Recently Mickey & Donald, the two iconic cartoon characters from the house of Walt Disney were spotted discussing something very unusual. The

excerpts of their conversation are given as under:

Mickey- Donald, the whole world is in the grip of recession. Even we are also feeling it’s pinch. Our

management is saying that our contribution to their top line has declined by 24% in the last quarter. Its an

alarming signal for us.Donald- Also most of our shows have gone off air now.

It’s a big question now that what shall we do to safeguard our future?

Mickey- I think it’s high time that we should step out of our comfort zone and try our luck outside the

Disneyland. I am planning to move to India to pursue a career in Finance because it is said that countries like

China & India are best equipped to handle this crisis. In China we will face the language problem so India will be

our best bet.Donald- But I don’t have any knowledge in this domain.Mickey- Don’t worry Donald, I will teach you everything

before you enter the rat race. Donald- Then, I am also ready to start now.

What is an NBFC?

•An NBFC broadly carries out lending functions and investment functions

•It can also accept deposits, though only for a fixed term (they cannot be withdrawn whenever the depositor wants). Hence, they are also less regulated than a bank

•Banks often establish NBFCs as a separate company, so that they can avail of the lesser regulatione.g. CitiFinancial, an NBFC, is a company wholly owned by Citigroup , which also holds a stake in Citibank. Such a wholly owned company is called a subsidiary.

Today Mickey will teach

Donald about the concept of

an NBFC

Thanks Mickey!

Now I have understood the

three basic traits of an NBFC.

DISTINCTION BETWEEN

A BANK & AN NBFC

The three differences between a bank and an NBFC are as follows:

NBFC Bank

1. An NBFC cannot accept deposits repayable on demand.

2. Any deposits accepted by NBFCs (these will be of fixed maturity as explained above) are not insured.

3. An NBFC cannot participate in the payment system

1. A bank can.

2. Bank deposits are insured upto Rs. 1 lakh per depositor, by the Deposit Insurance Credit Guarantee Corporation of India (DICGCI).

3. Banks can. Hence only banks can issue cheques drawn on themselves: i.e., can give their customers a cheque book to use.

Now I have got to know the

distinguishing features of

an NBFC and a Bank

•Scheduled and Non-scheduled: All banks with a deposit base < or =Rs. 200 Cr are ‘non-scheduled’ banks.

•Banks which have a deposits > Rs. 200 Cr are ‘Scheduled Banks’ – the technical definition of a Scheduled bank is ‘those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934’.

•Scheduled Banks are further divided into Commercial and Co-operative banks. The structure is given in the next slide:

Scheduled Banks in India

Scheduled Commercial Banks(217)

Scheduled Co-operative Banks(70)

Public Sector

Banks(27)

Private Sector

Banks(30)Foreign Banks

in India(40)Regional

Rural Banks(196)

Scheduled Urban Co-operative Banks(52)

Scheduled State Co-operative

Banks(16)

Nationalized Banks(19)

State Bank of India & its

Associates(8)Old Private

Sector BanksNew Private Sector Banks

Schedule Banking Structure in India(As on March 31, 2002)

A. Commercial Banks:

• Public Sector Banks (PSBs): PSBs are those where the Government holds a majority ownership. For example, if there are a 100 shares and the Central Government holds 51, LIC holds 25 and various members of the public hold 24, this will be a PSB. The State Bank of India (SBI) is a PSB and India’s largest bank. Punjab National Bank, Corporation Bank, Vijaya Bank, Central Bank of India are some more examples.

• Regional Rural Banks (RRBs): These are also banks with a Government ownership. The idea was to create banks which will focus on the rural areas and serve the underbanked sector. A scheduled commercial bank was to act as a sponsor of an RRB. The ownership pattern was set up as 50:15:35, with the Central government holding the majority share, the sponsor bank holding the second highest stake, and the rest by the respective state governments that housed the RRB.

• Private Banks: Private banks, as the name suggests, are banks owned by private (i.e. non-government) Indian entities such as corporates and individuals. ICICI Bank is the second largest bank in India, and is a private bank. HDFC Bank, Axis Bank, Yes Bank are some other examples.

• Foreign Banks: Foreign Banks are those owned by multi national/non-Indian entities. Citibank India for example, is owned by the US based Citi group. Deutsche Bank India is owned by Deustche Bank headquartered in Germany, and so on.

B. Co-operative Banks: •Urban Cooperative Banks (UCBs): Co-operative banks are formed by a group of members, and traditionally the thrust of UCBs, has been to mobilise savings from the middle and low income urban groups and accord credit to their members - many of which belonged to the weaker section.•State Co-operative banks: These are set up with state government partnership to help agricultural and rural development. For example, Andhra Pradesh State Cooperative Bank Limited (APCOB) is a Scheduled State Cooperative Bank for the State of Andhra Pradesh. The cooperative credit system in Andhra Pradesh with the APCOB at its apex level is a federal system consisting of a family of 22 affiliated District Cooperative Central Banks (DCCBs), which in turn, have 563 Branches and 2746 Primary Agricultural Cooperative Societies (PACS) through which, developmental agricultural credit is provided.

That’s enough for this session. Now I will conduct a small quiz to test whether you are ready to move

ahead or not.

Q 1. Which is the organisation which provides insurance cover for bank deposits?a)LICb)SBI Lifec)GICd)DICGCI

Q 2. An NBFC can accept deposits repayable on demand. State True or False.

Q3. Which is India’s second largest bank?a)Canara Bankb)Bank of Barodac)ICICI Bankd)PNB

Q4. An NBFC cannot participate in the payment system. State True or False.

Q5. In Public Sector Banks (PSBs) majority stake is held by a) GOI b) LIC c) Respective State Governmentsd) Others

Q6. The objectives behind setting up Urban Co-operative Banks were to

a)To mobilise savings from the middle & low income groupsb)To provide credit to their membersc)To help the weaker section of the societyd)All of the above

Q7. A Scheduled Commercial Bank act as a sponsor of an Regional Rural Bank (RRB). State True or False.

Q8. How many Scheduled Commercial Banks are prevailing in India, as per the March 31, 2002 data? Q9. Which category of Scheduled Banks were formed with various State Governments partnership to promote agricultural and rural development in the country?

Q10. What is the most primary reason behind the setting up of NBFCs as a separate entity by the banks?a)To give their NBFC operations more autonomyb)For more profitabilityc)To avoid the stringent regulations of RBId)None of the above

Q 11. All banks with a deposit base >Rs. 200 Cr are ‘non-scheduled’ banks. State True or False.

Q12. At present how many Regional Rural Banks are working in India?

a)70b)196c)52d)None of these

ANSWERSQ1. d) Q11. FalseQ2. False Q12. b)Q3. c)Q4. TrueQ5. a) Q6. d)Q7. TrueQ8. 217Q9. State Co-operative BanksQ10. c) (To be contd. if s……)

Hope I am

through!

Best Regards,Saurabh