in respect of interest rate and

liquidity risks management systems in NBFCs which form part of the Asset

Liability Management (ALM) function. This is applicable to all NBFCs and

Residuary non-banking companies meeting the criteria of asset base of

Rs.100 crores, whether accepting deposits or not, or holding public deposits of

Rs.20 crores or more. Sl.No. Description / Compliance requirement Comments.

As we are aware, the guidelines for introduction of ALM system by banks and all

India financial intuitions have already been issued by Reserve Bank of India and

the system has become operational. Since the operations of financial companies

also give rise to Asset Liability mismatches and interest rate risk exposures, it has

been decided to introduce an ALM system for the NON- Banking Financial

Companies (NBFCs) as well, as part of their overall system for effective risk

management in their various portfolios. A copy of the guidelines for Asset

Liability Management (ALM) system in NBFCs is enclosed.

Is there an Asset Liability Committee (ALCO) consisting of the company’s

senior management to decide the business strategy of the NBFC.

1. In the normal course, NBFC'S are exposed to credit and market risks in

view of the asset-liability transportation. With liberalization in Indian

financial markets over the last few years and growing integration of

domestic with external markets and entry of MNC's for meeting the credit

needs of not only the corporate but also the retail segments, the risks

associated with NBFC's operations have become complex and large,

requiring strategic management. NBFC’s are now operating in a fairly

deregulated environment and are required to determine on their own,

interest rates on deposits, subject to the ceiling of maximum rate of interest

T.Y.B.B. & I.


on deposits they can offer on deposits prescribed by the Bank; and advances

on a dynamic basis. The interest rates on investments of NBFC's in

Government and other securities are also now market related. Intense

pressure on the management of NBFC's to maintain a good balance among

spreads, profitability and long-term viability. Imprudent liquidity

management can put NBFC's earnings and reputation at great risk.

2. NBFC's need to address these risks in a structured manner by upgrading

their risk management and adopting more comprehensive Asset-Liability

Management (ALM) practices than has been done hitherto. ALM, among

other function, is also concerned with risk management and provides a

comprehensive and dynamic framework for measuring, monitoring and

managing liquidity and interest rate equity and commodity price risks of

major operators in the financial system that needs to be closely integrated

with the NBFC's business strategy. It involves assessment of various types

of risks and altering the asset-liability portfolio in a dynamic way in order to

manage risks.

3. This note lays down broad guidelines in respect of interest rate and liquidity

risks management systems in NBFC's which form part of the Asset-Liability

Management (ALM) function. The initial focus of the ALM function would

be to enforce the risk management discipline i.e. managing business after

assessing the risks involved. The objective of good risk management

systems should be that these systems will evolve into a strategic tool for

NBFC's management.

4. The ALM process rests on three pillars:

T.Y.B.B. & I.


ALM Information Systems

Management Information Systems

Information availability, accuracy, adequacy and expediency

ALM Organisation

Structure and responsibilities

level of top management involvement

Risk parameters

Risk identification

Risk management

Risk policies and tolerance levels.

ALM INFORMATION SYSTEMS

ALM has to be support by a management philosophy which clearly specifies the

risk policies and tolerance limits. This framework needs to be built on sound

methodology with necessary information system as back up. Thus, information is

the key to the ALM process. It is, however, recognized that varied business

profiles of NBFC's in the public and private sector do not make the adoption of a

uniform ALM System for all NBFC's feasible.

NBFC's have heterogeneous organizational structures, capital base, asset sizes

management profile, business activities and geographical spread. Some of them

have large number of branches and agents/ brokers whereas some have unitary

offices.

ALM ORGANISATION

T.Y.B.B. & I.


(a) Successful implementation of the risk management process would require

strong commitment on the part of the senior management in the NBFC, to

integrate basic operations and strategic decision making with risk

management.

(b) The Asset-Liability Committee (ALCO) consisting of the NBFC's senior

management including Chief Executive Officer (CEO) should be

responsible for ensuring adherence to the limits set by the Board as well as

for deciding the business strategy of the NBFC (on the assets and liabilities

sides) in line with the NBFC's budget and decided risk management

objectives.

(c) The ALM Support Groups consisting of operating staff should be

responsible for analyzing, monitoring and reporting the risk profiles to the

ALCO. The staff should also prepare forecasts (simulations) showing the

effects of various possible changes in market conditions related to the

balance sheet and recommended the action needed to adhere to NBFC's

internal limits.

LIQUIDITY RISK MANAGEMENT

Measuring and managing liquidity needs are vital for effective operation of

NBFCs. By ensuring an NBFC's ability to meet its liabilities as they become due,

T.Y.B.B. & I.


liquidity management can reduce the probability of an adverse situation

developing. The importance of liquidity transcends individual institution, as

liquidity shortfall in one institution can have repercussions on the entire system.

NBFCs management should measure not only the liquidity positions of NBFCs on

an ongoing basis but also examine how liquidity requirements are likely to involve

under different assumptions.

Experience shows that assets commonly considered as liquid, like Government

securities and other money market instruments, could also become illiquid when

the market and players are unidirectional.

NBFCs holding public deposits are required to invest up to a prescribed percentage

(15% as on date) of their public deposits in approved securities in terms of liquid

asset requirement of section 45-IB of the RBI Act,1934. Residuary Non-Banking

Companies (RNBCs) are required to invest up to 80% of their deposits in a manner

as prescribed in the Directions issued under the said Act. There is no such

requirements for NBFCs which are not holding public deposits. Thus various

NBFCs including RNBCs would be holding in their investments portfolio

securities which could be broadly classifiable as 'mandatory securities' (under

obligation of law) and other 'non-mandatory securities'.

Financial Companies Regulation Bill, 2000.

T.Y.B.B. & I.


The Government of India framed the Financial Companies Regulation Bill, 2000 to

Consolidate the law relating to NBFCs and unincorporated bodies with a view to

ensured posit or protection. The salient features of this Bill are:

All NBFCS will be known as Financial Companies instead of NBFCs; NBFCs

holding public deposits would not be allowed to carry on any non-Financial

business with out the prior approval of RBI; RBI would have the powers to

prescribe minimum net-worth norms; unsecured depositors would have first charge

on liquid assets and assets created out of deployment of part of the reserve fund.

Financial Companies would require prior approval of RBI for any change in

name, management or registered office; Regulation of unincorporated bodies

would be in the hands of the respective State Governments; Penalties have been

rationalized with the objective that they should serve as a deterrent and

investigative powers have been vested with District Magistrates and

Superintendents of Police; RBI would be empowered to appoint Special Officer(s)

on delinquent financial companies; Any sale of property in violation of RBI order

would be void; The Company Law Board will continue to be the authority to

adjudicate the claims of depositors. Financial companies would have no recourse

to the CLB to seek deferment of the depositors’ dues. The Bill has been introduced

in Parliament in 2000 and has since been referred to the Standing Committee on

Finance. 8.0 Anomalies in the NBFC regulations.

1. Clarity in Definition of NBFC:

T.Y.B.B. & I.


The clause (a) of the section 45 I of the RBI Act define the term

‘Business of A Non Banking Financial Institution’. Herein, it has been

stated that, ‘‘‘business of a non-banking financial institution’’ means carrying

on of the business of a financial institution referred to in clause (c) and includes

business of a non-banking financial company referred to in clause (f).’

Therefore, to understand what the business of Non Banking Financial

Institution is a reference has to be made to two other clauses (c) and (f).

Clause (c) defines the term ‘Financial Institution’ and clause (f) defines NBFC

itself. However, the clause (f) contains a comprehensive and exclusive definition

an NBFC. As per this clause a ‘‘non-banking financial company’’ means–

(i) A financial institution which is a company;

(ii) A non-banking institution which is a company and which has as its

principal business the receiving of deposits, under any scheme or

arrangement or in any other manner, or lending in any manner;

(iii) Such other non-banking institution or class of such institutions, as the

Bank may, with the previous approval of the Central Government and

by notification in the Official Gazette, specify. Therefore, we can say

an NBFC is always a company and can be a corporation or a co-operative

only if notified by RBI with approval of Central Government. However, no

co operative or corporation has been notified till now. The definition

of NBFC should have been simple to understand and need to cross

references to other clauses could have been avoided.

The definition of NBFC in our view could have been:

T.Y.B.B. & I.


‘‘Non-Banking Financial Company’’ means–

A non banking company which carries on as its business or part of its

business any of the following activities, namely:–

(i) The financing, whether by way of making loans or advances or

otherwise, of any activity other than its own.

(ii) The acquisition of shares, stock, bonds, debentures or securities issued

by the Government or local authority or other marketable securities of a like

nature.

(iii) Letting or delivering of any goods to a hirer under a hire-purchase

agreement as defined in clause (c) of section 2 of the Hire-Purchase Act,

1972.

(iv) The carrying on of any class of insurance business.

(v) Managing, conducting or supervising, as foreman, agent or in any other

capacity, of chits or kuries as defined in any law which is for the time

being in force in any State, or any business, which is similar thereto.

(vi) Collecting, for any purpose or under any scheme or arrangement by

whatever name called, monies in lump sum or otherwise, by way of

subscriptions or by sale of units, or other instruments or in any other

manner and awarding prizes or gifts, whether in cash or kind, or

disbursing monies in any other way, to persons from whom monies

are collected or to any other person, but does not include any institution,

which carries on as its principal business:–

(a) Agricultural operations; or (industrial activity; or)

T.Y.B.B. & I.


(b) The purchase or sale of any goods (other than securities) or the

providing of any services; or

(c) The purchase, construction or sale of immovable property, so

however, that no portion of the income of the institution is

derived from the financing of purchases, constructions or sales of

immovable property by other persons

(d) A non banking company and which has as its principal business

the receiving of deposits, under any scheme or arrangement or in any

other manner, or lending in any manner;

(e ) Such other non-banking institution or class of such institutions, as

the Bank may, with the previous approval of the Central

Government and by notification in the Official Gazette, specify.

2. Clarification regarding what in Principle Business:

The sub clause (ii) of clause (f) which defines NBFC states that a non- banking

company that has as its principal business the receiving of deposits, under any

scheme or arrangement or in any other manner, or lending in any manner is

regarded as NBFC. Moreover, clause (c) that defined ‘financial institution’ also

refers to the phrase Principle business when it states that financial institution

does not include institution that carries on as its principle business(a)

agricultural operations; or (a) industrial activity; or (b) the purchase or sale

of any goods (other than securities) or the providing of any services; or (c)

the purchase, construction or sale of immovable property, so however, that

T.Y.B.B. & I.


no portion of the income of the institution is derived from the financing of

purchases, constructions or sales of immovable property by other persons.

In the absence of a definition of the term ‘principal business’ in the Act itself, it is

not clear what should be the guidelines to be followed to determine the ‘principal

business’ of a company? In case of a company engaged exclusively in financial

business or a company doing exclusively non-financial business, the ‘principal

business’ will be evident enough and it may not be necessary to dwell upon

what constitutes ‘principal business’ of such a company. However, in the case

of companies which are carrying on multiple activities, both financial and

non- financial, in some what equal or near equal proportions, determining

the ‘principal business’ assumes considerable significance.

It would be necessary to define what constitutes the ‘principal business’ of these

companies, in the context of the obligations cast by the amended provisions

of the RBI Act on the NBFCs, viz., requirement of applying for registration in case

of existing companies and prior registration in case of new companies,

penalties for non-compliance with registration requirements, etc.

3. Applicability of Accounting Standards:

The clause 5 of the “Non-Banking Financial (Deposit Accepting or Holding )

Companies Prudential Norms (Reserve Bank) Directions, 2007” states that

Accounting Standards and Guidance notes issued by the Institute of Chartered

Accountants of India shall be followed in so far as they are not inconsistent

with any of the Directions. This clause should be rectified as ICAI has

T.Y.B.B. & I.


issued Companies (Accounting Standards) Rules 2006, which are applicable

to accounting periods commencing on or after 7-12-2006.

The Government of India framed a new legislation to amend and consolidate the

provisions contained in Chapter IIIB, III-C and V of the RBI Act, 1934 relating to

the regulation and supervision of financial companies, hither to known as non-

banking financial companies (NBFCs). This included prohibition of acceptance of

deposits by unincorporated bodies and incorporating the recommendations of the

Task Force on NBFCs, which had made certain recommendations to this effect.

The salient features of the proposed legislation, which are materially different from

the corresponding provisions of RBI Act or are new provisions, are as follows:

I. Basic Stipulations:

(i) The draft bill has been named as “Financial Companies Regulations Bill,

2000”. All the NBFCs will be known as Financial Companies instead of

NBFCs.

(ii) The term 'public deposit' has been defined in the Bill for the first time and

the definition would mean the same as at present in the NBFC Directions.

(iii) There would be a nine member Advisory Council for Financial Companies

under the Chairmanship of Depute Companies and other experts in related

areas to advise the Reserve Bank.

(iv) NBFCs holding /accepting public deposits would be prohibited from

carrying on any non- financial business without the prior approval of the

Reserve Bank and the non-financial business presently carried on by them

would have to be wound up or transferred to a subsidiary within three years.

Any other business or fee-based activity like insurance agency business,

T.Y.B.B. & I.


portfolio management, etc., would require prior approval of the Reserve

Bank.

II .Entry Point Norms:

(i) The requirement of obtaining the COR from the Reserve Bank would be

compulsory for all financial Companies, irrespective of whether the

companies accept public deposits or not. However, the nonpublic Deposit

taking financial companies would require minimum owned fund of Rs.25

Lakh, whereas the public deposit taking financial companies would require

minimum net owned fund (NOF) of Rs.2 Crores and a specific authorization

from the Reserve Bank to accept public deposits.

(ii) There would be powers with the Reserve Bank to:

(a) Prescribe different capital for different classes of financial companies,

(b) Raise the requirement of minimum owned fund (entry norm) from Rs.25

Lakh to of Rs.25 Lakh to Rs.2 crores for the existing financial

companies accepting public deposits. However, sufficient time would be

allowed to such financial companies to attain the enhanced capital

requirement.

(iii) The requirement of creation of reserve fund would be applicable only to the

financial companies accepting public deposits, as against the earlier

requirement applicable to all NBFCs.

(iv) Unsecured depositors would have first charge on liquid assets and assets

created out of the deployment of the part of the reserve fund.

T.Y.B.B. & I.


(v) The financial companies would require prior approval of the Reserve Bank

for any change in the name, change in the management or change in the

location of the registered office.

III Regulatory and Supervisory Issues:

(i) The Reserve Bank would be empowered to appoint Special Officer(s) on a

delinquent financial company and a duty has been cast on such company to

cooperate with such Special Officer(s).

(ii) The Company Law Board (CLB) would continue to be authority to

adjudicate the claims of depositors against the delinquent companies with

powers to order initial payment of a part of deposit, attach assets of the

fraudulent financial company and appoint Recovery Officer(s) for

management of such asset. Financial company would have no recourse to

the CLB to seek deferment of the depositors' dues.

(iii) The prohibitory provisions for unincorporated bodies would continue in the

Financial Companies Regulations Bill, but the role of exercising the powers

for enforcement of these provisions have been exclusively entrusted to State

Governments, in addition to the powers under the respective State Laws for

protecting the interests of investors in financial establishments.

(iv) There would be powers vested in the District Magistrates to call for

information and to proceed against delinquent unincorporated bodies.

(v) There would be a ban on the issue of advertisement for soliciting deposits

by all unincorporated bodies, irrespective of whether they are conducting

financial business or not.

T.Y.B.B. & I.


(vi) Unauthorized deposit-taking by companies (a) whose applications for

Certificate of Registration have been rejected, (b) whose registration has

been cancelled, (c) who have been prohibited from accepting public

deposits would be a cognizable offence. The same would be the case for

unregistered financial companies as well as unincorporated bodies.

(vii) Powers would be vested with a police officer of the rank not below that of

the Superintendent of Police Of any State to order investigations into the

alleged violations of requirement of registration by financial companies and

prohibition from acceptance of deposits by unincorporated bodies.

(viii) Penalties have been rationalized in accordance with the severity of defaults,

with the objective that the penalty should serve as a deterrent to others. The

Bill has been introduced in the Parliament in 2000 and has since been

referred to the Standing Committee on finance.

The Government of India framed the Financial Companies Regulation Bill, 2000,

to consolidate the law relating to NBFCs and unincorporated bodies with a view to

ensure depositor protection.

T.Y.B.B. & I.


AN APPRAISAL OF FINANCIAL COMPANIES

REGULATION BILL, 2000:

THE UNION Government's move to enact a separate law to regulate and control

the non-banking finance companies (NBFC) sector is indeed laudable, after a large

number NBFCs had failed to repay public deposits, ruining thousands of gullible

investors, drawn mainly from the middle class strata of the society. However, a

careful perusal of the new bill, introduced in the Lok Sabha on December 13,

shows that this legislation seeks largely to consolidate into a single stand-alone

enactment the regulatory provisions concerning the NBFC sector already existing

in Chapters 111-B and C of the Reserve Bank of India Act, 1934, (RBI Act), as

amended in 1997. Thus the new law, when enacted, will just be old wine in new

bottle.

It was in the wake of the CRB scam that left several thousands of depositors high

and dry that the RBI Act was amended in 1997 to empower, inter alia, the

Company Law Board (CLB) to hear and decide complaints from depositors on

defaults committed by financial companies. However, an objective study will

reveal that the RBI (Amendment) Act, 1997, which added Chapter IR-B to the

parent Act, has hardly benefited the depositor fraternity. The winding-up petition

filed against CRB by the RBI under the new provisions in 1997 is still pending

with the Delhi High Court. The perpetrators of the CRB fraud have been bailed out

and are scot-free. Many depositors have been devastated. Justice delayed is indeed

justice denied.

T.Y.B.B. & I.


Ineffective CLB orders

Close on the heels of this `mother' scam came a host of other NBFC failures - to

name a few, Prudential Capital Markets, Lloyds Finance, Enarai Finance and

Kirloskar Investments. The CLB's orders on all these cases, directing the

companies concerned, to pay the depositors in accordance with specified phased

repayment schedules are just dead letters. Repayments are yet to start at Prudential

though the CLB order was passed in 1998; Lloyds continues to default on

repayments and is way behind schedule. Repeated representations from the

aggrieved depositors of these companies to the CLB and the RBI have failed to

improve matters. The RBI simply passes the buck on to the CLB. The latter just

does not have either the determination or the will to punish the errant boards and

managements though it has all the requisite powers under the Companies Act to do

so. The result - the depositors continue to suffer. ICICI got the CLB order on

Enarai Finance stayed and filed a liquidation petition against the company, which

is still pending. The RBI was inspired to follow ICICI's example in the case of

Kirloskar Investments and is keenly awaiting the Karnataka High Court's order on

its liquidation petition filed last February.

Against such a dismal scenario, is it not disappointing that the new bill provides for

payment defaults by the NBFCs to be adjudicated by the CLB? The CLB has no

power to review its own orders. It refuses to entertain petitions from depositors to

amend/clarify its orders and curtly asks the petitioners to approach the High Court.

Their order is routinely challenged at the High Courts and stays obtained. The

courts being overburdened with cases are least bothered to hear and dispose of the

stay petitions expeditiously.

T.Y.B.B. & I.


The lay depositor is an unsecured creditor; he is entitled to immediate relief if the

company defaults. This can be provided by compulsory insurance of his deposit.

Bank deposits are automatically insured up to Rs. 1 Lakh per account.

Moreover, as an added protection to depositors, the Finance Minister has declared

in Parliament that no public sector bank will be liquidated. Why cannot the RBI

make it mandatory for NBFCs too to insure the deposits taken by them and issue

certificates of insurance along with the deposit receipts? If this were done, in the

event of default, all that the depositor has to do is to approach the insurance

company and claim his deposit and expeditious remedy and merits incorporation in

the bill. With the opening of the insurance business to the private sector, insurance

of NBFC deposits should not pose any problem. The insurance premium could be

allowed as tax deductible expenditure in the company's assessments.

For the first time, the bill provides for a first charge on the company's assets to the

depositor. However, in practice, this will be no solace to the depositor. For, the

`first charge' is available only upon default. Further, the charge is not on the entire

assets. It is on a maximum of 25 per cent of the total value of deposits taken which

the company is supposed to hold in unencumbered term deposits/approved

securities. Realization of the charged assets, upon an order of the CLB, is another

exercise altogether. All in all, the charge provision in the bill, though innovative,

does not inspire confidence. The Finance Ministry would do well to review this bill

in the light of these comments and make it more investor friendly as the avowed

objective of the new legislation is to protect the interests of depositors. The

Supreme Court has time and again ruled that death sentences should be

pronounced only in the rarest of rare cases. Perhaps, the RBI should extend this

dictum to corporate as well and refrain from filing liquidation petitions against

failed NBFCs.

T.Y.B.B. & I.


NORMS for NBFCS.

In public interest and to regulate the credit system in the best interest of India, the

RBI has laid down the following important norms or rules to be followed by

NBFCs accepting public deposits:

(1) What constitutes public deposits?

Public deposit includes fixed or recurring deposits which are received from friends,

relative, shareholders of a public limited company and money raised in issued of

unsecured debentures or bond. It does not include money raised from issue of

secured debentures and bond or from borrowings of banks or financial institutions,

deposits from directors or inter- corporate deposits received from foreign national

citizens and from shareholders of private limited companies.

(2) Who is allowed to accept deposits from public?

The NBFCs which have net owned capital of less than Rs. 25 Lakh will not be

permitted to accept deposit from public. In order to raise funds the NBFC can

borrow from some other sources also.

(3) NBFCs have to submit financial statements:

All NBFCs will have to submit their annual financial statements and returns if they

accept public deposits.

(4) Certain deposits are not regulated by RBI:

The RBI has given directions to NBFCs accepting public deposits to regulate the

amount of deposit, rate of interest, time period of deposits, brokerage and

borrowings received by them. The directions do not include amount received or

T.Y.B.B. & I.


generated by central bank or state government. Amount received from IDBI, ICICI

Nabard, Electricity Board and IFCI are also not included in directions of RBI.

Amount received from mutual funds, directors of firm and shareholders also do not

come under the category of amount received for regulation from RBI.

(5) Ceiling (limits on interest):

There is a maximum limit on the rate of interest of deposits. The limit charges with

the RBI directions.

(6) Period of deposits:

The deposits can be accepted for a minimum period of 12 months and a maximum

period of 2 year.

(7) Register of depositors:

The NBFCs have to maintain a register of depositors with details like name,

address, amount, date of each deposit, maturity period and other details according

to the required by RBI.

(8) Credit rating:

To protect the public NBFCs are required to get themselves approved by the RBI

through credit rating agencies. The NBFCs which have not owned funds of Rs 25

Lakhs can obtain public deposits if they are credit rated and they receive a

minimum investment grade for their fixed deposits from an approved rating

agency.

T.Y.B.B. & I.


The NBFCs have to submit this different agency is as follow:

The credit analysis and Research Limited (CARE) gives the minimum

rating of BBB in triple B rating.

The investment information and credit Rating Agency of India LTD.

(ICRA) gives the minimum rating of (MA-)

The Credit Rating Information Services of India Ltd. (CRISIL) and gives a

minimum rating of (FA-).

FITCH Rating India Pvt. Ltd. Provides (BBB-) as its acceptable rating.

If the credit rating is below the minimum investment grate the NBFCs has

to send report to the RBI within 15 days of received the grating. During that

time the NBFC has to stop accepted the deposits and within 3 years makes

the repayment to the depositors.

RBI deposit norms for small NBFCs.

The RBI has tightened the rules governing access to such public deposits.

It said that NBFCs with a net owned fund (NoF) of between Rs 25 Lakh and Rs 2

crore, must limit their public deposits to the level of their net owned funds as

against the current ceiling of 1.5 times the net owned funds. Further, for those

companies (with NoF of between Rs 25 Lakh and Rs 2 crore) that had a capital

adequacy ratio of 12% and who enjoyed credit rating, the current ceiling of 4

times the NoF was being revised to 1.5 times the NoF. As per RBI statistics, there

were 243 companies in 2007 that would probably be affected by this regulation.

Their net owned funds were of the order of Rs 171 crore while the public deposits

that they held were about Rs 96 crore. This category of companies constitutes a

big chunk in the total category of NBFCs taking deposits that number about 359.

T.Y.B.B. & I.


In terms of amount of deposits involved, this category of NBFCs is a very small

category. Total public deposits of all NBFCs with access to such deposits were of

the order of Rs 2042 crore in 2007.

These regulations are part of the RBI’s move to ensure that NBFCs who accept

deposits are adequately capitalized and have some minimum net owned funds.

Mr. T.T.Srinivasaraghavan, Managing Director, Sundaram Finance, said that this

regulation had adopted a fair approach to the issue of dealing with risks involved

in smaller companies accepting deposits. He said the regulation met the

aspirations of those small companies as it would now take the pressure off them

when they were scrambling for capital to reach the minimum NoF limits. It would

also force them to live within their means, by limiting their access to public

deposits.

T.Y.B.B. & I.


The current status of Non- Banking Financial Companies.

PRUDENTIAL NORMS:

The Reserve Bank put in place in January 1998 a new regulatory framework

involving prescription of prudential norms for NBFCs which deposits are taking to

ensure that these NBFCs function on sound and healthy lines. Regulatory and

supervisory attention was focused on the ‘deposit taking NBFCs’ (NBFCs – D) so

as to enable the Reserve Bank to discharge its responsibilities to protect the

interests of the depositors. NBFCs - D are subjected to certain bank –like

prudential regulations on various aspects such as income recognition, asset

classification and provisioning; capital adequacy; prudential exposure limits and

accounting / disclosure requirements. However, the ‘non-deposit taking NBFCs’

(NBFCs – ND) are subject to minimal regulation.

The application of the prudential guidelines / limits is thus not uniform across the

banking and NBFC sectors and within the NBFC sector. There are distinct

differences in the application of the prudential guidelines / norms as discussed

below:

i) Banks are subject to income recognition, asset classification and

provisioning norms; capital adequacy norms; single and group borrower

limits; prudential limits on capital market exposures; classification and

valuation norms for the investment portfolio; CRR / SLR requirements;

accounting and disclosure norms and supervisory reporting requirements.

ii) NBFCs – D are subject to similar norms as banks except CRR requirements

and prudential limits on capital market exposures. However, even where

applicable, the norms apply at a rigour lesser than those applicable to banks.

T.Y.B.B. & I.


Certain restrictions apply to the investments by NBFCs – D in land and

buildings and unquoted shares.

iii) Capital adequacy norms; CRR / SLR requirements; single and group

borrower limits; prudential limits on capital market exposures; and the

restrictions on investments in land and building and unquoted shares are not

applicable to NBFCs – ND.

iv) Unsecured borrowing by companies is regulated by the Rules made under

the Companies Act. Though NBFCs come under the purview of the

Companies Act, they are exempted from the above Rules since they come

under RBI regulation under the Reserve Bank of India Act. While in the

case of NBFCs – D, their borrowing capacity is limited to a certain extent

by the CRAR norm, there are no restrictions on the extent to which NBFCs

– ND may leverage, even though they are in the financial services sector.

T.Y.B.B. & I.


Current Status:

Financial Linkages between Banks and NBFC:

Banks and NBFCs compete for some similar kinds of business on the asset side.

NBFCs offer products/services which include leasing and hire-purchase, corporate

loans, investment in non-convertible debentures, IPO funding, margin funding,

small ticket loans, venture capital, etc. However NBFCs do not provide operating

account facilities like savings and current deposits, cash credits, overdrafts etc.

NBFCs avail of bank finance for their operations as advances or by way of banks’

subscription to debentures and commercial paper issued by them.

Since both the banks and NBFCs are seen to be competing for increasingly similar

types of some business, especially on the assets side, and since their regulatory and

cost-incentive structures are not identical it is necessary to establish certain checks

and balances to ensure that the banks’ depositors are not indirectly exposed to the

risks of a different cost-incentive structure. Hence, following restrictions have been

placed on the activities of NBFCs which banks may finance:

i) Bills discounted / rediscounted by NBFCs, except for rediscounting of bills

discounted by NBFCs arising from the sale of –

a) Commercial vehicles (including light commercial vehicles); and

b) Two-wheeler and three-wheeler vehicles, subject to certain conditions;

c) Investments of NBFCs both of current and long term nature, in any

company/entity by way of shares, debentures, etc. with certain exemptions;

ii) Unsecured loans/inter-corporate deposits by NBFCs to/in any company.

T.Y.B.B. & I.


iii) All types of loans/advances by NBFCs to their subsidiaries, group

companies/entities.

iv) Finance to NBFCs for further lending to individuals for subscribing to Initial

Public Offerings (IPOs).

v) Bridge loans of any nature, or interim finance against capital/debenture issues

and/or in the form of loans of a bridging nature pending raising of long-term

funds from the market by way of capital, deposits, etc. to all categories of

Non-Banking Financial Companies, i.e. equipment leasing and hire-purchase

finance companies, loan and investment companies, Residuary Non-Banking

Companies (RNBCs).

vi) Should not enter into lease agreements departmentally with equipment

leasing companies as well as other Non-Banking Financial Companies

engaged in equipment leasing.

T.Y.B.B. & I.


Current Status:

Structural Linkages between Banks and NBFCs :

Banks and NBFCs operating in the country are owned and established by entities

in the private sector (both domestic and foreign), and the public sector.

Some of the NBFCs are subsidiaries/ associates/ joint ventures of banks –

including foreign banks, which may or may not have a physical operational

presence in the country. There has been increasing interest in the recent past in

setting up NBFCs in general and by banks, in particular.

Investment by a bank in a financial services company should not exceed 10 per

cent of the bank’s paid-up share capital and reserves and the investments in all

such companies, financial institutions, stock and other exchanges put together

should not exceed 20 per cent of the bank’s paid-up share capital and reserves.

Banks in India are required to obtain the prior approval of the concerned regulatory

department of the Reserve Bank before being granted Certificate of Registration

for establishing an NBFC and for making a strategic investment in an NBFC in

India. However, foreign entities, including the head offices of foreign banks having

branches in India may, under the automatic route for FDI, commence the business

of NBFI after obtaining a Certificate of Registration from the Reserve Bank.

NBFCs can undertake activities that are not permitted to be undertaken by banks or

which the banks are permitted to undertake in a restricted manner, for example,

financing of acquisitions and mergers, capital market activities, etc. The

differences in the level of regulation of the banks and NBFCs, which are

undertaking some similar activities, gives rise to considerable scope for regulatory

T.Y.B.B. & I.


arbitrage. Hence, routing of transactions through NBFCs would tantamount to

undermining banking regulation.

This is partially addressed in the case of NBFCs that are a part of banking group on

account of prudential norms applicable for banking groups.

T.Y.B.B. & I.


CURRENT NEWS.

1) MAT changes will hit NBFCs.

Tuesday, September 1, 2009

The Direct Taxes Code (DTC) is slowly being put to deeper scrutiny. As is always

the case, some of the changes may be ushered in with good intention, but inept

drafting leaves the door open for needless litigation.

The newly crafted Minimum Alternate Tax (MAT) is a case in point. Ever since

Rajiv Gandhi unleashed the book profits tax on India Inc. in 1987, it has generated

controversies galore and kept all the courts busy interpreting the intention and

scope of the provision.

At present, MAT is applicable to corporate at 15 per cent on published profits. The

nominal tax rate for the corporate sector is 33.99 per cent and the effective rate

after all deductions/concessions stands at around 22.22 per cent.

MAT computation

MAT, despite the controversy surrounding its existence, has lived by the year for

now 22 years and promises to open a new chapter from April 1, 2011.

The mechanics, as per the DTC, is simple. MAT will now be 2 per cent of the

value of gross assets as against 15 per cent on profits. For this purpose the value of

gross assets would be computed as shown in the Table.

It may be noted that even business assets such as sundry debtors, loans and

advances will now form part of the computation of gross assets for the purpose of

the levy.

T.Y.B.B. & I.


Further, while in the vertical form of the balance sheet the current assets are

disclosed net of current liabilities, the proposed MAT computation mechanism

does not envisage a reduction of current liabilities from current assets.

This also leads to an anomalous situation where a company has to pay MAT on the

amount of deferred tax asset, if it appears in the balance sheet of a company. The

rate of MAT is proposed to be 0.25 per cent in the case of banking companies and

2 per cent in the case of all other companies, including foreign companies.

This is clearly a hardship for Non-Banking Financial Companies (NBFCs) where

70-75 per cent of the assets in the balance-sheet constitute loans and advances,

stock on hire and business receivables. There does not appear to be any

justification in levying 2 per cent MAT on business assets, which in any case yield

income on monthly basis liable to corporate tax at 33.99 per cent (proposed to be

reduced to 25 per cent by the DTC). In the case of several large NBFCs, 2 per cent

MAT on gross assets would be far greater than 25 per cent on taxable income.

To make matters worse, MAT will now represent a final tax and will not be

allowed to be carried forward for claiming tax credit in subsequent years. Not only

this, certain companies, will receive an additional blow — for example, those in

gestation period; having negative net worth because of huge accumulated losses;

having book losses in the current year; having low asset-turnover ratio low net

profit ratio; and those earning mainly exempt income.

Change in concept:

The justification for re-jigging MAT is that several countries have adopted a tax

based on a percentage of assets. The concept of MAT when it first originated in

1987 was completely different from what is proposed in the DTC.

T.Y.B.B. & I.


The economic rationale of “assets-based tax” is that it serves as an incentive for

efficiency. If that be so then the normal tax itself should serve the purpose.

Any sort of tax that departs from the mainstream route of linkage with

income/profits is bound to be litigious.

Added to that is the discrimination between banking companies and other

companies on the rate of tax. Some serious rethinking is required on the proposed

MAT in the DTC.

2) NBFCs

Posted on 19 September 2008 by Sara Jain close Author: Sara Jain:-

A 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, 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.

Major difference between Banks & NBFCs

NBFCs are doing functions akin to that of banks; however there are a few

differences:

A NBFC cannot accept demand deposits (demand deposits are funds deposited at a

depository institution that are payable on demand immediately or within a very

short period like your current or savings accounts).

T.Y.B.B. & I.


It is not a part of the payment and settlement system and as such cannot issue

cheque to its customers.

Deposit insurance facility of DICGC is not available for NBFC depositors unlike

in case of banks.

The important regulations relating to acceptance of deposits by

NBFCs are as follows:

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.

NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI

from time to time. The present ceiling is 11 per cent per annum. The interest may

be paid or compounded at rests not shorter than monthly rests.

NBFCs cannot offer gifts/incentives or any other additional benefit to the

depositors.

NBFCs (except certain AFCs) should have minimum investment grade credit

rating.

The deposits with NBFCs are not insured.

The repayment of deposits by NBFCs is not guaranteed by RBI.

There are certain mandatory disclosures about the company in the Application

Form issued by the company soliciting deposits.

Non-banking financial companies (NBFCs) have seen considerable business model

shift over last decade because of regulatory environment and market dynamics.

T.Y.B.B. & I.


In the early 2000s, the NBFC sector in our country was facing following problems:

High cost of funds.

Slow industrial growth.

Stiff competition with NBFCs as well as with banking sector.

Small balance sheet size resulting in high cost of fund and low asset profile.

3) On AM ET advertisement:

(Start September 23, 2009 4:488.)

Reserve Bank of India's (RBI) latest guideline allowing non-banking finance

companies (NBFC) to issue semi-closed system pre-paid payment instruments will

boost the growth of m-commerce in India. Industry sources estimate that, in the

next 3 years, India could have 25 mn m-commerce users up from the current 5 mn.

The industry currently stands at a market size of $10bn.

"The new guideline will increase the reach of the services to the people at the

bottom of pyramid. Now, people not having any bank account could pay their

utility bill by electronic transfer. We expect a five fold increase in number of

people using m-commerce services," said Anil Gajwani, Senior Vice President -

Technology, Comviva Technologies.

After the new guideline, entry of a few NBFC MNCs into the segment could not be

denied. However, the most viable business plan would be for telecom operators, as

the guidelines will allow them to operate as a pre-paid payment instrument as well.

T.Y.B.B. & I.


Considering the reach of the telcos, in urban, rural and semi-urban areas, their

entry will increase the penetration of the services among the masses.

Further, these telecom operators already have a large network of agents, who are

selling pre-paid recharge coupon to the end customer. As per industry estimate

every service provider has around 50,000 such agents. Telcos could use these

existing agents for m-commerce as well.

"This will certainly bring more people into the eco-system. Even people not having

any bank account would be able to do some basic financial transaction," said

Probir Roy, Co-founder and MD of Pay mate. Pay mate has currently half a million

users in the country. The company expects to grow manifold, in terms of the users,

by the end of current FY.

However, the new guidelines still have some bottlenecks, which the industry

people wanted to be removed. RBI restricts the maximum value of such payment

instruments that can be issued by the institutions/companies to Rs 5,000. Further,

these pre-paid payment instruments up to Rs 5,000 can be issued by accepting any

'officially valid documents' defined under Rule 2(d) of Prevention of Money

Laundering Act, as proof of identity.

Such instruments shall not permit cash withdrawal. The utility bills/essential

services shall include only electricity bills, water bills, telephone/mobile phone

bills, and insurance premium, cooking gas payments, ISP for Internet/broadband

connections, cable/DTH subscriptions and citizen services by government or

government bodies.

T.Y.B.B. & I.


4) Invest in only top 15 NBFCs to play safe.

(On September 23, 2009 4:488)

NIVEDITA MOOKERJI

Investors once again faced disappointment with Kuber Finance defaulting on

payments. Although there have been several defaults in the past couple of years,

the Kuber fiasco brought back memories of the CRB scam in 1997. After the CRB

letdown, one thought investors were going to stay away from non-banking finance

companies (NBFCs) for a long time to come. But the temptation to earn high

returns was hard to resist, and investors burnt their fingers again.

But why don't investors learn from others' experiences? What is it that draws them

to NBFCs? Sheer Singh, banking and consumer analyst, Consult Opportune

(India's first consumer banking advisory service), explains why investors are still

opting for NBFCs.

Says Singh, ``the lure of earning returns, which are significantly higher than what

banks offer, is one of the reasons.'' Seen against the backdrop of dismal stock

market performance over the past few years, it becomes quite clear why people

still invest in NBFCs, he says. Lack of sufficient investment alternatives is also

why investors are drawn to NBFCs, says Singh. Giving a consumer point of view,

Singh says that through NBFC investments, people seek returns to hedge against

inflation. Plus, it is seen as a way to earn income to finance the growing

consumerist urge. And more than anything else, high returns promised by some

NBFCs seem to fulfill investors' desire to make a fast buck.

In such a scenario, sound guidelines may help investors in opting for the reliable

NBFCs. Sheer Singh offers guidelines which have been formulated by Consult

T.Y.B.B. & I.


Opportune. The things to look for while investing in NBFCs, according to Consult

Opportune, are:

a) Deposits of NBFCs must have an adequate rating by one of the credit rating

agencies in India.

b) Preferably invest in deposits of only the top 10-15 NBFCs in India.

c) Review half-yearly factors such as credentials, market standing, and

professionalism of management and promoters track record of such NBFCs.

d) Take a close and critical look at the financing activities of such NBFCs to

decipher their long run viability.

e) Beware of glossy and misleading advertisements.

f) Avoid any NBFC offering unusually high interest rates which seem

`significantly higher' than prevalent rates offered by banks on similar

maturity periods.

g) Must prefer an NBFC with a nationwide network and more oriented towards

retail/ consumer finance activities due to significantly lower default rates

Apart from these dos and don'ts, the Reserve Bank of India also offers a

good data bank of the NBFCs which may be trusted. Particularly its website

at www.rbi.org. in has a list of over 500 NBFCs all over India which are

authorized by the RBI to accept public deposits. Similarly, the site also

gives out the names of hundreds of NBFCs which have been denied

registration. Also, there's substantial information on RBI rules and

notifications in the subject Overall and valuable source of information and

assessment regarding investment in NBFCs. Such an information base could

sometimes prompt investors to even look for alternatives.

T.Y.B.B. & I.


Talking about alternatives, Sheer Singh says that private sector banks rapidly

expanding their branch network in urban centers of India may emerge as preferred

alternatives to those NBFCs which are not among the top 20 in India.

He adds that high quality service being offered by new private sector banks;

beefing up of service and product levels by public sector banks; and expansion of

networks and product lines of the top NBFCs should offer investors other

alternatives.

On the future of NBFCs, Singh says: ``we foresee a bright future for the top 20

NBFCs in India.'' But it's not going to be a cakewalk. Says Singh: ``Considering

that in the future consumer-led growth rather than institutional-led growth would

be the trend, top NBFCs which focus on retail lending predominantly can

substantially leverage their networks to offer similar lending products offered by

banks.'' The focus has to be on marketing and service initiatives, he adds. And the

mantra for success: Offer cut-throat competition to banks.

T.Y.B.B. & I.


List of Non-Banking Financial Companies:

A. R. T. LEASING PRIVATE LIMITED.

144, M.C.ROAD, CHENGANNUR.

ALAPUZHA DISTRICT

KERALA

ADOR FINANCE LTD.

ADOR HOUSE, 6 K DUBASH MARG

MUMBAI - 400 023

AL BARR FINANCE HOUSE LTD

(FORMERLY KNOWN AS

ALBARAKA FINANCE HOUSE

LIMITED),

INDIA HOUSE NO. 2,

KEMPS CORNER,

MUMBAI – 400 036.

AD-MANUM FINANCE LTD

5, YESHWANT COLONY,

INDORE 452 003 (MP)

ADAYAR FINANCE & LEASING LTD.,

208, BHARATHI SALAI,

ROYAPETTAH,

CHENNAI – 600 014

ALPIC FINANCE LTD.,

NEW EXCELSIOR BLDG.,

6TH FLOOR,

WALLACE STREET, FORT,

MUMBAI - 400 001

ALTA LEASING & FINANCE LTD.

ALTA BHAVAN,

532, SENAPATI BAPAT MARG

DADAR,

MUMBAI - 400 028

ANMOL FINANCIAL SERVICES LTD

A -66, IST FLOOR,

GURU NANAK PURA , VIKAS MARG,

DELHI - 110092

ANNA FINANCE LIMITED

16 B/9, DEV NAGAR,

ABIRAMI FINANCIAL SERVICES

(INDIA) LTD

T.Y.B.B. & I.


D.B. GUPTA ROAD,

KAROL BAGH,

157, HABIBULLAH ROAD, T. NAGAR,

CHENNAI - 600 017

AMARPREET FINANCE PVT. LTD.,

182, NEW JAWAHAR NAGAR,

JALANDHR.

ANNA FINANCE LIMITED

16 B/9, DEV NAGAR,

D.B. GUPTA ROAD,

KAROL BAGH,

NEW DELHI -110005

Conclusion:

T.Y.B.B. & I.


NBFCs are gaining momentum in last few decades with wide variety of products

and services. NBFCs collect public funds and provide loan able funds. There has

been significant increase in such companies since 1990s. They are playing a vital

role in the development financial system of our country. The banking sector is

financing only 40 per cent to the trading sector and rest is coming from the NBFC

and private money lenders. At the same line 50 per cent of the credit requirement

of the manufacturing is provided by NBFCs. 65 per cent of the private construction

activities was also financed by NBFCs. Now they are also financing second hand

vehicles. NBFCs can play a significant role in channelizing the remittance from

abroad to states such as Gujarat and Kerala.

NBFCs in India have become prominent in a wide range of activities like hire

purchase finance, equipment lease finance, loans, investments, and so on. NBFCs

have greater reach and flexibility in tapping resources. In desperate times, NBFCs

could survive owing to their aggressive character and customized services. NBFCs

are doing more fee-based business than fund based. They are focusing now on

retailing sector-housing finance, personal loans, and marketing of insurance. Many

of the NBFCs have ventured into the domain of mutual funds and insurance.

NBFCs undertake both life and general insurance business as joint venture

participants in insurance companies. The strong NBFCs have successfully emerged

as ‘Financial Institutions’ in short span of time and are in the process of converting

themselves into ‘Financial Super Market’. The NBFCs are taking initiatives to

establish a self-regulatory organization (SRO). At present, NBFCs are represented

by the Association of Leasing and Financial Services (ALFS), Federation of India

Hire Purchase Association (FIHPA) and Equipment Leasing Association of India

(ELA). The Reserve Bank wants these three industry bodies to come together

T.Y.B.B. & I.


under one roof. The Reserve Bank has emphasis on formation of SRO Particularly

for the benefit of smaller NBFCs.

T.Y.B.B. & I.


Bibliography

BOOKS :-

1) Statutory guidance’s for non- banking financial companies. –

Taxman.

WEBSITES:-

www.NBFC.com

www.RBI.com

www. How Stuff Works.com

www. Wikipedia.com

T.Y.B.B. & I.

38293475 project on nbfc

Documents

james raj

appoint special

require prior

banking financial

banking financial

capital market

indian financial

national housing