Prepared By: Dilip

GajiparaAnkit

SolankiVishal

Gogari

Non Banking Financial Companies

Introduction

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The non-banking financial sector in India has recorded marked growth in the recent years, in terms on number of NBFCs, their deposits and so on.

After considering the growth of NBFCs, the banking laws of 1963 was introduced to regulate them.

Able to carve niche in meeting credit need of wholesale and retail customers.

NBFC

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It means A financial institutions that is company A non–banking institution that is a company

whose principal business is the receiving of deposits under any scheme or arrangement or lending in any manner

Other non banking institutions with prior approval of GOI.

It excludes FI which carry on agricultural operations as their principal business.

Cont…

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It is only non–banking institution that is any hire–purchase finance, investment, loan or mutual benefit financial company and an equipment leasing company but excludes and insurance company/stock exchange/stock broking company/ merchant banking company.

Difference between NBFC and Bank

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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.)

It is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and

deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

Categorization of NBFCDepending on the nature and type of service

provided. Asset Finance, Consumer Finance, Investment, and

loan company, and factoring and forfaiting organization-RBI

Housing finance companies-NATIONAL HOUSING BANK

Merchant banking organizations, stock broking firm, depositories, credit rating agencies, and venture capital funds-SEBI

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RBI Act Framework The RBI regulates different types of NBFCs

under the provision of chapter III-B and chapter III-C of the RBI act.

It was amended in 1997.

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Salient features of chapter III-B Deposits: the term deposit is defined in a broad sense

to include any receipt of money by way of deposit or loan or any other form. However, certain receipts are excluded:

• Amount received from banks, development finance corp., other financial institutions, individual/firm/association related to money lending, and ordinary course of business, security deposit, dealership deposit, earnest money, advance against order for goods/property/services, loan from mutual funds.

Financial Institution: These mean any non banking institution/financial company.

• Hire purchase, loans, advances, insurance and stock broking etc.

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Registration

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With effect from Jan 1997, to commence a new company or to carry on existing company the business of NBFC must obtain certificate of registration from RBI.

Net Own Funds

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NOF means• Paid up capital • Free reserves – accumulated losses, deferred

revenue expenditure and other intangible assets • Less investments in shares• Less the book value of

debentures/bonds/outstanding loans and advances including hire-purchase and lease finance.

Minimum NOF must be rs. 25 lakh or such other amount not exceeding Rs 200 lakh.

Maintenance of Assets

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They have to invest in unencumbered approved Indian securities 5% or more their outstanding deposits at the close of business on the last working day of second preceding quarter.

Approved securities – it means securities of any state government or central government and bonds unconditionally guaranteed by them as regards the payment of interest as well as repayment of principal.

Cont…

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Included in unencumbered approved securities are approved securities lodged by NBFCs with other institutions for an advance/any other arrangement.

The basis of valuation of such securities would be the cost or current market price.

Reserve Fund

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Every NBFC must create a reserve fund to which at least 20% of its net profits must be transferred before the declaration of any dividend.

Power of regulation

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RBI can general regulate or prohibit the issue by any NBI of any prospectus or advertisement soliciting deposits of money form the public and also specify conditions subject to which they can be issued.

Type of NBFC

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1. An equipment leasing company (ELC)2. A hire purchase company (HPC)3. An investment company (IC)4. A loan company(LC)5. A mutual benefit financial companies

(MBFC)I.e. Nidhi companies

Mutual Benefit Finance Company

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A MBFC is a financial institution notified by the government under section 620-A of the companies act.

MBFCs or Nidhis were exempt from provision of RBI’s NBFCs directions.

MNBCs

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A company or Financial Insititute carrying all or any of following types of business.

collection of money in one lump sum/installments by way of • Contributions• Sale of units/certificates/other instruments• In any manner• As membership/admission fee/• Service charges to with respect to Mutual

benefit, any savings, thrift etc.

RNBC

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All non banking financial institutions other than NBFC, MBFC and MNBCs are known as RNBCs.

Public Deposits

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It include FD, Recurring deposits, deposits received from relatives and friends, shareholders by public limited company and money raised by issue of unsecured debentures/bonds.

It will not include money raised by NBFCs by way of issue of secured debentures/bonds, borrowings from banks/ financial institutions deposit form directors, foreign citizens, private limited companies form their shareholders.

RBI (Amendment) Act, 1997 March

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Minimum NOF Rs. 25 lakh Compulsory registration with RBI Maintenance of liquid assets Creation of reserve fund into with 20% of Net

profit should be transferred

Minimum credit ratings

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NBFCS that have minimum NOF of 25 lakh can accept public deposits but they must have minimum investment grade for their FD from one of approved rating agencies at least once a year.

A copy of rating should be sent to RBI along with the return.

Credit rating agency such as CRISIL, ICRA, CARE.

Ceiling on quantum of deposits for ELC/HPC

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NOF – Rs. 25 Lack Capital adequacy ratio – 15% (As per last

balance sheet) Acceptance of deposits – 1.5 times of NOF or

10 cr which ever is lower. If they have minimum grade – 4 times of NOF

LC/IC

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NOF – Rs. 25 lakh or more Min Investment grade 15% adequacy ratio as per last balance sheet. If AAA ratings – ad. Ratio is below 15%- they

are prohibited from accepting/renewing deposits in excess of amount outstanding as on Dec 18 1998 or 1.5 NOF – which ever is low.

Cont…

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If grading is AA – but with less than 15% ad ratio than its allowed to accept public deposit upto its NOF till it attains 15%

If grading is A – and ad ratio is less than 15% the ceiling on deposit is one half of NOF.

Interest rate ceiling

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It is the rate of interest on deposits. It is paid or compounded at rests but not

shorter than monthly rests. Currently ceiling is 12.5%.

Brokerage

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Brokerage payable by NBFCs on deposit of one year to five years has at 2% uniformly.

The permissible brokerage commissions, incentives, or any other benefit on deposits with all NBFC is 2% of the deposit.

The expenses, by way of reimbursement on the basis of related vouchers/bill produced, up to 0.5% of the deposits are also permitted.

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