NON BANKING FINANCIAL COMPANY(NBFC)Presented by:Pervez Tamboli (Roll No. 55)

Introduction Role of NBFC Classification of NBFCs Eligibility & Registration of NBFC Accepting Deposit mechanism of NBFC Prudential Norms on NBFCs FDI in NBFCs

What will Cover?

“Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956. and conducting financial business as their principle business.’

Any company 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 etc.

E.g: Sundaram Finance, Cholamandalam Investments, Bajaj Finance Ltd.

What is NBFC?

NBFCs are required as they have a greater reach to various markets and have great efficiency in mobilizing funds. Generally banks to reduce their operational costs establish NBFC. NBFC enjoys many liberal policies by RBI in comparison with the commercial banks. However this scenario is changing. RBI now has strict measures for NBFCs also.

All NBFCs are under direct control of RBI in India.

NBFCs: Why are they required?

As recognized by RBI and expert committees

Development of sectors like Transport & Infrastructure

Substantial employment generation

Help & increase wealth creation

Broad base economic development

Irreplaceable supplement to bank credit in rural segmentsmajor thrust on semi-urban, rural areas & first time buyers /

users

To finance economically weaker sections

Huge contribution to the State exchequer

Role of NBFCs

Dynamic of Indian financial system

Financial Intermediaries Financial Market Financial Assets

Banks NBFC MutualFunds

Insurance Organization

Leasing CompaniesHire-Purchase/Consumer Finance CompaniesHousing Finance CompaniesVenture Capital FundsMerchant Banking OrganizationCredit Rating AgenciesStock broking firmsDepositories

Money Mkt Capital Mkt

Secondary Mkt

Primary Mkt

Primary/Direct

EquityPreference Debenture

Innovative debt

instruments

Indirect

Mutual Fund UnitsSecurity Receipts

Derivatives

ForwardFutureOption

Hierarchy of NBFCs in India

NBFIs

Development Finance

Institutions (DFI)

Non Banking Financial Company (NBFC)

Insurance Company

Mutual Funds

Investment Company

Equipment Leasing

Loan CompanyHire-Purchase

Leasing

Re-Classification of NBFCs

Asset Finance (AF)

Investment Company (IC)

Loan Company (LC)

NBFCs

With effect from December 6, 2006 , the NBFCs registered with RBI have been reclassified as follows:-

Classification of NBFCs according to RBI

NBFCs

Accepting DepositsNBFC-D

Not Accepting Deposits

NBFC- ND

 NBFCs are classified into two categories

NBFC accepting deposits from customersNBFC which do not take deposits from customers

Residuary Non-Banking Company is a class of NBFC whose principal business is receiving of deposits, under any scheme or arrangement. The deposits received do not involve investment, asset financing, or loans.

These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds

Sahara Mutual Fund was the first RNBC started in India.

Residuary NBFCs

The history of the NBFC Industry in India is a story of under-regulation followed by over-regulation. Policy makers have swung from one extreme position to another in their attempt to set controls and then restrain them so that they do not curb the growth of the industry.

James Raj Committee (1974) Chakravarthy Committee (1984) Vaghul Committee (1987) Narsimhan Committee (1991) Dr. A.C.Shah Committee (1992) Khanna Committee (1995) Vasudev Committee (1998)

Historical Background

NBFCs are doing functions akin to that of banks, however there are a few differences:

NBFC cannot accept demand deposits

It is not a part of the payment and settlement system

Accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.

They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. (Currently the ceiling rate is 12.5%)

They should have minimum investment grade credit rating from the credit rating agencies

NBFCs v\s Banks

The company with its principal business as (a) Agricultural operations (b) Industrial activity (c) The purchase or sale of any goods (other than

securities) or the providing of any services (d) The purchase, construction or sale of

immovable property, Moreover no portion of the income should be derived from the financing of purchases, constructions or sales of immovable property by other persons

Who Can’t be NBFC’s?

In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

NBFC’s Exempted from Registration with RBI:

Housing Finance Companies Merchant Banking Companies Nidhi Companies Insurance Companies Chit Fund Companies

Registration of NBFCs with RBI

Incorporation status:

A company must be incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934

Capital Requirement:

The start up company should have a minimum net owned fund (NOF) of Rs 25 lac which is raised to Rs 200 lac from April 21, 1999.

Eligibility criteria for starting NBFC

Net Owned Fund (NOF)Particulars AmtPaid Up Capital XXXX

Free Reserve XXX

Less:

Accumulated Losses (XX)

Deferred revenue exp. (XX)

Other intangible assets (XX)

Investment in shares of Subsidiaries (XX)

Finance made & Deposits with NBFC in excess of 10% of owned fund

(XX)

NOF 200 Lakhs

Name of rating agencies Level of minimum investment grade credit rating (MIGR)

CRISIL FA- (FA MINUS)

ICRA MA- (MA MINUS)

CARE CARE BBB (FD)

FITCH Ratings India Pvt. Ltd tA-(ind)(FD)

Minimum Investment Level Credit Rating:

NBFC with Minimum NOF can accept public deposits, provided they obtain minimum investment Level ratings for their Fixed assets deposits from one of the approved rating agencies at least once in a year as per RBI guidelines.

(I) NBFCs having Net Owned Fund (NOF) of more than 200 Lacs

Ceiling on NBFC-D (Taking Public deposits)

Category of NBFC Ceiling on public deposits

AFCs maintaining CRAR of 15% without credit rating

1.5 times of NOF or Rs 10 crore whichever is less

AFCs with CRAR of 12% and having minimum investment grade credit rating

4 times of NOF

LC/IC with CRAR of 15% and having minimum investment grade credit rating

1.5 times of NOF

(ii) NBFCs having NOF more than 25 lakhs but less than 200 Lakhs

Ceiling on NBFC-D (Taking Public deposits)

Category of NBFC Ceiling on public deposits

AFCs maintaining CRAR of 15% without credit rating

Equal to NOF (1xNOF)

AFCs with CRAR of 12% and having minimum investment grade credit rating

1.5 times of NOF

LC/IC with CRAR of 15% and having minimum investment grade credit rating

Equal to NOF( 1xNOF)

The NBFCs accepting public deposits should furnish to RBI:

Audited balance sheet of each financial year Audited P&L a\c of each financial year Statutory Annual Return on deposits Certificate from the Auditors that the company is in a

position to repay the deposits as and when the claims arise. Quarterly Return on liquid assets A copy of the Credit Rating obtained Monthly return on exposure to capital market by

companies having public deposits of Rs 50 crore and above

Ongoing Regulations: NBFCs-D (Holding Public Deposits)

The NBFCs-ND having assets size of Rs 100 crore are required to submit a Monthly Return on important financial parameters of the company

Board resolution to be passed to the effect that the company have neither accepted public deposit nor would accept any public deposit during the year

Other Regulations: NBFCs-ND (Not Holding Public Deposits)

NBFCs should comply with RBIs policies and directions regarding prudential norms and Deployment of funds:

Income RecognitionAccounting StandardsClassification of AssetsProvision for NPA (Non Performing assets)Capital AdequacyDeclaration of Purpose, Quantum & Advances of Loan

Prudential Norms

Minimum level of liquid asset to be maintained by NBFCs is 15 % of public deposits outstanding as on the last working day of the second preceding quarter .

Of the 15%, NBFCs are required to invest not less than 10% in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank.. Thus, the liquid assets may consist of government securities, government guaranteed bonds and term deposits with any scheduled commercial bank.

Maintenance of Liquid Assets:

Reserve Fund appropriation Advertisement and Statement in Lieu of

Advertisement Register of Deposits Downgrading of Credit Rating Information of Safe Custody of Approved

Security

Other Obligatory

(I) Public deposits are unsecured.

(ii) A proper deposit receipt which should, besides the name of the depositor/s state the date of deposit, the amount in words and figures, rate of interest payable and the date of maturity should be insisted. The receipt shall be duly signed by an officer authorized by the company in that behalf.

(iii) The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

While making deposits with a NBFC, the following aspects should be borne in mind:

FDI/NRI investments allowed in the following 19 NBFC activities:

FDI in NBFC sector

Merchant banking Credit Reference Agencies

Underwriting Credit rating Agencies

Portfolio Management Services

Leasing & Finance

Investment Advisory Services Housing Finance

Financial Consultancy Forex Broking

Stock Broking Credit card business

Asset Management Money changing Business

Venture Capital Micro Credit

Custodial Services Rural Credit

Factoring

Minimum Capitalization Norms for Fund based NBFCs:

For FDI up to 51% - US$ 0.5 million should be brought upfront

For FDI above 51% and up to 75% - US $ 5 million should be brought upfront

For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million should be brought upfront and the balance in 24 months

Regulations for FDI in NBFCs

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non- fund based NBFCs with foreign investment

Joint Venture operating NBFC’s which have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow

FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India.

Minimum capitalization norms for Non-fund based activities:

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