NON-BANKING FINANCE COMPANIES 1

Non-Banking Finance CompaniesRohit Sharma

MBA –III Sem. Student

Spe. Finance & Marketing

Date 30-08-2015

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NON-BANKING FINANCE COMPANIES 2

Non-bank financial institution(Meaning)

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.

NBFIs facilitate bank-related financial services, such as  investment,  risk pooling,  contractual savings, and  market brokering.

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Share of NBFC,s in INDIA…….

Bank63%

Insurance19%

NBFC'S8%

Mutual Funds6% Pen.&Por

4%

NBFC’S Share in INDIA

Bank Insurance NBFC'S Mutual Funds Pen.&Por

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4

Role in NBFC’S…..The role and importance of non-bank financial intermediaries is clear from the various functions performed by these institutions. Major functions of the NBFIs are as follows:

1. Financial Intermediation The most important function of the non-bank financial intermediaries is the transfer of funds from the savers to the investors.Financial intermediation is economical and less expensive to both small businesses and small savers,\(a) It provides funds to small businesses for which it is difficult to sell stocks and bonds because of high transaction costs,(b) It also benefits the small savers by pooling their funds and diversifying their investments.

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Continue… 2. Inducement to Save:Non-bank financial intermediaries play an important role in promoting savings in the country. Savers need stores of value to hold their savings in. These institutions provide a wide range of financial assets as store of value and make available expert financial services to the savers. As stores of value, the financial assets have certain special advantages over the tangible assets (such as, physical capital, inventories of goods, etc.). They are easily storable, more liquid, more easily divisible, and less risky. In fact, saving- income ratio is positively related to both financial institutions and financial assets; financial progress . induces larger savings out of the same level of real income. 

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Continue….3. GrowthSome research suggests a positive relation between a financial development and economic growth. The NBFC is also increase the growth of the NATION.

4. StabilityA multi-faceted financial system that includes non-bank financial institutions can protect economies from financial shocks/crisis and enable speedy recovery when these shocks happen. NBFIs provide “multiple alternatives to transform an economy's savings into capital investment, [which] serve as backup facilities should the primary form of intermediation fail

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NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

1. NBFC cannot collect deposits in the manner of a bank

2. NBFC cannot issue checks drawn on itself

3. NBFC cannot issue Demand Drafts like banks

4. NBFC cannot indulge primarily in agricultural or industrial activity

5. NBFC cannot engage in construction of immovable property

6. NBFC cannot accept demand deposits

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Types of NBFC,s in INDIA….1.Risk-pooling institutions Insurance companies underwrite economic risks associated with illness, death, damage and other risks of loss. In return to collecting an insurance premium, insurance companies provide a contingent promise of economic protection in the case of loss. There are two main types of insurance companies: general insurance and life insurance. General insurance tends to be short-term, while life insurance is a longer-term contract, which terminates at the death of the insured. Both types of insurance, life and general, are available to all sectors of the community.

Although insurance companies do not have banking licenses, in most countries insurance has a separate form of regulation specific to the insurance business and may well be covered by the same financial regulator that also covers banks. There have also been a number of instances where insurance companies and banks have merged thus creating insurance companies that do have banking licenses.

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Continue………2.Contractual savings institutions Contractual savings institutions (also called institutional investors) give individuals the opportunity to invest in collective investment vehicles (CIV) as a fiduciary rather than a principal role. Collective investment vehicles pool resources from individuals and firms into various financial instruments including equity, debt, and derivatives. Note that the individual holds equity in the CIV itself rather what the CIV invests in specifically. The two most popular examples of contractual savings institutions are pension funds and mutual funds.

The two main types of mutual funds are open-end and closed-end funds. Open-end funds generate new investments by allowing the public to purchase new shares at any time, and shareholders can liquidate their holding by selling the shares back to the open-end fund at the net asset value. Closed-end funds issue a fixed number of shares in an IPO. In this case the shareholders capitalize on the value of their assets by selling their shares in a stock exchange.

Mutual funds are usually distinguished by the nature of their investments. For example, some funds specialize in high risk, high return investments, while others focus on tax-exempt securities. There are also mutual funds specializing in speculative trading (i.e. hedge funds), a specific sector, or cross-border investments.

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Continue…… 3.Market makers Market makers are broker-dealer institutions that quote a buy and sell price and facilitate transactions for financial assets. Such assets include equities, government and corporate debt, derivatives, and foreign currencies. After receiving an order, the market maker immediately sells from its inventory or makes a purchase to offset the loss in inventory. The differential between the buying and selling quotes, or the bid–offer spread, is how the market-maker makes profit. A major contribution of the market makers is improving the liquidity of financial assets in the market.

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Continue……….. 4.Specialized sectorial financiers They provide a limited range of financial services to a targeted sector. For example, real estate financiers channel capital to prospective homeowners, leasing companies provide financing for equipment and payday lending companies that provide short term loans to individuals that are Underbanked or have limited resources. for example Uganda Development Bank

5.Financial service providers Financial service providers include brokers (both securities and mortgage), management consultants, and financial advisors, and they operate on a fee-for-service basis. Their services include: improving informational efficiency for the investors and, in the case of brokers, offering a transactions service by which an investor can liquidate existing assets.

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TOP 10 NBFC’S in INDIA….. 1. HDFC 2. Power Finance Corporation 3. Reliance Capital 4. Infrastructure Development Finance Company 5. Rural Electricity Corp. 6. Shree Global 7. Shriram Transport Finance 8. Bajaj Holdings 9. M & M Financials 10. Muthoot Finance22-04-2015

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Type of Services provided by NBFCs:….Types of services under non-banking finance services include the following:

1. Hire Purchase Services 2. Leasing Services 3. Housing Finance Services 4. Asset Management Services 5. Venture Capital Services 6. Mutual Benefit Finance Services (Nidhi) banks. 

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Continue……..1.Hire Purchase Services Hire purchase the legal term for a conditional sale contract with an intention to finance consumers towards vehicles, white goods etc. If a buyer cannot afford to pay the price as a lump sum but can afford to pay a percentage as a deposit, the contract allows the buyer to hire the goods for a monthly rent. If the buyer defaults in paying the installments, the owner can repossess the goods. HP is a different form of credit system among other unsecured consumer credit systems and benefits. Hero Honda Motor Finance Co., Bajaj Auto Finance Company is some of the HP financing companies.

2.Leasing Services A lease or tenancy is a contract that transfers the right to possess specific property. Leasing service includes the leasing of assets to other companies either on operating lease or finance lease. An NBFC may obtain license to commence leasing services subject to , they shall not hold, deal or trade in real estate business and shall not fix the period of lease for less than 3 years in the case of any finance lease agreement except in case of computers and other IT accessories. First Century Leasing Company Ltd., Sundaram Finance Ltd. is some of the Leasing companies in India.

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Continue………3.Housing Finance Services 

Housing Finance Services means financial services related to development and construction of residential and commercial properties. An Housing Finance Company approved by the National Housing Bank may undertake the services /activities such as Providing long term finance for the purpose of constructing, purchasing or renovating any property, Managing public or private sector projects in the housing and urban development sector and Financing against existing property by way of mortgage.

4. Asset Management Company Asset Management Company is managing and investing the pooled funds of retail investors in securities in line with the stated investment objectives and provides more diversification, liquidity, and professional management service to the individual investors. Mutual Funds are comes under this category. Most of the financial institutions having their subsidiaries as Asset Management Company like SBI, BOB, UTI and many others. 

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Continue………5.Venture Capital Companies Venture capital Finance is a unique form of financing activity that is undertaken on the belief of high-risk-high-return. Venture capitalists invest in those risky projects or companies (ventures) that have success potential and could promise sufficient return to justify such gamble. Venture capitalist not only in India and SIDBI, IDBI and others also promoting venture capital finance activities.

6.Benefit Finance Companies (MBFC's), A mutual fund is a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities/bonds. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification.

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Financial Sector Reforms & Liberalization measures for NBFCs

 During the period from 1992-93 to 1995-96 Indian Government took many steps to reform the financial sector like liberalized bank norms, higher ceiling on term loans, allowed to set their own interest rates, freed to fix their own foreign exchange open position subject of RBI approval and guidelines issued to ensure qualitative improvement in their customer service. 

Foreign equity investments in NBFCs are permitted in more than17 categories of NBFC activities approved for foreign equity investments such as merchant banking, stock broking, venture capital, housing finance, forex broking, leasing and finance, financial consultancy etc. Guidelines for foreign investment in NBFC sector have been amended so as to provide for a minimum capitalization norm for the activities, which are not fund based and only advisory, or consultancy in nature, irrespective of the foreign equity participation level. 

The objectives behind the reforms in the financial sector are to improve the efficiency and competitiveness in the systems. 

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Recent trends in Non-Banking Financial Companies Sector 

NBFCs initially cater to the needs of individual and small savings investors and later developed into financial institutions, providing services similar to those of banks. NBFCs have many tailor made services for their clients with lesser degree of regulation. They have offered high rate of interest to their investors and attracted many small size investors. In 1998, Reserve Bank of India implemented unprecedented regulatory measures to safeguard the public deposits. 

The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions interalia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares. 

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Conclusion…NBFC,s are gaining momentum in last few decades with wide verity of products and services. NBFC,s collect public funds and provide loan funds. There has been significant increase in such companies since 1990s.They are playing a vital role in the development of 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 time 50 per cent of the credit requirement of the manufacturing is provide by NBFC,s.Now they are also financing second hand vehicles. NBFC,s can play a significant role in Channelizing the remittance from abroad to state such as Gujarat and kerla.NBFC’s in India Have Become prominent in a wide range of activities like hire purchase finance, equipment lease finance, loans ,investment bad so on. NBFC’s have greater reach and flexibility in tapping resource. In desperate time, NBFC’s could survive owing to their aggressive character and customized service. NBFC,s are doing more fee-based business than fund based. They are focusing now on retailing sector finance, personal loans and marketing of insurance. Many of NBFC,s have ventured into the domain of mutual funds and insurance. NBFC’s undertake both life and general insurance busied as joint venture participant in insurance companies. The Strong NBFC,s have successfully emerged as Financial Institution in short span of time and are in progress of converting themselves into Financial Super Market. The NBFC’s are taking initiatives to establish a self-regulatory organisation. At present NBFC,s are represented by the Association of Leasing and Financial Service(ALFS0 and Equipment Leasing Association of INDIA(ELA).The Reserve Bank wants these three industries bobbies to come together.

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Websites….The RBI has issued guidelines for entry of NBFCs into insurance sector in June 2000 . Accordingly no NBFC registered with RBI having owned fund of Rs.2 Crore as per the last audited Balance Sheet would be permitted to undertake insurance business as agent of insurance companies on fee basis, without any risk participation. WEBSITES:- www.NBFC.com WWW.RBI.com WWW.HowStuffWork.com WWW.Wikipedia.com

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