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Non banking financial company

INTRODUCTION:

We studied about banks, apart from banks the Indian Financial System has a large number of
privately owned, decentralised and small sized financial institutions known as Non-banking
financial companies. In recent times, the non-financial companies (NBFCs) have contributed to
the Indian economic growth by providing deposit facilities and specialized credit to certain
segments of the society such as unorganized sector and small borrowers. In the Indian Financial
System, the NBFCs play a very important role in converting services and provide credit to the
unorganized sector and small borrowers.

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund
companies etc. NBFCs can be classified into deposit accepting companies and non-deposit
accepting companies. NBFCs are small in size and are owned privately. The NBFCs have grown
rapidly since 1990. They offer attractive rate of return. They are fund based as well as service
oriented companies. Their main companies are banks and financial institutions. According to
RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of India.

The NBFCs in advanced countries have grown significantly and are now coming up in a very
large way in developing countries like Brazil, India, and Malaysia etc. The non-banking
companies when compared with commercial and co-operative banks are a heterogeneous
(varied) group of finance companies. NBFCs are heterogeneous group of finance companies
means all NBFCs provide different types of financial services.

Non-Banking Financial Companies constitute an important segment of the financial system.
NBFCs are the intermediaries engaged in the business of accepting deposits and delivering
credit. They play very crucial role in channelizing the scare financial resources to capital
formation.

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NBFCs supplement the role of the banking sector in meeting the increasing financial need of the
corporate sector, delivering credit to the unorganized sector and to small local borrowers. NBFCs
have more flexible structure than banks. As compared to banks, they can take quick decisions,
assume greater risks and tailor-make their services and charge according to the needs of the
clients. Their flexible structure helps in broadening the market by providing the saver and
investor a bundle of services on a competitive basis.

Non Banking Finance Companies (NBFCs) are a constituent of the institutional structure of the
organized financial system in India. The Financial System of any country consists of financial
Markets, financial intermediation and financial instruments or financial products. All these
Items facilitate transfer of funds and are not always mutually exclusive. Inter-relationships
Between these are parts of the system e.g. Financial Institutions operate in financial markets and
are, therefore, a part of such markets.

NBFCs at present providing financial services partly fee based and partly fund based. Their fee
based services include portfolio management, issue management, loan syndication, merger and
acquisition, credit rating etc. their asset based activities include venture capital financing,
housing finance, equipment leasing, hire purchase financing factoring etc. In short they are now
providing variety of services. NBFCs differ widely in their ownership: Some are subsidiaries of
large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others are owned
by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital Market Ltd, Muthoot Bankers
Muthoot Financial Services Ltd a key player in Kerala financial services. Other financial
institutions are IFCIs IFCI Financial Services Ltd or IFCI Custodial Services Ltd (Devdas,
2005).
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings
for rendering other financial services including investment. All such Institutions are financial
intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries
(NBFIs) or Investment Institutions.
The term Finance is often understood as being equivalent to money. However, final exactly
is not money; it is the source of providing funds for a particular activity. The word system, in the
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term financial system, implies a set of complex and closely connected or inter-linked Institutions,
agents, practices, markets, transactions, claims, and liabilities in the Economy. The financial
system is concerned about money, credit and finance. The three terms are intimately related yet
are somewhat different from each other:

Money refers to the current medium of exchange or means of payment.
Credit or loans is a sum of money to be returned, normally with interest; it refers to a
debt
Finance is monetary resources comprising debt and ownership funds of the state,
company or person.
HISTORICAL BACKGROUND.

The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by the Reserve Bank
Amendment Act, 1963 to include provisions relating to non-banking institutions receiving
deposits and financial institutions. It was observed that the existing legislative and regulatory
framework required further refinement and improvement because of the rising number of
defaulting NBFCs and the need for an efficient and quick system for Redressal of grievances of
individual depositors. Given the need for continued existence and growth of NBFCs, the need to
develop a framework of prudential legislations and a supervisory system was felt especially
to encourage the growth of healthy NBFCs and weed out the inefficient ones. With a view to
review the existing framework and address these shortcomings, various committees were formed
and reports were submitted by them. Some of the committees and its recommendations are given
hereunder:

1. James Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank of India in 1974. After studying
the various money circulation schemes which were floated in the country during that time and
taking into consideration the impact of such schemes on the economy, the Committee after
extensive research and analysis had suggested for a ban on Prize chit and other schemes which
were causing a great loss to the economy. Based on these suggestions, the Prize Chits and Money
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Circulation Schemes (Banning) Act, 1978 was enacted


2. Dr.A.C.Shah Committee (1992):

The Working Group on Financial Companies constituted in April 1992 i.e. the Shah Committee
set out the agenda for reforms in the NBFC sector. This committee made wide ranging
recommendations covering, inter-alia entry point norms, compulsory registration of large sized
NBFCs, prescription of prudential norms for NBFCs on the lines of banks, stipulation of credit
rating for acceptance of public deposits and more statutory powers to Reserve Bank for better
regulation of NBFCs.

3. Khan Committee (1995)

This Group was set up with the objective of designing a comprehensive and effective supervisory
framework for the non-banking companies segment of the financial system. The important
recommendations of this committee are as follows:
i. Introduction of a supervisory rating system for the registered NBFCs. The ratings assigned
to NBFCs would primarily be the tool for triggering on-site inspections at various
intervals.
ii. Supervisory attention and focus of the Reserve Bank to be directed in a comprehensive
manner only to those NBFCs having net owned funds of Rs.100 laths and above.
iii. Supervision over unregistered NBFCs to be exercised through the off-site surveillance
mechanism and their on-site inspection to be conducted selectively as deemed necessary
depending on circumstances.
iv. Need to devise a suitable system for co-coordinating the on-site inspection of the
NBFCs by the Reserve Bank in tandem with other regulatory authorities so that they were
subjected to one-shot examination by different regulatory authorities.

v. Some of the non-banking non-financial companies like industrial/manufacturing units
were also undertaking financial activities including acceptance of deposits, investment
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operations, leasing etc to a great extent. The committee stressed the need for identifying
an appropriate authority to regulate the activities of these companies, including plantation
and animal husbandry companies not falling under the regulatory control of Either
Department of Company Affairs or the Reserve Bank, as far as their mobilization of
public deposit was concerned.

vi. Introduction of a system whereby the names of the NBFCs which had not complied with
the regulatory framework / directions of the Bank or had failed to submit the prescribed
returns consecutively for two years could be published in regional newspapers.

4. Narasimhan Committee (1991)

This committee was formed to examine all aspects relating to the structure, organization &
functioning of the financial system.

These were the committees which founded non- banking financial companies.















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NON-BANKING FINANCIAL COMPANY (NBFC)

-MEANING

Non-Banking Financial Companies (NBFCs) play a vital role in the context of Indian Economy.
They are indispensible part in the Indian financial system because they supplement the activities
of banks in terms of deposit mobilization and lending. They play a very important role by
providing finance to activities which are not served by the organized banking sector. So, most
the committees, appointed to investigate into the activities, have recognized their role and have
recognized the need for a well-established and healthy non-banking financial sector.

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
1956 and is 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 but
does not include any institution whose principal business is that of agriculture activity,
industrial activity, sale/purchase/construction of immovable property.
Non-banking institution which is a company and which has its principal business of receiving
deposits under any scheme of arrangement or any other manner, or lending in any manner
is also a non- banking financial company.

DEFINITIONS OF NBFC.

Non-Banking Financial Company has been defined as:
(i) A non-banking institution, which is a company and which has its principal business the
receiving of deposits under any scheme or lending in any manner.
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(ii) Such other non-banking institutions, as the bank may with the previous approval of the
central government and by notification in the official gazette, specify.
NBFCS provide a range of services such as hire purchase finance, equipment lease finance,
loans, and investments. NBFCS have raised large amount of resources through deposits from
public, shareholders, directors, and other companies and borrowing by issue of non-convertible
debentures, and so on.
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings
for rendering other financial services including investment. All such Institutions are financial
intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries
(NBFIs) or Investment Institutions:
UNIT TRUST OF INDIA.
LIFE INSURANCE CORPORATION (LIC).
GENERAL INSURANCE CORPORATION (GIC).











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Factors contributing to the Growth of NBFCs:
According to A.C. Shah Committee, a number of factors have contributed to the growth of
NBFCs. Comprehensive regulation of the banking system and absence or relatively lower degree
of regulation over NBFCs has been one of the main reasons for their growth. During recent years
regulation over their activities has been strengthened, as see a little later.
The merit of non-banking finance companies lies in the higher level of their customer
orientation. They involve lesser pre or post-sanction requirements, their services are marked with
simplicity and speed and they provide tailor-made services to their clients. NBFCs cater to the
needs of those borrowers who remain outside the purview of the commercial banks as a result of
the monetary and credit policy of RBI. In addition, marginally higher rates of interest on deposits
offered by NBFCs also attract a large number of depositors
Regulation of NBFCs
In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing directions to the
maximum amount of deposits, the period of deposits and rate of interest they could offer on the
deposits accepted. Norms were laid down regarding maintenance of certain percentage of liquid
assets, creation of reserve funds, and transfer thereto every year a certain percentage of profit,
and so on. These directions and norms were revised and amended from time to time.
In 1997, the RBI Act was amended and the Reserve Bank was given comprehensive powers to
regulate NBFCs. The amended Act made it mandatory for every NBFC to obtain a certificate of
registration and have minimum net owned funds. Ceilings were prescribed for acceptance of
deposits, capital adequacy, credit rating and net-owned funds. T he Reserve Bank also developed
a comprehensive system to supervise NBFCs accepting/ holding public deposits. Directions were
also issued to the statutory auditors to report non-compliance with the RBI Act and regulations to
the RBI, Board of Directors and shareholders of the NBFCs.


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CLASSIFICATION OF NBFCs:

This classification is in addition to the present classification of NBFCs into deposit-taking and
Non-deposit-taking NBFCs. Depending on the nature their major activity, the non-banking
financial companies can be classified into the following categories, they are:

(1) Equipment leasing companies.
(2) Hire-purchase finance companies.
(3) Housing finance-companies.
(4) Investments companies.
(5) Loan companies.
(6) Mutual Fund Benefit Companies.
(7) Chit fund companies.
(8) Residuary companies.

Equipment Leasing Company:

(a) Equipment leasing company means any company which is carrying on the activity of
leasing of equipment, as its main business, or the financing of such activity.
(b) The leasing business takes place of a contract between the lessor (lessor means the leasing
company) and the lessee (lessee means a borrower).
(c) Under leasing of equipment business a lessee is allowed to use particular capital equipment,
as a hire, against a payments of a monthly rent.

(d) Hence, the lessee does not purchase the capital equipment, but he buys the right to use it.
(e) There are two types of leasing arrangements, they are:
(i) Operating leasing: In operating leasing the producer of capital equipment offers his
product directly to the lessee on a monthly rent basis. There is no middleman in
operating leasing.
(ii) Finance leasing: In finance leasing, the producer of the capital equipment sells the
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equipment to the leasing company, then the leasing company leases it to the final user of
the equipment. Hence, there are three parties in finance leasing. The leasing company
acts as a middleman between the producer of equipment and the user of equipment.

Benefits/Advantages of Leasing:

(1) 100% finance:
They borrower in the equipment can get up to 100% finance for the use of capital through
leasing arrangement in the sense, that the leasing company provides the equipment
immediately and the borrower need not pay the full amount at once. Hence, the borrower
can use the amount for fulfilling other needs such as expansion development, etc.

(2) Payment is easier:
Leasing finance is costlier. However, the borrower finds it convenient (easy) as he has to
pay in installments out of the return from the investment in the equipment. Hence, the
borrower does not feel the burden of payment.


(3) Tax concessions:
The borrower can get tax concessions in case of leasing equipments. The total amounts of
rent paid on leased equipment are deducted from the gross income. In case of immediate
purchase, interest on the loan and the depreciation are deducted from the taxable income.

Hire-purchase Finance Companies:

(a) Hire purchase finance company means any company which is carrying on the main
business of financing, physical assets through the system of hire-purchase.
(b) In hire-purchase, the owner of the goods hires them to another party for a certain period
and for a payment of certain installment until the other party owns it.
(c) The main feature of hire-purchase is that the ownership of the goods remains with the
owner until the last installment is paid to him. The ownership of goods passes to the user
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only after he pays the last installment of goods.
(d) Hire-purchase is needed by farmers, professionals and transport group people to buy
equipment on the basis of hire purchase.
(e) It is a less risky business because the goods purchased on hire purchase basis serve as
securities till the installment on the loan is paid.
(f) Generally, automobile industry needs lot hire-purchase finance.
(g) The problem of recovery of loans does not occur in most cases, as the borrower is able to
pay back the loan out of future earnings through the regular generation of funds out of
the asset purchased.
(h) In India, there are many individuals and partnership firms doing this business. Even
commercial banks, hire-purchase companies and state financial corporations provide
hire-purchase credit.
Housing Finance Companies:

(a) A housing finance company means any company which is carrying on its main business
of financing the construction or acquisition of houses or development of land for housing
purposes.
(b) Housing finance companies also accept the deposits and lend money only for housing
purposes.
(c) Even though there is a heavy demand for housing finance, these companies have not
made much progress and as on 31st March, 1990 only 17 such companies here reported
to the RBI.
(d) The ICICI and the Canara Bank took the lead to sponsor housing finance companies,
namely, Housing Development Corporation Ltd. and the Canfin Homes Ltd.
(e) All the information about the Housing finance companies is available with the National
Housing Bank. Housing finance companies also have to compulsorily to register
themselves with the Reserve Bank of India.
(f) National Housing bank is the apex institution in the field of housing. It promotes housing
finance institutions, both on regional and local levels.

Investment Companies:
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(a) Investment company means any company which is carrying on the main business of
securities.
(b) Investment companies in India can be broadly classified into two types:
(1) Holding Companies:
(i) In case of large industrial groups, there are holding companies which buy shares mainly
for the purpose of taking control over another institution.
(ii) They normally purchase the shares of the institution with the aim of controlling it
rather than purchasing shares of different companies.
(iii) Such companies are set up as private limited companies.

(2) Other Investment Companies:
(i) Investment companies are also known as Investment trusts.
(ii) Investment companies collect the deposits from the public and invest them in securities.
(iii) The main aim of investment companies is to protect small investors by collecting their
small savings and investing than in different securities so that the risk can be spread.
(iv) An individual investor cannot do all this on his own, due to lack of expertise in
investing. Hence, investing companies are formed for collective investing. Companies
are formed for collective investments of money, mainly of small investors.
(v) Another benefit of an investment company is that it offers trained, experienced and
specialised management of funds.
(vi) It helps the investors to select a financially sound and liquid security.
Liquid security means a security which can be easily converted into cash.
(vii)In India investment trusts are very popular. They help in putting the savings of people
into productive investments.
(viii)Some of the investment trusts also do underwriting, promoting and holding company
business besides financing.
(ix)These investments trusts help in the survival of business in the economy by keeping the
capital market alive, active and busy.



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Loan company:

(a) A loan company means any company whose main business is to provide finance through
loans and advances.
(b) It does not include a hire purchase finance company or an equipment leasing company or
a housing finance company.
(c) Loan company is also known as a Finance Company".
(d) Loan companies have very little capital, so they depend upon public deposits as their
main source of funds. Hence, they attract deposits by offering high rates of interest.
(e) Normally, the loan companies provide loans to wholesalers, retailers, small-scale
industries, self-employed people, etc.
(f) Most of their loans are given without any security. Hence, they are risky.
(g) Due to this reason, the loan company charges high rate of interest on its loans. Loans are
generally given for short period of time but they can be renewed.

Mutual Benefit Financial Company:

(a) They are the oldest form of non-banking financial companies.
(b) A mutual benefit financial company means any company which is notified under section
620A of the Companies Act, 1956.
(c) It is popularly known as "Nidhis".
(d) Usually, it is registered with only very small number of shares. The value of the shares is
often Rs. 1 only
(e) It accepts deposits from its members and lends only to its members against tangible
securities.
Chit-fund Companies:
History:

The chit fund schemes have a long history in the southern states of India. Rural unorganized chit
funds may still be spotted in many southern villages. However, organized chit fund companies
are now prevalent all over India. The word is Hindi and refers to a small note or piece of
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something. The word passed into the British colonial lexicon and is still used to refer to a small
piece of paper, a child or small girl

How Chit Fund Help?

Chit Funds have the advantage both for serving a need and as an investment. Money can be
readily drawn in an emergency or could be continued as an investment.
Interest rate is determined by the subscribers themselves, based on mutual decisions and varies
from auction to auction.
The money that you borrow is against your own future contributions.
The amount is given on personal sureties too; unlike in banks and other financial institutions
which demand a tangible security.
Chit funds can be relied upon to satisfy personal needs. Unlike other financial institutions, you
can draw upon your chit fund for any purpose - marriages, religious functions, medical expenses,
just anything...
Cost of intermediation is the lowest.

(a) Chit funds companies are one of the oldest forms of local non-banking financial
institution in India.
(b) They are also known as "kuries".
(c) These institutions have originated from south India and are very popular over there.
(d) A chit fund organisation is an organisation of a number of people who join together and
subscribe (contribute) amounts monthly so that any members who is in need of funds can
draw the amount less expenses for conducting the chit. It is an organisation run on co-
operative basis for the benefit of the members who contribute money, the funds are used
by them as and when a particular member needs it.
(e) It helps the persons who save money regularly to invest their savings with good chances
of profit.
(f) Chit funds have many defects as the rate of return given to each member is not the same.
(g) It differs from person to person, this leads in improper distribution of gains and losses.
(h) Also, the promoters of these funds do everything for their own benefit to get maximum
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income.
(I) Hence, the banking commission has made suggestions to pass uniform chit funds laws
for the whole of India.


Residuary Non-banking Companies:

(a) The term "residue" means a small part of something that remains. As the meaning of the
term shows, a residuary company is one which does not fall in any of the above
categories.

(b) It generally accepts deposits by operating different schemes similar to recurring deposit
schemes of banks.
(c) Deposits are collected from a large number of people by promising them that their
money would be invested in banks and government securities
(d) The collection of deposits is done at the doorsteps of depositors through bank staff, who
is paid commission.
(e) These companies get the funds at low cost for longer terms, at they invest them in
investments which generates good amount of return.
(f) Many of these companies operate with very small amount of capital.
(g) They have some adverse (bad) features, such as:
(ii) Some do not submit periodic returns to the regulatory authority.
(iii) Some of them do not appoint banks, etc.








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ROLE OF NON- BANKING FINANCIAL COMPANIES.

(1) Promoters Utilization of Savings:
Non- Banking Financial Companies play an important role in promoting the utilization of
savings among public. NBFCs are able to reach certain deposit segments such as unorganized
sector and small borrowers were commercial bank cannot reach. These companies encourage
savings and promote careful spending of money without much wastage. They offer attractive
schemes to suit needs of various sections of the society. They also attract idle money by offering
attractive rates of interest. Idle money means the money which public keep aside, but which is
not used. It is surplus money.
(2) Provides easy, timely and unusual credit:
NBFCs provide easy and timely credit to those who need it. The formalities and procedures in
case of NBFCs are also very less. NBFCs also provides unusual credit means the credit which
is not usually provided by banks such as credit for marriage expenses, religious functions, etc.
The NBFCs are open to all. Every one whether rich or poor can use them according to their
needs.
(3) Financial Supermarket:
NBFCs play an important role of a financial supermarket. NBFCs create a financial
supermarket for customers by offering a variety of services. Now, NBFCs are providing a
variety of services such as mutual funds, counseling, merchant banking, etc. apart from their
traditional services. Most of the NBFCs reduce their risks by expanding their range of products
and activities.

(4) Investing funds in productive purposes:
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NBFCs invest the small savings in productive purposes. Productive purposes mean they invest
the savings of people in businesses which have the ability to earn good amount of returns. For
example In case of leasing companies lease equipment to industrialists, the industrialists can
carry on their production with less capital and the leasing company can also earn good amount of
profit.
(5) Provide Housing Finance:
NBFCs, mainly the Housing Finance companies provide housing finance on easy term and
conditions. They play an important role in fulfilling the basic human need of housing finance.
Housing Finance is generally needed by middle class and lower middle class people. Hence,
NBFCs are blessing for them.
(6) Provide Investment Advice:
NBFCs, mainly investment companies provide advice relating to wise investment of funds as
well as how to spread the risk by investing in different securities. They protect the small
investors by investing their funds in different securities. They provide valuable services to
investors by choosing the right kind of securities which will help them in gaining maximum rate
of returns. Hence, NBFCs plays an important role by providing sound and wise investment
advice.
(7) Increase the Standard of living:
NBFCs play an important role in increasing the standard of living in India. People with lesser
means are not able to take the benefit of various goods which were once considered as luxury but
now necessity, such as consumer durables like Television, Refrigerators, Air Conditioners,
Kitchen equipments, etc. NBFCs increase the Standard of living by providing consumer goods
on easy installment basis. NBFCs also facilitate the improvement in transport facilities through
hire- purchase finance, etc. Improved and increased transport facilities help in movement of
goods from one place to another and availability of goods increase the standard of living of the
society.
(8) Accept Deposits in Various Forms:
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NBFCs accept deposits forms convenient to public. Generally, they receive deposits from public
by way of depositor a loaner in any form. In turn the NBFCs issue debentures, units
certificates, savings certificates, units, etc. to the public.
(9) Promote Economic Growth:
NBFCs play a very important role in the economic growth of the country. They increase the rate
of growth of the financial market and provide a wide variety of investors. They work on the
principle of providing a good rate of return on saving, while reducing the risk to the maximum
possible extent. Hence, they help in the survival of business in the economy by keeping the
capital market active and busy. They also encourage the growth of well- organized business
enterprises by investing their funds in efficient and financially sound business enterprises only.
One major benefit of NBFCs speculative business means investing in risky activities. The
investing companies are interested in price stability and hence NBFCs, have a good influence on
the stock- market. NBFCs play a very positive and active role in the development of our
country.











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Functions of Non- Banking Financial Companies:
(1) Receiving benefits:
The primary function of nbfcs is receive deposits from the public in various ways such as issue
of debentures, savings certificates, subscription, unit certification, etc. thus, the deposits of nbfcs
are made up of money received from public by way of deposit or loan or investment or any other
form.
(2) Lending money:
Another important function of nbfcs is lending money to public. Non- banking financial
companies provide financial assistance through.
(a) Hire purchase finance:
Hire purchase finance is given by nbfcs to help small important operators, professionals,
and middle income group people to buy the equipment on the basis on Hire purchase.
After the last installment of Hire purchase paid by the buyer, the ownership of the
equipment passes to the buyer.
(b) Leasing Finance:
In leasing finance, the borrower of the capital equipment is allowed to use it, as a hire,
against the payment of a monthly rent. The borrower need not purchase the capital
equipment but he buys the right to use it.
(c) Housing Finance:
NBFCs provide housing finance to the public, they finance for construction of houses,
development of plots, land, etc.
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(d) Other types of finance provided by NBFCs include:
Consumption finance, finance for religious ceremonies, marriages, social activities,
paying off old debts, etc. NBFCs provide easy and timely finance and generally those
customers which are not able to get finance by banks approach these companies.
(e) Investment of surplus money:
NBFCs invest their surplus money in various profitable areas.




















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How RBI controlling NBFC

By Supervision:

The RBI has instituted a strong and comprehensive supervisory mechanism for NBFCs.

The focus of the RBI is on prudential supervision so as to ensure that NBFCs function on
sound and healthy lines and avoid excessive risk taking.

The RBI has put in place a four pronged supervisory framework based on:

On-site inspection;
Off-site monitoring supported by state-ofthe
art technology;
Market intelligence; and
Exception reports of statutory auditors ofNBFCs.

The thrust of supervision is based on the asset size of the NBFC and whether it accepts/ holds
Deposits from the public.

The system of on-site examination put in place during 1997 is structured on the basis of
assessment and evaluation of CAMELS (Capital, Assets, Management, Earnings, Liquidity,
and Systems and Procedures) approach and the same is akin to the supervisory model
adopted by the RBI for the banking system.

Market intelligence systemis also being strengthened as one of theimportant tools of
supervision.
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This process of continuous and on-going supervision is expected to facilitate RBI to pick
up warning signals,which can result in triggering supervisory action promptly.
The returns being submitted by the NBFCs arc reviewed and re-looked at intervals to
widen the scope of information so as to address the requirements either for supervisory
objectives or for furnishing the same to variousinterest groups on the important aspect of the
working of these companies.
The companies notholding public deposits arc supervised in a limited manner with
companies with asset size of Rs.100crore and above being subjected to annual inspection and
other non-public deposit companies by rotation once in every 5 years.
The exception reports, if any, from the auditors of such companies coupled with adverse
market information and the sample check at periodical intervals are the main tools for
monitoring the activities of such companysvis--vis the RBIregulations.

By Policy Developments

The RBI introduced a number of measures toenhance the regulatory and supervisory
standards of this sector, to bring them on parwith commercial banks over a period of
time.

The regulatory norms, applicable to NBFCs are presented in Box 6.2. Regulatory
measures adopted during the year aim at aligning the interest rates in this sector with the
rates prevalent in the rest of the economy, tightening prudential norms, standardizing
operating procedures and aligning the RBIs regulations with the requirements of the
amended Companies Act.


ALSO by imposing certain norms and restrictions some of them are as
follows.
A)
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1) Certificate of Registration:
No company, other than those exempted by the RBI, cancommence or ea. the business of
non-banking financial institutionwithout obtaining a CoR RBI.

The pre-requisite for eligibility for such a CoR is that the NBFC have a minimum NOF of
Rs. 25 lakh (since raised to Rs. 2crore on and April 21, 1999 for anynew applicant
NBFC). The RBI considers grant CoR after satisfyingitself about the companys
compliance with the c enumerated in
2) Maintenance of Liquid Assets:
NBFCs have to invest in unencumbered approved securities, valued at a not exceeding
current market price, an amount which,at the close of business on any day, shall not be
less than 5.0per cent but not exceeding 25.0 per cent specified by RBI, of thedeposits
outstanding at the close of business on the working day of the second preceding quarter.

3) Creation of Reserve Fund:

Every non-banking financial company shall create a reserve fundand transfer thereto a
sum not less than 20.0 per cent of its netprofit every year as disi in the profit and loss
account and beforeany dividend is declared. Such fund to be created by every NBFC
Of the fact whether it accepts] deposits or not. Further,no appropriation can be made from
the fund ft. purpose withoutprior written approval of RBI.

B) Deposit Acceptance Related Regulations:

1) Ceiling on quantum of public deposits:
Loan and investment companies - 1.5 times of NOF if the company has NOF of
Rs. 25 lakh, minimum investment grade (MIG) creditrating, comply with all the
prudential norms and has CRAR of15 per cent. Equipment leasing and hire
purchase financecompanies - if company has NOF of Rs. 25 lakh and complies
24

with all the prudential norms.
i. with MIG credit rating and 12 per cent CRAR - 4 times of NOF
ii. without MIG credit rating but CRAR 15 per cent or above -1.5 times of NOF,
or Rs. 10crore, whichever is less.


2) Investment in liquid assets:

NBFCs - 15 per cent of outstanding public deposit liabilities as at the close of business
on the last working day of the second preceding quarter, of which

i. not less than 10 per cent in approved securities and

ii. Not more than 5 per cent in term deposits with scheduledcommercial
banks.

Directions for investments by RNBCs were rationalized in June 2004 with a view to re
ducing the overall systemic risk in the Financial sector and safeguarding the interest of the
depositors.

In this regard the following roadmap was prescribed:
a) From the quarter ended June 2005 and onwards, RNBCs were permitted to
invest only to the extent of 10% of the Aggregated Liabilities to Depositors
(ALDs) as at the second preceding
Quarter or one time of their Net Owned Funds, whichever is
Non-Banking Financial Companies lower, in the manner which in their
opinion of the company is safe as per approval of its Board of Directors.

b) From the quarter ended June 2006 onwards, this limit would
stand abolished and RNBCs would not be permitted to invest
any amount out of ALDs as per their discretion. However, to
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avoid strain, in complying with 100% directed investments
by companies, the same had been modified to 95% of ALD
up to March 31, 2007 and 100% of ALD thereafter. These
liquid asset securities are required to be lodged with one of
the scheduled commercial banks or Stock Holding Corporation
Of India Ltd.. or a depository or its participant (registered
with SEB1).Effective October 1, 2002, government securities
are to be necessarily held by NBFCs either in Constituents
Subsidiary General Ledger Account with a scheduled
Commercial bank or in a demit account with a depository
participant registered with SEBI.These securities cannot be
withdrawn or otherwise dealt with for any purpose other than
Repayment of public deposits.

3) Period of Deposits :

No demand deposits
NBFCs 12 to 60 months
RNBCs 12 to 84 months
MNBCs (chit Funds) 6 to 36 months

4) Ceiling of deposit rate:
NBFCs, MNBCs and Nidhis - 11.0 per cent per annum (effective March 4,2003)
RNBCs - Minimum interest of 4.0 per cent on daily deposits and
6.0 per cent on other than daily deposits. Interest may be paid or
Compounded at periods not shorter than monthly rests.
5) Advertisement methodology for acceptance of deposits/public deposits :
Every company which accepts deposits by advertisement has to comply with the
advertisement rules prescribed in this regard, the deposit acceptance form should
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contain certain prescribed information, issue receipt for deposits and maintain a
deposit register. Etc.
6) Submission of returns :
All NBFCs holding or accepting public deposits have to submit periodical returns to
RBI at Quarterly, half yearly and annual intervals.
C) Prudential Norms applicable to only those NBFCs which are
accepting/holding public deposits.
1) Capital to Risk Assets Ratio CRAR):
The NBFCs holding/accepting public deposits are required to maintain CRAR as
under:
i. Equipment leasing companies/hire purchase financecompanies (with MIG credit
rating) 12 percent

ii. Equipment leasing companies/hire purchase finance
companies (without MIG credit rating) 15 percent

iii. Loan/investment companies 15 percent

iv. RNBCs 12 per cent
CRAR comprises tier I and tier II capital To be maintained on a Daily basis and
not merely on the reporting dates. Tier I Capital core capital or NOF but includes
compulsorily convertiblepreference shares (CCPS) as a special case for CRAR purposes.
Tier II Capital all quasi-capital like preference shares (other than CCPS) subordinated
debt, convertible debentures, etc. Tier III Capital not to exceed tier I capital General
provisions and loss reserves not to exceed 1.25 per cent of the risk weighted Assets.
Subordinated debt issued with original tenor of 60 months Or more.

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2) Restrictive norms:
Acceptance of public deposits not allowed if the prudential norms are not
complied with fully.
Any NBFC defaulting in repayment of the matured deposits prohibited from
creating any further assets until the defaults are rectified.

Investments in real estate, except for own use, restricted to 10per cent of the
owned fund. Investments in unquoted shares restricted as under:EL/HP
Companies 10 percent of owned fund Loan/investment companies 20 per cent of
owned fund No further investments in real estate or unquoted shares in case of
excess position held till its regularization.

Sufficient adjustment period allowed - further extension on merits of each case.
3) Credit/investment concentration norms :
Single borrower exposure limits credit - 15 percent of owned fund
Investments - 15 percent of owned fund

Single group of borrower exposure limits credit - 25 percent of owned fund

Composite (credit and investments) exposure limits

Single borrower - 25 percent of owned fund

Single group of borrowers - 40 percent of owned fund
Exposure norms also applicable to own group companies and
Subsidiaries.
A) Includes all forms of credit and credit related and certain
Other receivables as also off balance sheet exposures.

B) Debentures/bonds to be treated as credit for the purpose of
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Prudential norms but as investments for the purpose of
Balance sheet and compliance with investment obligations.
4) Reporting System: Half yearly return :
Half-yearly returns to be submitted as at the end of March and September every year,
A) Time allowed for submission - 3 months from the due date,
B) The return to be certified by the statutory auditors of the
Company. However, it need not wait for audit and the figures
furnished therein could be the unaudited figures but must
be certified by auditors

D) Prudential Norms applicable to all NBFCs irrespective of whether they
accept/hold public deposits or not.
1) Income Recognition Norms.
The recognition of income on the NPA is allowed on cash basis only. The
unrealized income recognized earlier is required to be reversed.
2) NPA norms.
Recognition of income on accrual basis before the asset becomes NPA as under:
Loans and Advances: up to 6 months and 30 days
past due period (past due period done away with effect from March
31, 2003) Lease and Hire Purchase Finance: 12 months
3) Restrictive Norms
Loans against own shares not allowed.
4) Policy on demand/call loans:
Companies to frame a policy for demand and call loans relating to cut-off date for
recalling the loans, the rate of interest,
Periodicity of such interest, periodical reviews of such performance,etc.
29


5) Accounting Standards

All the Accounting Standards and Guidance Notes issued by
Institute of Chartered Accountants of India (ICAl) is applicable
to all NBFCs in so far as They are not inconsistent with theguidelines of RBI.
6) Accounting for investments

All NBFCs to have a well-defined investment policy.

Investments classified into two categories
(1) Long term and
(ii) Current investments.

Long term investments to be valued as per Accounting Standard,Issued by ICAI.
Current investments to be classified into - (a) quoted and (b)unquoted.

Current quoted investments to be valued at lower of cost or marketvalue.
Block valuation permitted - Notional gains or losses within the
Block permitted to be netted - but not inter-block, net notionalgains to be ignored
but notional losses to be provided for.

Valuation norms for current unquoted investments are as under:
i. Equity shares (at lower of cost or breakup value or fair value)
i. Re I/- for the entire block of holding if the balance sheet of
1. the investee company is not available for the last two years
ii. Preference shares at lower of cost or face value
iii. Government securities at carrying cost
iv. Mutual Fund units at net asset value (NAV) for each scheme and
v. Commercial paper (CP) at its carrying cost

30


7) Asset Classification

All forms of credit (including receivables) to be classified into four
Categories -
Standard asset
Sub-standard asset
Doubtful asset
Loss asset

8) Provisioning for Non-PerformingAssets Loans and Advances.

Standard assets - No provision Sub-standard assets- 10 per cent of outstanding
balance
Doubtful assets - on unsecured portion 100 per cent and on secured portion 20, 30
and 50 per cent depending on the age of the doubtful assets Loss asset - 100 per
cent of the outstanding.

9) Provisioning for Non-PerformingAssets Equipment Lease andHire
Purchase accounts.

Unsecured portion to be fully provided for

Further provisions on net book value (NBV) of EL/HP assets

Accelerated additional provisions against NPAsNPA for 12months or
more but less than 24 months 10 per cent ofNBVNPA for 24 months or
more but less than 36 months 40per cent of NBVNPA for 36 months or
more but less than 48months 70 per cent of NBVNPA for 48 months or
more 100per cent of NBVValue of any other security considered
onlyagainst additional provisions.
31


Rescheduling in any manner willnot upgrade the asset up to 12 months of
satisfactoryperformance under the new terms. Repossessed assets to
betreated in the same category of NPA or own assets optionlies with the
company.

10) Risk Weights and CreditConversion factors.
Risk - weights to be applied to all assets except intangibleassets.
Risk - weights to be applied after netting off the provisions held against
relative assets.
Risk - weights are 0, 20 and 100.
Assets deducted from owned fund like exposure to subsidiariesor
companies in the same group or intangibles to be assigned0 per cent risk -
weight.
Exposures to all-India financial institutions (AIFIs) at 20 percent risk -
weight and all other assets to attract 100 per centrisk - weights.
Off-balance sheet items to be factored at 50 or 100 and thenconverted for
risk - weight.

11) Disclosure requirements

1. Every NBFC is required to separately disclose in its balance
1. Sheet the provisions made as outlined above without nettingthem
from the income or against the value of assets.

2. The provisions shall be distinctly indicated under separateheads of accounts as under:
i. provisions for bad and doubtful assets; and
ii. Provisions for depreciation in investments.

3. Such provisions shall not be appropriated from the generalprovisions and loss reserves
held, if any, by the NBFC.
32


4. Such provisions for each year shall be debited to the profitand loss account. The excess of
provisions, if any, held underthe heads general provisions and loss reserves may be
written back without making adjustment against them.

5. Nidhis and Chit Fund companies exempted.

Major difference between Banks & NBFCs
NBFCs are doing functions akin to that of banks; however there are a few differences:
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 cheque to its
customers.
Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of
banks.












33

Guidelines of RBI to NBFC:

Priority Status:

Bank loans to all MFIs, including NBFCs working as MFIs on or after April 1,
2011, will be eligible for classification as priority sector loans under respective
category of indirect finance only if the prescribed percentage of their total assets
are in the nature of "qualifying assets" and they adhere to the "pricing of interest"
guidelines to be issued.

Priority Sector status for Bank Loans to other NBFCs

Bank loans to other NBFCs wouldnot be reckoned as priority sectorloans with effect
from April 1, 2011

Qualifying Assets

i. Loans disbursed by an MFI to a borrower with a rural householdannual income not
exceedingRs.60,000 or urban and semi urban household income not exceeding
Rs.1,20,000.

ii. Loan amount not to exceed Rs.35, 000in the first cycle andRs.50, 000in subsequent
cycles. Totalindebtedness of the borrower not to exceed Rs.50, 000.

iii. Tenure of loan not to be less than 24 months for loan amount inexcess of Rs.15,000
withoutprepayment penalty; loan to beextended without collateral

iv. Aggregate amount of loan, given for income generation, not to be less than 75 per
cent of the total loans given by the MFIs.

34

v. Loan to be repayable by weekly, fortnightly or monthly installments at the choice of
the borrower.

Pricing of Interest:

Banks should ensure a margin cap of 12 per cent and an interest rate cap of 26 per
cent for their lendingto be eligible to be classified aspriority sector loans.



Individual Lending Outside SHG/JLG:
Loans by MFIs can also beextended to individuals outsidethe self-help group
(SHG)/jointliability group (JLG) mechanism


















35

Current Status of NBFC:

Recent years have witnessed significant increase in financial intermediation by the NBFCs.
But as far as the current status of the NBFCs is concerned, these are trapped in a cycle of high
costs of funds leading to high rate of interest for borrowers.
In order to meet with the fund requirements, NBFCs borrow from the markets directly at much
higher rates than the banks. Consequently, the rates at which they lend are also higher. As a
result, higher interest outgo caps margins of the borrowers from the NBFCs and also deters their
growth.
NBFCs mostly lend to sectors like infrastructure equipment, farm equipment and commercial
vehicles since these areas do not get loans from the banks.
Conversion of some of these NBFCs into full-fledged banking structure would enable these
infrastructure companies to raise loans at a cheaper rate. Low cost of fund raising will enable
these infra companies to maintain the competitive spirit of the industry.
Budget expectations
Give private banking licenses - The NBFCs wants private banking license because they borrow
from the markets directly at much higher rates than the banks.
Consequently, the rates at which they lend are also higher. As a result, a higher interest outgo
caps margin of the borrowers from the NBFCs deters their growth.
NBFCs mostly lend to sectors like infrastructure equipment, farm equipment and commercial
vehicles since these areas do not get loans from the banks.
Halt monetary tightening - Another demand of the industry is that it wants the finance ministry
to urge Reserve Bank of India (RBI) on the issue of monetary tightening because though
36

controlling inflation is of utmost importance, further monetary tightening measures will further
boost the refinancing rates for NBFCs.
This will result in higher lending and hence decline in overall volume of business. as well
because of increase in borrowing rates and tight liquidity conditions will hamper borrowing and
lending conditions.
Restore the status of priority sector lending against gold loan - Since the RBI has said that
advances given by banks to NBFCs for loans that are provided to farmers against gold jewelry,
will not be treated as priority sector lending, the NBFCs now dont get priority sector loans and
hence the interest rates on the loans they take from banks have been increased because regular
loans are costlier than priority sector ones. Hence, the industry wants the status of priority sector
lending against gold loan to be restored so that fund raising plans of the industry will not be
impacted










37

Non banking financial companies in India
1. Housing Development Finance Corporation Limited (HDFC).
2. Power Finance Corporation Ltd (PFC).
3. Reliance Capital Ltd.
Housing Development Finance Corporation Limited (HDFC):
Housing Development Finance Corporation Limited (HDFC) headquartered in Mumbai is the
biggest private sector public housing mortgage company. Its major shareholders are Foreign
Institutional Investors with about 59% holdings. FDI holds 15% while Insurance companies and
mutual funds hold about 12% of its shares. Citigroup through its Mauritius subsidiary, Citigroup
Strategic Holdings Mauritius Ltd, is the biggest shareholder with 9.1% in HDFC.

Power Finance Corporation Ltd (PFC):
Power Finance Corporation Ltd (PFC) is one of the Navratna Public Sector Undertakings (the
best government companies in India). PFC is the provider of large range of financial products in
the power finance sector. It is playing an important role in developing Indias power sector.

Reliance Capital Ltd:
Reliance Capital Ltd, a Reliance - Anil Dhirubhai Ambani Group (aka ADAG) company, is one of
Indias fastest growing private sector financial services firm. Reliance Capital has business
spread across domains like asset management, insurance, private equity, stock broking,
depository services, consumer finance etc. Promoters group holds 53% of shares in Reliance
Capital.

38

Conclusion:
After a deep research with many aspects, concluded that the existing governance system with
laws and updated guidelines/directions issued by Reserve Bank of India is doing justice to many
viz. The Economy Of The Nation, as the guidelines currently existing have pace with the
dynamic commercial economy and the RBI comes up with updated and amended guidelines as
and when it is required; The Public, as the RBI guidelines and the different laws governing
NBFCs have been vested with many powers and procedures so as to enable the depositors of
these NBFCs to enforce their rights; the NBFCs, as the RBI guidelines and the laws governing
have generally given bright prospects to the NBFCs. RBI, thus, can be said to be a cautious and
active watchman of the financial market, who keeps a vigil on the market and ensures positive
growth of the nation. Emergence of NBFCs in the Indian market has also created alternative of
savings to the people but it has always to be borne in mind while investing in the NBFCs that
they cannot be compared at all with the Banks and today also Banks are the safest place to
deposit/invest money into.











39

BIBLOGRAPHY:

BOOKS:-

NON BANKING FINANACIAL COMPANY


www.NBFC.com