ch.5-nbfc and norms

8/13/2019 Ch.5-NBFC and Norms

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Non Banking Institutes

and Norms


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INTRODUCTION

A company whose principal business is to receive

deposits and lend funds, but not qualified

enough to be called as a Bank as qualified in

Banking Regulation Act, 1949.


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WHAT IS AN NBFC?

As per Sec. 45 I (f) of RBI Act, 1934

A financial institution is an NBFC

which has a principle business of receiving deposits

under any scheme or an arrangement or lending in

any manner,

Approved by Central Govt. and Notified by Official

Gazette.


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NBFC V/s BANKi. an NBFC cannot accept demand deposits

ii. it is not a part of the payment and settlementsystem - cannot issue cheques to its customers; and

iii. deposit insurance facility of DICGC (Deposit

Insurance and Credit Guarantee Corporation) is notavailable for NBFC depositors.

iv. U/S 45-IA of the RBI Act, 1934, it is mandatory that

every NBFC should be registered with RBI tocommence or carry on any business of nonbanking

financial institution


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Types of NBFC

i. Asset Finance Company (AFC)

ii. Investment Company (IC)

iii. Loan Company (LC)


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i. Asset Finance Company (AFC)

Its principal business the financing of physical assetssupporting productive/ economic activity,

e.g. Automobiles, tractors, generators sets, general

purpose industrial machines.

It is regulated by RBI.


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ii. Investment Company (IC)

Company that is a financial institution carrying on,

its principal business, the acquisition of securities.

e.g. Kotak Mahindra Investment Co.

Tata Investment Corp. Ltd.

It is regulated by RBI.


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iii. Loan Company (LC)

A company that is a financial institution whose

principal business is providing finance, whether bymaking loans or advances or otherwise for any

activity other than its own, but does not include an

asset finance company. e.g. Birla Financial Corp. ltd.

Standard Charted Finance Ltd.

Regulated by RBI.

O h l


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Other Types Regulatory

Authority Stock broking Co. -SEBI

Merchant banking co. -SEBI

Insurance Co. -IRDA

Housing Finance co. -National housingbank

Micro finance co. -Dept. of co. affairs

of the Govt. of India.


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Residuary Non Banking Companies:Company which receives deposits under any scheme bywhatever name , in one lump-sum or ininstallments by way of contributions or subscriptions or by saleof units or certificates or other instruments, or in any manner.A type of NBFCs.Governed by the provisions of Residuary Non-BankingCompanies (Reserve Bank) Directions, 1987.At present ,there are 4 companies operate as RNBCs inIndia.Peerless General Finance and investment Company Limited(PGFIL) is the largest RNBC.


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Only class of NBFCs for which the floor rate of interest fordeposits is specified by the RBI. Can accept deposits for a minimum period of 12 months and

maximum period of 84 months from the date of receipt of suchdeposit. Cannot accept deposits repayable on demand. The amount payable by way of interest, premium, bonus orother advantage, by whatever name called in respect of depositsreceived:

Shall not be less than the rate of 5 (to be compoundedannually) on the amount deposited in lump sum or atmonthly or longer intervals; At the rate of3.5 (to be compounded annually) on theamount deposited under daily deposit scheme.


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To secure the interest of depositor, RNBCs are required to investin a portfolio comprising of highly liquid and secure instrumentslike- Central/State Government securities, Fixed deposits with scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, Units of Mutual Funds, etc


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Mutual Benefit Financial Companies: A company structure in which the company's owners are alsoits clients. The mutual company's profits are distributed to itsparticipating customers each year in proportion to theirindividual exposures to the company. Many insurance companies are structured as mutualcompanies, meaning that policyholders have the right toreceive portions of the company's profits, and often may electthe company's management. Also known as Nidhis


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Type of NBFCs notified under Section 620 A of CompaniesAct, 1956. Regulated by the Department of Company Affairs (DCA). Are exempt from the provisions of the RBI Act and NBFCdirections Act,1956.


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Miscellaneous Non Banking Companies Engaged in chit fund business. RBI regulates only the deposits accepted by thesecompanies, not the chit fund business. Chit fund business is administered by the respective state

governments.


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Regulatory Norms and

Directions for NBFCs


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A. Important statutory provisions of

chapter 3B of the RBI Act as

applicable to NBFCs


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Subject Particulars

Certificate of registration No company can commence or carry on

NBFC without obtaining CoR from RBI.

Pre-requisite for CoR - Minimum NOF(netowned fund) of 25 lakhs

Maintenance of liquid assets Investment, in unencumbered approved

securities, of an amount not less than 5%but not exceeding 25% of the deposits

outstanding at the close of business on the

last working day of the second preceding

quarter

Creation of reserve fund NBFC shall create reserve fund and

transfer thereto a sum not less than 20%

of net profit as disclosed in P&L account

before any dividend is declared


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B. Directions applicable to

NBFCs


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1. Deposit Acceptance related

Regulation


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a) Ceiling on quantum of public

deposits

Loan and investment companies - 1.56 times of NOF if:

1. NOF- Rs 25 lakhs

2. Minimum Investment Grade (MIG) credit rating

3. Capital to Risk Assets Ratio(CRAR)-15% Equipment leasing and hire purchase finance companies - If

company has NOF of Rs 25 lakhs.

A. With MIG credit rating and 12% CRAR - 4 times of NOF

B. Without MIG credit rating but CRAR 15% or above1.5times of NOF, or Rs 10 crore whichever is less


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b. Investment in liquid assets

NBFCs - 15 % of outstanding public deposit liabilities of which:

a) not less than 10% in approved securities,

b) not more than 5 % in term deposits with scheduled

commercial banks

RNBCs10%of outstanding deposit liabilities

Liquid assets securities are required to be lodged with scheduledcommercial bank or Stock Holding Corporation of India Ltd. Or

a depository


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C. Period of Deposits

NBFCs12 to 60 months

RNBCs12 to 84 months

MNBCs6 to 36 months


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d. Ceiling on deposit rate

NBFCs, MNBCs and Nidhis12.5% p.a.

RNBCsMinimum interest of 4 % on daily deposits and 6 %

on other than daily deposits


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e. Advertisement and methodology for

acceptance deposits/public deposits

Every company accepting deposits by advertisement has to

comply with advertisement rules prescribed in this regard, the

deposit acceptance form should contain certain prescribed

information, issue receipt for deposits, and maintain a deposit

register


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f. Submission of returns

All NBFCs have to submit periodical returns to RBI at

quarterly, half-yearly and annual intervals.

Provisional return for the quarter ended March may be

submitted within 30 days of the close of the quarter and final

return should be submitted within a copy of the audited

balance sheet as soon as the same is finalised but not later

than Sept. 30 of the year


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CRAR

Type of companies CRAR

Hire purchase finance companies (with MIG credit rating) 12%

Hire purchase finance companies (without MIG credit

rating)

15%

Loan/Investment companies 15%

RNBCs 12%


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Restrictive Norms

Acceptance of public deposits

Defaulter cant create further assets

Investments in real assets prohibited to 10% No investment in real estate or unquoted

shares

Sufficient adjustment period is allowed


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Reporting System

Half yearly return to be submitted

Time allowed for submission is 3 months

Certified by the statutory auditors


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Norms

Income recognition norms

NPA norms

Restrictive norms

Policy on demand/call loans

Accounting Standards

Asset Classification


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Accounting for investments

Investments

Short-term

Quoted Unquoted

Long-term


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Provision for NPA

(Loans and Advances)

State of Asset Provision

Standard No Provision

Sub-standard10% on outstanding amount

Doubtful

Unsecured : 100%

Secured : depending on the age of doubtful assets

Loss 100% on outstanding amount


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Provision for NPA

(Equipment Lease & Hire Purchase)

Time period Provision

12 months to 24 months 10% on NBV

24 months to 36 months40% on NBV

36 months to 48 months70% on NBV

48 months and more 100% on NBV


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Risk weights

Credit Conversion factors

Risk weights are applied to all assets except

intangible assets

After netting off provisions

Risk weights

Assets deducted from own fund to be assigned 0%

Exposure to AIFIs at 20%

Balance sheet items at 50%


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Disclosures

Disclose provision as outlined above

Provisions shall not be appropriated from GR

Provisions shall be debited to P & L A/c


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FINANCIAL HIGHLIGHTS OF NBFCs

2000-2006 SCENARIO

2000-01Decline in the income of NBFCs REASONDrop in the fund based income which contributed

94% in this decline

2001-02Decline trend continued. Loss of Rs 212 crore reported

2002-03Decline trend broke NBFCs reported profit of Rs 325 crore


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CONTD..

March 2006NBFCs held Rs 22842 crore of

public deposits.

Major chunk of public deposits was held by

RNBCs ( Residual non-banking companies)

which was little over 80%


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1998- INTRODUCTION OF CRAR

Following the 1997 scam, capital adequacy

norms were made applicable to NBFCs

CRARCapital to risk weighted average ratio

According to norms

Every NBFC shall maintain a minimum capital ratio

consisting of tier 1 & 2 capital that shall not be

less than 12 per cent on or before 31 March 1999,of its aggregate risk weighted assets and of risk

adjusted value of off-balance sheet items.


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CONTD. .

NBFCs with less than 10 CRAR were existed

during 2000-01

Almost 73 % NBFCs had above 30% CRAR as

on 31 march 2001

As on 2006, around 94 % NBFCs had achieved

capital adequacy norms of more than 12%

In march 2006 there were only 19 NBFCs with

less than 12 CRAR


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2005-THE RBI RESTRICTIONS

The RBI placed restrictions on BANK FUNDINGSTO NBFCs in August 2005.

Key features :

Banks are not allowed to lend to NBFCs if: Investments of NBFCs in shares & debentures of any

company.

Grants of unscheduled loans to and inter-corporatedeposits by NBFCs in any company

Loans by NBFCs to subsidiaries any group companiesand funding to NBFCs for on-lending to individuals forsubscribing to IPOs and discounting or rediscountingof bills by NBFCs.


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CONTD. .

Shares and debentures can not be accepted ascollateral for secured loans granted to NBFCs.

Banks funding to RNBFs will be restricted to

their net owned funds(NOF) Banks are not allowed to execute guarantees

covering intercompany deposits and loans toNBFCs

Banks cannot provide bridge loans of any kindagainst an upcoming equity or bond issue .


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CONTD. .

Banks cannot provide bridge loans of any

other form such as floating rate bonds.

Banks cannot enter into lease agreements

with equipment leasing firms .


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SMALL & LARGE NBFCs

Small NBFCs focus on deposit taking

Large NBFCs focus on asset financing

Large NBFCs have specialized skills in credit

intermediation and have a collective assetbase of Rs 17000 crore.

NBFCs are leader in financing commercial

vehicles, tractors and autotomobiles They offer personal loans , insurance and

various other services


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BANKS & NBFCs

Banks are entering the niche markets of NBFCs

Banks have edge over NBFCs as they haveassess to low cost deposits which NBFCs dont.

Foreign banks floated in India as a result ofwhich no of NBFCs increased

RBI tightened the norms in 2006 according to

which, non-deposit taking NBFCs having assetsof Rs 100 crore will be subject to exposure andcapital adequacy norms.


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NEW GUIDELINESRBI(2006)

RBI tightened the norms in 2006 according towhich, non-deposit taking NBFCs having assets ofRs 100 crore will be subject to exposure andcapital adequacy norms.

Banks will not be able to lend indiscriminately tothem .

Banks will not be allowed to hold more than 10percent equity stake in deposit taking NBFCs

Foreign banks with NBFC subsidies will berequired to include the activities of their NBFCarms in their reporting to Reserve Bank.

ch.5-nbfc and norms

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