NBFC Binal

Non Banking Financial Companies
INTRODUCTION:
We studied about banks, apart from banks the Indian Financial System has a large number of
privately owned, decentralized 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
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formation.
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. Interrelationships 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
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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 term financial system, implies a set of complex and closely connected or interlinked 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

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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 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
ii.
various intervals.
Supervisory attention and focus
of the Reserve Bank to be directed in a

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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
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 nonbanking 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.
(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 nonconvertible 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).
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.
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 nonbanking financial companies can be classified into the following categories, they are:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Equipment leasing companies.

Hire-purchase finance companies.
Housing finance-companies.
Investments companies.
Loan companies.
Mutual Fund Benefit Companies.
Chit fund companies.
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.
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(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
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.
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(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 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
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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:
(a)
Investment company means any company which is carrying on the main business of
securities.
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(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
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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.
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:
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(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 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.
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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 income.
(I)
Hence, the banking commission has made suggestions to pass uniform chit funds
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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.
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(iii)
Some of them do not appoint banks, etc.
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.
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(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:
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:
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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:
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 wellorganized 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.
Functions of Non- Banking Financial Companies:

(1)
Receiving benefits:
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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.
(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:
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NBFCs invest their surplus money in various profitable areas.
Commercial Bank versus
(v/s)
Non-banking Financial Companies
While commercial banks and non-banking financial companies are both financial
intermediaries (middleman) receiving deposits from public and lending them. Commercial
bank is called as Big brother while the NBFC is called as the Small brother. But there
are some important differences between both of them, they are as follows:
No.
Commercial Banks.
Non Bank Financial companies.

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Issue of cheques:
In case of commercial banks, a cheque
In case of NBFCs there is no facility to
can be issued against bank deposits.
issue cheques against bank deposits.
Rate of interest:
Commercial bank offer lesser rate of
NBFCs offer higher rate of interest on
interest on deposits and charge less rate
deposits and charge higher rate of interest
of interest on loans as compared to
on loans as compared to Commercial
NBFCs.
banks.
Facilities provided by them:

Commercial banks can enjoy the benefit
NBFCs are not given such facilities.
of certain facilities like deposit insurance

cover facilities, refinancing facilities, etc.
Law which governs them:

NBFCs are regulated by different
regulation such as SEBI, Companies Act,
Commercial banks are regulated by
Banking Regulation Act 1949 and RBI.
National Housing Bank, Unit Fund Act and

RBI.
Types of assets:
NBFCs specialize in one types of asset.
For e.g.: Hire purchase companies
commercial banks hold a variety of
specialize in consumer loans while

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assets in the form of loans, cash credit,
Housing Finance Companies specialize in
bill of exchange, overdraft etc.
housing finance only.
RBI Guidelines for Asset-Liability Management (ALM) system in NBFCs.

This note lays down broad guidelines in respect of interest rate and liquidity risks
management systems in NBFCs which form part of the Asset Liability Management
(ALM) function.
This is applicable to all NBFCs and Residuary non-banking
companies meeting the criteria of asset base of Rs.100 crores, whether accepting
deposits or not, or holding public deposits of Rs.20 crores or more. Sl.No. Description /
Compliance requirement Comments.
As we are aware, the guidelines for introduction of ALM system by banks and all India
financial intuitions have already been issued by Reserve Bank of India and the system has
become operational. Since the operations of financial companies also give rise to Asset
24

Liability mismatches and interest rate risk exposures, it has been decided to introduce an
ALM system for the NON- Banking Financial Companies (NBFCs) as well, as part of their
overall system for effective risk management in their various portfolios. A copy of the
guidelines for Asset Liability Management (ALM) system in NBFCs is enclosed.
Is there an Asset Liability Committee (ALCO) consisting of the companys senior
management to decide the business strategy of the NBFC.
1.
In the normal course, NBFC'S are exposed to credit and market risks in view of the
asset-liability transportation. With liberalization in Indian financial markets over the
last few years and growing integration of domestic with external markets and entry of
MNC's for meeting the credit needs of not only the corporate but also the retail
segments, the risks associated with NBFC's operations have become complex and
large, requiring strategic management. NBFCs are now operating in a fairly
deregulated environment and are required to determine on their own, interest rates on
deposits, subject to the ceiling of maximum rate of interest on deposits they can offer
on deposits prescribed by the Bank; and advances on a dynamic basis. The interest
rates on investments of NBFC's in Government and other securities are also now
market related. Intense pressure on the management of NBFC's to maintain a good
balance among spreads, profitability and long-term viability. Imprudent liquidity
management can put NBFC's earnings and reputation at great risk.
2.
NBFC's need to address these risks in a structured manner by upgrading their risk
management and adopting more comprehensive Asset-Liability Management (ALM)
practices than has been done hitherto. ALM, among other function, is also concerned
with risk management and provides a comprehensive and dynamic framework for
measuring, monitoring and managing liquidity and interest rate equity and
commodity price risks of major operators in the financial system that needs to be
closely integrated with the NBFC's business strategy. It involves assessment of
various types of risks and altering the asset-liability portfolio in a dynamic way in
order to manage risks.
25

3.
This note lays down broad guidelines in respect of interest rate and liquidity risks
management systems in NBFC's which form part of the Asset-Liability Management
(ALM) function. The initial focus of the ALM function would be to enforce the risk
management discipline i.e. managing business after assessing the risks involved. The
objective of good risk management systems should be that these systems will evolve
into a strategic tool for NBFC's management.
4.
The ALM process rests on three pillars:
ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and expediency
ALM Organisation
Structure and responsibilities
level of top management involvement
Risk parameters
Risk identification
Risk management
Risk policies and tolerance levels.
ALM INFORMATION SYSTEMS
26
ALM has to be support by a management philosophy which clearly specifies the risk policies
and tolerance limits. This framework needs to be built on sound methodology with necessary
information system as back up. Thus, information is the key to the ALM process. It is,
however, recognized that varied business profiles of NBFC's in the public and private sector
do not make the adoption of a uniform ALM System for all NBFC's feasible.
NBFC's have heterogeneous organizational structures, capital base, asset sizes management
profile, business activities and geographical spread. Some of them have large number of
branches and agents/ brokers whereas some have unitary offices.
ALM ORGANISATION
(a)
Successful implementation of the risk management process would require strong

commitment on the part of the senior management in the NBFC, to integrate basic
operations and strategic decision making with risk management.
(b)
The Asset-Liability Committee (ALCO) consisting of the NBFC's senior

management including Chief Executive Officer (CEO) should be responsible for
ensuring adherence to the limits set by the Board as well as for deciding the business
strategy of the NBFC (on the assets and liabilities sides) in line with the NBFC's
budget and decided risk management objectives.
(c)
The ALM Support Groups consisting of operating staff should be responsible for
analyzing, monitoring and reporting the risk profiles to the ALCO. The staff should
also prepare forecasts (simulations) showing the effects of various possible changes
in market conditions related to the balance sheet and recommended the action needed
to adhere to NBFC's internal limits.
27
LIQUIDITY RISK MANAGEMENT
Measuring and managing liquidity needs are vital for effective operation of NBFCs. By
ensuring an NBFC's ability to meet its liabilities as they become due, liquidity management
can reduce the probability of an adverse situation developing. The importance of liquidity
transcends individual institution, as liquidity shortfall in one institution can have
repercussions on the entire system. NBFCs management should measure not only the
liquidity positions of NBFCs on an ongoing basis but also examine how liquidity
requirements are likely to involve under different assumptions.
Experience shows that assets commonly considered as liquid, like Government securities and
other money market instruments, could also become illiquid when the market and players are
unidirectional.
NBFCs holding public deposits are required to invest up to a prescribed percentage (15% as
on date) of their public deposits in approved securities in terms of liquid asset requirement of
section 45-IB of the RBI Act,1934. Residuary Non-Banking Companies (RNBCs) are
required to invest up to 80% of their deposits in a manner as prescribed in the Directions
issued under the said Act. There is no such requirements for NBFCs which are not holding
public deposits. Thus various NBFCs including RNBCs would be holding in their
investments portfolio securities which could be broadly classifiable as 'mandatory securities'
(under obligation of law) and other 'non-mandatory securities'.
28
Financial Companies Regulation Bill, 2000.

The Government of India framed the Financial Companies Regulation Bill, 2000 to
Consolidate the law relating to NBFCs and unincorporated bodies with a view to ensured
posit or protection. The salient features of this Bill are:
All NBFCS will be known as Financial Companies instead of NBFCs; NBFCs holding public
deposits would not be allowed to carry on any non-Financial business with out the prior
approval of RBI; RBI would have the powers to prescribe minimum net-worth norms;
unsecured depositors would have first charge on liquid assets and assets created out of
deployment of part of the reserve fund.
Financial Companies
would require prior approval of RBI for any change in
name,
management or registered office; Regulation of unincorporated bodies would be in the hands

of the respective State Governments; Penalties have been rationalized with the objective that
they should serve as a deterrent and investigative powers have been vested with District
Magistrates and Superintendents of Police; RBI would be empowered to appoint Special
Officer(s) on delinquent financial companies; Any sale of property in violation of RBI order
would be void; The Company Law Board will continue to be the authority to adjudicate the
claims of depositors. Financial companies would have no recourse to the CLB to seek
deferment of the depositors dues. The Bill has been introduced in Parliament in 2000 and has
since been referred to the
Standing Committee on Finance. 8.0 Anomalies in the NBFC
regulations.
29

1. Clarity in Definition of NBFC:
The clause (a) of the section 45 I of the RBI Act define the term Business of A
Non Banking Financial Institution.
non-banking
Herein, it has been stated that, business of a
financial institution means carrying
on of
the business of a financial
institution referred to in clause (c) and includes business of a non-banking financial

company referred to in clause (f).
Therefore, to understand what the business of Non Banking Financial Institution is a
reference has to be made to two other clauses (c) and (f). Clause (c) defines the term
Financial Institution and clause (f) defines NBFC itself. However, the clause (f) contains a
comprehensive and exclusive definition an NBFC. As per this clause a non-banking
financial company means
(i)
A financial institution which is a company;
(ii)
A non-banking institution which is a company and which has as its principal

business the receiving of deposits, under any scheme or arrangement or in any
other manner, or lending in any manner;
(iii)
Such other non-banking institution or class of such institutions, as the Bank

may, with the previous approval of the Central Government and by notification
in the Official Gazette, specify. Therefore, we can say an NBFC is always a
company and can be a corporation or a co-operative only if notified by RBI with
approval of Central Government. However, no co operative or corporation has
been notified till now. The definition of NBFC should have been simple to
understand and
need to cross references to other clauses could have been
avoided.
The definition of NBFC in our view could have been:

Non-Banking Financial Company means
30

A non banking company which carries on as its business or part of its business any
of the following activities, namely:
(i)
The financing, whether by way of making loans or advances or otherwise, of

any activity other than its own.
(ii)
The acquisition of shares, stock, bonds, debentures or securities issued by the

Government or local authority or other marketable securities of a like nature.
(iii)
Letting or delivering of any goods to a hirer under a hire-purchase agreement

as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972.
(iv)
The carrying on of any class of insurance business.
(v)
Managing, conducting or supervising, as foreman, agent or in any other capacity,

of chits or kuries as defined in any law which is for the time being in force in any
State, or any business, which is similar thereto.
(vi)
Collecting, for any purpose or under any scheme or arrangement by whatever

name called, monies in lump sum or otherwise, by way of subscriptions or by sale
of units, or other instruments or in any other manner and awarding prizes or gifts,
whether in cash or kind, or disbursing monies in any other way, to persons
from whom monies are collected or to any other person, but does not include any
institution, which carries on as its principal business:
(a) Agricultural operations; or (industrial activity; or)
(b) The purchase or sale of any goods (other than securities) or the providing
of any services; or
(c) The purchase, construction or sale of immovable property, so however, that
no portion of the income of the institution is derived from the financing
of purchases, constructions or sales of immovable property by other persons
31

(d) A non
banking company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner,

or lending in any manner;
(e ) Such other non-banking institution or class of such institutions, as the Bank
may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.
2. Clarification regarding what in Principle Business:

The sub clause (ii) of clause (f) which defines NBFC states that a non- banking company that
has as its principal business the receiving of deposits, under any scheme or arrangement or in
any other manner, or lending in any manner is regarded as NBFC. Moreover, clause (c) that
defined financial institution also refers to the phrase Principle business when it states
that financial institution does not include institution that carries on as its principle
business(a) agricultural operations; or (a) industrial activity; or (b) the purchase or sale
of any goods (other than securities) or the providing of any services; or (c) the
purchase, construction or sale of immovable property, so however, that no portion of
the income of the institution is derived from the financing of purchases, constructions or
sales of immovable property by other persons.
In the absence of a definition of the term principal business in the Act itself, it is not clear
what should be the guidelines to be followed to determine the principal business of a
company? In case of a company engaged exclusively in financial business or a company
doing exclusively non-financial business, the principal business will be evident enough
and it may not be necessary to dwell upon what constitutes principal business of such
a company. However, in the case of companies which are carrying on multiple
activities, both financial and non- financial, in some what equal or near equal
proportions, determining the principal business assumes considerable significance.
It would be necessary to define what constitutes the principal
business
of
these
companies, in the context of the obligations cast by the amended provisions of the RBI
Act on the NBFCs, viz., requirement of applying for registration in case of existing
32

companies and prior registration in case of new companies, penalties for noncompliance with registration requirements, etc.
3. Applicability of Accounting Standards:

The clause 5 of the Non-Banking Financial (Deposit Accepting or Holding )
Companies Prudential Norms (Reserve Bank) Directions, 2007 states that Accounting
Standards and Guidance notes issued by the Institute of Chartered Accountants of India shall
be followed in so far as they are not inconsistent with any of the Directions. This
clause should be rectified as ICAI has issued Companies (Accounting Standards) Rules
2006, which are applicable to accounting periods commencing on or after 7-12-2006.
The Government of India framed a new legislation to amend and consolidate the provisions
contained in Chapter IIIB, III-C and V of the RBI Act, 1934 relating to the regulation and
supervision of financial companies, hither to known as non-banking financial companies
(NBFCs). This included prohibition of acceptance of deposits by unincorporated bodies and
incorporating the recommendations of the Task Force on NBFCs, which had made certain
recommendations to this effect. The salient features of the proposed legislation, which are
materially different from the corresponding provisions of RBI Act or are new provisions, are
as follows:
I. Basic Stipulations:
(i)
The draft bill has been named as Financial Companies Regulations Bill, 2000. All
the NBFCs will be known as Financial Companies instead of NBFCs.
(ii)
The term 'public deposit' has been defined in the Bill for the first time and the
definition would mean the same as at present in the NBFC Directions.
(iii)
There would be a nine member Advisory Council for Financial Companies under the
Chairmanship of Depute Companies and other experts in related areas to advise the
Reserve Bank.
33

(iv)
NBFCs holding /accepting public deposits would be prohibited from carrying on any
non- financial business without the prior approval of the Reserve Bank and the nonfinancial business presently carried on by them would have to be wound up or
transferred to a subsidiary within three years. Any other business or fee-based activity
like insurance agency business, portfolio management, etc., would require prior
approval of the Reserve Bank.
II .Entry Point Norms:

(i)
The requirement of obtaining the COR from the Reserve Bank would be compulsory
for all financial Companies, irrespective of whether the companies accept public
deposits or not. However, the nonpublic Deposit taking financial companies would
require minimum owned fund of Rs.25 Lakh, whereas the public deposit taking
financial companies would require minimum net owned fund (NOF) of Rs.2 Crores
and a specific authorization from the Reserve Bank to accept public deposits.
(ii)
There would be powers with the Reserve Bank to:

(a) Prescribe different capital for different classes of financial companies,
(b) Raise the requirement of minimum owned fund (entry norm) from Rs.25 Lakh to
of Rs.25 Lakh to Rs.2 crores for the existing financial companies accepting
public deposits. However, sufficient time would be allowed to such financial
companies to attain the enhanced capital requirement.
(iii)
The requirement of creation of reserve fund would be applicable only to the financial
companies accepting public deposits, as against the earlier requirement applicable to
all NBFCs.
(iv)
Unsecured depositors would have first charge on liquid assets and assets created out
of the deployment of the part of the reserve fund.
34

(v)
The financial companies would require prior approval of the Reserve Bank for any
change in the name, change in the management or change in the location of the
registered office.
III Regulatory and Supervisory Issues:

(i)
The Reserve Bank would be empowered to appoint Special Officer(s) on a delinquent

financial company and a duty has been cast on such company to cooperate with such
Special Officer(s).
(ii)
The Company Law Board (CLB) would continue to be authority to adjudicate the
claims of depositors
against the delinquent companies with powers to order initial
payment of a part of deposit, attach assets of the fraudulent financial company and
appoint Recovery Officer(s) for management of such asset. Financial company would
have no recourse to the CLB to seek deferment of the depositors' dues.
(iii)
The prohibitory provisions for unincorporated bodies would continue in the Financial
Companies Regulations Bill, but the role of exercising the powers for enforcement of
these provisions have been exclusively entrusted to State Governments, in addition to
the powers under the respective State Laws for protecting the interests of investors in
financial establishments.
(iv)
There would be powers vested in the District Magistrates to call for information and
to proceed against delinquent unincorporated bodies.
(v)
There would be a ban on the issue of advertisement for soliciting deposits by all
unincorporated bodies, irrespective of whether they are conducting financial business
or not.
(vi) Unauthorized deposit-taking by companies (a) whose applications for Certificate of

Registration have been rejected, (b) whose registration has been cancelled, (c) who
have been prohibited from accepting public deposits would be a cognizable offence.
The same would be the case for unregistered financial companies as well as
unincorporated bodies.
35

(vii)
Powers would be vested with a police officer of the rank not below that of the
Superintendent of Police Of any State to order investigations into the alleged
violations of requirement of registration by financial companies and prohibition from
acceptance of deposits by unincorporated bodies.
(viii)
Penalties have been rationalized in accordance with the severity of defaults, with the
objective that the penalty should serve as a deterrent to others. The Bill has been
introduced in the Parliament in 2000 and has since been referred to the Standing
Committee on finance.
The Government of India framed the Financial Companies Regulation Bill, 2000, to
consolidate the law relating to NBFCs and unincorporated bodies with a view to ensure
depositor protection.
AN APPRAISAL OF FINANCIAL COMPANIES REGULATION BILL, 2000:

THE UNION Government's move to enact a separate law to regulate and control the nonbanking finance companies (NBFC) sector is indeed laudable, after a large number NBFCs
had failed to repay public deposits, ruining thousands of gullible investors, drawn mainly
from the middle class strata of the society. However, a careful perusal of the new bill,
introduced in the Lok Sabha on December 13, shows that this legislation seeks largely to
consolidate into a single stand-alone enactment the regulatory provisions concerning the
NBFC sector already existing in Chapters 111-B and C of the Reserve Bank of India Act,
36

1934, (RBI Act), as amended in 1997. Thus the new law, when enacted, will just be old wine
in new bottle.
It was in the wake of the CRB scam that left several thousands of depositors high and dry that
the RBI Act was amended in 1997 to empower, inter alia, the Company Law Board (CLB) to
hear and decide complaints from depositors on defaults committed by financial companies.
However, an objective study will reveal that the RBI (Amendment) Act, 1997, which added
Chapter IR-B to the parent Act, has hardly benefited the depositor fraternity. The winding-up
petition filed against CRB by the RBI under the new provisions in 1997 is still pending with
the Delhi High Court. The perpetrators of the CRB fraud have been bailed out and are scotfree. Many depositors have been devastated. Justice delayed is indeed justice denied.
Ineffective CLB orders

Close on the heels of this `mother' scam came a host of other NBFC failures - to name a few,
Prudential Capital Markets, Lloyds Finance, Enarai Finance and Kirloskar Investments. The
CLB's orders on all these cases, directing the companies concerned, to pay the depositors in
accordance with specified phased repayment schedules are just dead letters. Repayments are
yet to start at Prudential though the CLB order was passed in 1998; Lloyds continues to
default on repayments and is way behind schedule. Repeated representations from the
aggrieved depositors of these companies to the CLB and the RBI have failed to improve
matters. The RBI simply passes the buck on to the CLB. The latter just does not have either
the determination or the will to punish the errant boards and managements though it has all
the requisite powers under the Companies Act to do so. The result - the depositors continue to
suffer. ICICI got the CLB order on Enarai Finance stayed and filed a liquidation petition
against the company, which is still pending. The RBI was inspired to follow ICICI's example
in the case of Kirloskar Investments and is keenly awaiting the Karnataka High Court's order
on its liquidation petition filed last February.
Against such a dismal scenario, is it not disappointing that the new bill provides for payment
defaults by the NBFCs to be adjudicated by the CLB? The CLB has no power to review its
37

own orders. It refuses to entertain petitions from depositors to amend/clarify its orders and
curtly asks the petitioners to approach the High Court. Their order is routinely challenged at
the High Courts and stays obtained. The courts being overburdened with cases are least
bothered to hear and dispose of the stay petitions expeditiously.
The lay depositor is an unsecured creditor; he is entitled to immediate relief if the company
defaults. This can be provided by compulsory insurance of his deposit. Bank deposits are
automatically insured up to Rs. 1 Lakh per account.
Moreover, as an added protection to depositors, the Finance Minister has declared in
Parliament that no public sector bank will be liquidated. Why cannot the RBI make it
mandatory for NBFCs too to insure the deposits taken by them and issue certificates of
insurance along with the deposit receipts? If this were done, in the event of default, all that
the depositor has to do is to approach the insurance company and claim his deposit and
expeditious remedy and merits incorporation in the bill. With the opening of the insurance
business to the private sector, insurance of NBFC deposits should not pose any problem. The
insurance premium could be allowed as tax deductible expenditure in the company's
assessments.
For the first time, the bill provides for a first charge on the company's assets to the depositor.
However, in practice, this will be no solace to the depositor. For, the `first charge' is available
only upon default. Further, the charge is not on the entire assets. It is on a maximum of 25 per
cent of the total value of deposits taken which the company is supposed to hold in
unencumbered term deposits/approved securities. Realization of the charged assets, upon an
order of the CLB, is another exercise altogether. All in all, the charge provision in the bill,
though innovative, does not inspire confidence. The Finance Ministry would do well to
review this bill in the light of these comments and make it more investor friendly as the
avowed objective of the new legislation is to protect the interests of depositors. The Supreme
Court has time and again ruled that death sentences should be pronounced only in the rarest
of rare cases. Perhaps, the RBI should extend this dictum to corporate as well and refrain
from filing liquidation petitions against failed NBFCs.
NORMS for NBFCS.
38

In public interest and to regulate the credit system in the best interest of India, the RBI has
laid down the following important norms or rules to be followed by NBFCs accepting public
deposits:
(1)
What constitutes public deposits?
Public deposit includes fixed or recurring deposits which are received from friends, relative,
shareholders of a public limited company and money raised in issued of unsecured
debentures or bond. It does not include money raised from issue of secured debentures and
bond or from borrowings of banks or financial institutions, deposits from directors or intercorporate deposits received from foreign national citizens and from shareholders of private
limited companies.
(2)
Who is allowed to accept deposits from public?
The NBFCs which have net owned capital of less than Rs. 25 Lakh will not be permitted to
accept deposit from public. In order to raise funds the NBFC can borrow from some other
sources also.
(3)
NBFCs have to submit financial statements:
All NBFCs will have to submit their annual financial statements and returns if they accept
public deposits.
(4)
Certain deposits are not regulated by RBI:
The RBI has given directions to NBFCs accepting public deposits to regulate the amount of
deposit, rate of interest, time period of deposits, brokerage and borrowings received by them.
The directions do not include amount received or generated by central bank or state
government. Amount received from IDBI, ICICI Nabard, Electricity Board and IFCI are also
not included in directions of RBI. Amount received from mutual funds, directors of firm and
shareholders also do not come under the category of amount received for regulation from
RBI.
(5)
Ceiling (limits on interest):
39

There is a maximum limit on the rate of interest of deposits. The limit charges with the RBI
directions.
(6)
Period of deposits:
The deposits can be accepted for a minimum period of 12 months and a maximum period of 2
year.
(7)
Register of depositors:
The NBFCs have to maintain a register of depositors with details like name, address, amount,
date of each deposit, maturity period and other details according to the required by RBI.
(8)
Credit rating:
To protect the public NBFCs are required to get themselves approved by the RBI through
credit rating agencies. The NBFCs which have not owned funds of Rs 25 Lakhs can obtain
public deposits if they are credit rated and they receive a minimum investment grade for their
fixed deposits from an approved rating agency.
The NBFCs have to submit this different agency is as follow:
The credit analysis and Research Limited (CARE) gives the minimum rating of BBB
in triple B rating.
The investment information and credit Rating Agency of India LTD. (ICRA) gives
the minimum rating of (MA-)

The Credit Rating Information Services of India Ltd. (CRISIL) and gives a minimum
rating of (FA-).
FITCH Rating India Pvt. Ltd. Provides (BBB-) as its acceptable rating.
If the credit rating is below the minimum investment grate the NBFCs has to send
report to the RBI within 15 days of received the grating. During that time the NBFC
has to stop accepted the deposits and within 3 years makes the repayment to the
depositors.
40

RBI deposit norms for small NBFCs.
The RBI has tightened the rules governing access to such public deposits.
It said that NBFCs with a net owned fund (NoF) of between Rs 25 Lakh and Rs 2 crore,
must limit their public deposits to the level of their net owned funds as against the current
ceiling of 1.5 times the net owned funds. Further, for those companies (with NoF of between
Rs 25 Lakh and Rs 2 crore) that had a capital adequacy ratio of 12% and who enjoyed credit
rating, the current ceiling of 4 times the NoF was being revised to 1.5 times the NoF. As per
RBI statistics, there were 243 companies in 2007 that would probably be affected by this
regulation. Their net owned funds were of the order of Rs 171 crore while the public
deposits that they held were about Rs 96 crore. This category of companies constitutes a big
chunk in the total category of NBFCs taking deposits that number about 359. In terms of
amount of deposits involved, this category of NBFCs is a very small category. Total public
deposits of all NBFCs with access to such deposits were of the order of Rs 2042 crore in
2007.
These regulations are part of the RBIs move to ensure that NBFCs who accept deposits are
adequately capitalized and have some minimum net owned funds.
Mr. T.T.Srinivasaraghavan, Managing Director, Sundaram Finance, said that this regulation
had adopted a fair approach to the issue of dealing with risks involved in smaller companies
accepting deposits. He said the regulation met the aspirations of those small companies as it
would now take the pressure off them when they were scrambling for capital to reach the
minimum NoF limits. It would also force them to live within their means, by limiting their
access to public deposits.
41

The current status of Non- Banking Financial Companies.
PRUDENTIAL NORMS:
The Reserve Bank put in place in January 1998 a new regulatory framework involving
prescription of prudential norms for NBFCs which deposits are taking to ensure that these
NBFCs function on sound and healthy lines. Regulatory and supervisory attention was
focused on the deposit taking NBFCs (NBFCs D) so as to enable the Reserve Bank to
discharge its responsibilities to protect the interests of the depositors. NBFCs - D are
subjected to certain bank like prudential regulations on various aspects such as income
recognition, asset classification and provisioning; capital adequacy; prudential exposure
limits and accounting / disclosure requirements. However, the non-deposit taking NBFCs
(NBFCs ND) are subject to minimal regulation.
The application of the prudential guidelines / limits is thus not uniform across the banking
and NBFC sectors and within the NBFC sector. There are distinct differences in the
application of the prudential guidelines / norms as discussed below:
i)
Banks are subject to income recognition, asset classification and provisioning norms;
capital adequacy norms; single and group borrower limits; prudential limits on capital
market exposures; classification and valuation norms for the investment portfolio;
CRR / SLR requirements; accounting and disclosure norms and supervisory reporting
requirements.
ii)
NBFCs D are subject to similar norms as banks except CRR requirements and
prudential limits on capital market exposures. However, even where applicable, the
norms apply at a rigour lesser than those applicable to banks. Certain restrictions
apply to the investments by NBFCs D in land and buildings and unquoted shares.
iii)
Capital adequacy norms; CRR / SLR requirements; single and group borrower limits;
prudential limits on capital market exposures; and the restrictions on investments in
land and building and unquoted shares are not applicable to NBFCs ND.
iv)
Unsecured borrowing by companies is regulated by the Rules made under the

Companies Act. Though NBFCs come under the purview of the Companies Act, they
42

are exempted from the above Rules since they come under RBI regulation under the
Reserve Bank of India Act. While in the case of NBFCs D, their borrowing capacity
is limited to a certain extent by the CRAR norm, there are no restrictions on the
extent to which NBFCs ND may leverage, even though they are in the financial
services sector.
Current Status:
Financial Linkages between Banks and NBFC:
Banks and NBFCs compete for some similar kinds of business on the asset side. NBFCs
offer products/services which include leasing and hire-purchase, corporate loans, investment
in non-convertible debentures, IPO funding, margin funding, small ticket loans, venture
capital, etc. However NBFCs do not provide operating account facilities like savings and
current deposits, cash credits, overdrafts etc.
NBFCs avail of bank finance for their operations as advances or by way of banks
subscription to debentures and commercial paper issued by them.
43

Since both the banks and NBFCs are seen to be competing for increasingly similar types of
some business, especially on the assets side, and since their regulatory and cost-incentive
structures are not identical it is necessary to establish certain checks and balances to ensure
that the banks depositors are not indirectly exposed to the risks of a different cost-incentive
structure. Hence, following restrictions have been placed on the activities of NBFCs which
banks may finance:
i) Bills discounted / rediscounted by NBFCs, except for rediscounting of bills discounted by
NBFCs arising from the sale of
a) Commercial vehicles (including light commercial vehicles); and
b) Two-wheeler and three-wheeler vehicles, subject to certain conditions;
c) Investments of NBFCs both of current and long term nature, in any company/entity by
way of shares, debentures, etc. with certain exemptions;
ii) Unsecured loans/inter-corporate deposits by NBFCs to/in any company.
iii) All
types
of
loans/advances
by
NBFCs
to
their
subsidiaries,
group
companies/entities.
iv) Finance to NBFCs for further lending to individuals for subscribing to Initial Public
Offerings (IPOs).
v) Bridge loans of any nature, or interim finance against capital/debenture issues and/or in
the form of loans of a bridging nature pending raising of long-term funds from the
market by way of capital, deposits, etc. to all categories of Non-Banking Financial
Companies, i.e. equipment leasing and hire-purchase finance companies, loan and
investment companies, Residuary Non-Banking Companies (RNBCs).
vi) Should not enter into lease agreements departmentally with equipment leasing
companies as well as other Non-Banking Financial Companies engaged in equipment
leasing.
44
Current Status:
Structural Linkages between Banks and NBFCs:
Banks and NBFCs operating in the country are owned and established by entities in the
private sector (both domestic and foreign), and the public sector.
Some of the NBFCs are subsidiaries/ associates/ joint ventures of banks including foreign
banks, which may or may not have a physical operational presence in the country. There has
been increasing interest in the recent past in setting up NBFCs in general and by banks, in
particular.
Investment by a bank in a financial services company should not exceed 10 per cent of the
banks paid-up share capital and reserves and the investments in all such companies, financial
institutions, stock and other exchanges put together should not exceed 20 per cent of the
banks paid-up share capital and reserves.
Banks in India are required to obtain the prior approval of the concerned regulatory
department of the Reserve Bank before being granted Certificate of Registration for
establishing an NBFC and for making a strategic investment in an NBFC in India. However,
foreign entities, including the head offices of foreign banks having branches in India may,
45

under the automatic route for FDI, commence the business of NBFI after obtaining a
Certificate of Registration from the Reserve Bank.
NBFCs can undertake activities that are not permitted to be undertaken by banks or which the
banks are permitted to undertake in a restricted manner, for example, financing of
acquisitions and mergers, capital market activities, etc. The differences in the level of
regulation of the banks and NBFCs, which are undertaking some similar activities, gives rise
to considerable scope for regulatory arbitrage. Hence, routing of transactions through NBFCs
would tantamount to undermining banking regulation.
This is partially addressed in the case of NBFCs that are a part of banking group on account
of prudential norms applicable for banking groups.
46
CURRENT NEWS.
1) MAT changes will hit NBFCs.
Tuesday, September 1, 2009
The Direct Taxes Code (DTC) is slowly being put to deeper scrutiny. As is always the case,
some of the changes may be ushered in with good intention, but inept drafting leaves the door
open for needless litigation.
The newly crafted Minimum Alternate Tax (MAT) is a case in point. Ever since Rajiv Gandhi
unleashed the book profits tax on India Inc. in 1987, it has generated controversies galore and
kept all the courts busy interpreting the intention and scope of the provision.
At present, MAT is applicable to corporate at 15 per cent on published profits. The nominal
tax rate for the corporate sector is 33.99 per cent and the effective rate after all
deductions/concessions stands at around 22.22 per cent.
MAT computation
MAT, despite the controversy surrounding its existence, has lived by the year for now 22
years and promises to open a new chapter from April 1, 2011.
The mechanics, as per the DTC, is simple. MAT will now be 2 per cent of the value of gross
assets as against 15 per cent on profits. For this purpose the value of gross assets would be
computed as shown in the Table.
It may be noted that even business assets such as sundry debtors, loans and advances will
now form part of the computation of gross assets for the purpose of the levy.
Further, while in the vertical form of the balance sheet the current assets are disclosed net of
current liabilities, the proposed MAT computation mechanism does not envisage a reduction
of current liabilities from current assets.
47

This also leads to an anomalous situation where a company has to pay MAT on the amount of
deferred tax asset, if it appears in the balance sheet of a company. The rate of MAT is
proposed to be 0.25 per cent in the case of banking companies and 2 per cent in the case of all
other companies, including foreign companies.
This is clearly a hardship for Non-Banking Financial Companies (NBFCs) where 70-75 per
cent of the assets in the balance-sheet constitute loans and advances, stock on hire and
business receivables. There does not appear to be any justification in levying 2 per cent MAT
on business assets, which in any case yield income on monthly basis liable to corporate tax at
33.99 per cent (proposed to be reduced to 25 per cent by the DTC). In the case of several
large NBFCs, 2 per cent MAT on gross assets would be far greater than 25 per cent on taxable
income.
To make matters worse, MAT will now represent a final tax and will not be allowed to be
carried forward for claiming tax credit in subsequent years. Not only this, certain companies,
will receive an additional blow for example, those in gestation period; having negative net
worth because of huge accumulated losses; having book losses in the current year; having
low asset-turnover ratio low net profit ratio; and those earning mainly exempt income.
Change in concept:
The justification for re-jigging MAT is that several countries have adopted a tax based on a
percentage of assets. The concept of MAT when it first originated in 1987 was completely
different from what is proposed in the DTC.
The economic rationale of assets-based tax is that it serves as an incentive for efficiency. If
that be so then the normal tax itself should serve the purpose.
Any sort of tax that departs from the mainstream route of linkage with income/profits is
bound to be litigious.
Added to that is the discrimination between banking companies and other companies on the
rate of tax. Some serious rethinking is required on the proposed MAT in the DTC.
48

2) NBFCs
Posted on 19 September 2008 by Sara Jain close Author: Sara Jain:A 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.
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.
The important regulations relating to acceptance of deposits by NBFCs are as follows:
The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months
and maximum period of 60 months. They cannot accept deposits repayable on demand.
NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to
time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded
at rests not shorter than monthly rests.
NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
NBFCs (except certain AFCs) should have minimum investment grade credit rating.
49

The deposits with NBFCs are not insured.
The repayment of deposits by NBFCs is not guaranteed by RBI.
There are certain mandatory disclosures about the company in the Application Form issued
by the company soliciting deposits.
Non-banking financial companies (NBFCs) have seen considerable business model shift over
last decade because of regulatory environment and market dynamics.
In the early 2000s, the NBFC sector in our country was facing following problems:
High cost of funds.
Slow industrial growth.
Stiff competition with NBFCs as well as with banking sector.
Small balance sheet size resulting in high cost of fund and low asset profile.
3) On AM ET advertisement:
(Start September 23, 2009 4:488.)
Reserve Bank of India's (RBI) latest guideline allowing non-banking finance companies
(NBFC) to issue semi-closed system pre-paid payment instruments will boost the growth of
m-commerce in India. Industry sources estimate that, in the next 3 years, India could have 25
mn m-commerce users up from the current 5 mn. The industry currently stands at a market
size of $10bn.
"The new guideline will increase the reach of the services to the people at the bottom of
pyramid. Now, people not having any bank account could pay their utility bill by electronic
transfer. We expect a five fold increase in number of people using m-commerce services,"
said Anil Gajwani, Senior Vice President - Technology, Comviva Technologies.
50

After the new guideline, entry of a few NBFC MNCs into the segment could not be denied.
However, the most viable business plan would be for telecom operators, as the guidelines will
allow them to operate as a pre-paid payment instrument as well. Considering the reach of the
telcos, in urban, rural and semi-urban areas, their entry will increase the penetration of the
services among the masses.
Further, these telecom operators already have a large network of agents, who are selling prepaid recharge coupon to the end customer. As per industry estimate every service provider has
around 50,000 such agents. Telcos could use these existing agents for m-commerce as well.
"This will certainly bring more people into the eco-system. Even people not having any bank
account would be able to do some basic financial transaction," said Probir Roy, Co-founder
and MD of Pay mate. Pay mate has currently half a million users in the country. The company
expects to grow manifold, in terms of the users, by the end of current FY.
However, the new guidelines still have some bottlenecks, which the industry people wanted
to be removed. RBI restricts the maximum value of such payment instruments that can be
issued by the institutions/companies to Rs 5,000. Further, these pre-paid payment instruments
up to Rs 5,000 can be issued by accepting any 'officially valid documents' defined under Rule
2(d) of Prevention of Money Laundering Act, as proof of identity.
Such instruments shall not permit cash withdrawal. The utility bills/essential services shall
include only electricity bills, water bills, telephone/mobile phone bills, and insurance
premium, cooking gas payments, ISP for Internet/broadband connections, cable/DTH
subscriptions and citizen services by government or government bodies.
4) Invest in only top 15 NBFCs to play safe.

(On September 23, 2009 4:488)
51

NIVEDITA MOOKERJI
Investors once again faced disappointment with Kuber Finance defaulting on payments.
Although there have been several defaults in the past couple of years, the Kuber fiasco
brought back memories of the CRB scam in 1997. After the CRB letdown, one thought
investors were going to stay away from non-banking finance companies (NBFCs) for a long
time to come. But the temptation to earn high returns was hard to resist, and investors burnt
their fingers again.
But why don't investors learn from others' experiences? What is it that draws them to
NBFCs? Sheer Singh, banking and consumer analyst, Consult Opportune (India's first
consumer banking advisory service), explains why investors are still opting for NBFCs.
Says Singh, ``the lure of earning returns, which are significantly higher than what banks
offer, is one of the reasons.'' Seen against the backdrop of dismal stock market performance
over the past few years, it becomes quite clear why people still invest in NBFCs, he says.
Lack of sufficient investment alternatives is also why investors are drawn to NBFCs, says
Singh. Giving a consumer point of view, Singh says that through NBFC investments, people
seek returns to hedge against inflation. Plus, it is seen as a way to earn income to finance the
growing consumerist urge. And more than anything else, high returns promised by some
NBFCs seem to fulfill investors' desire to make a fast buck.
In such a scenario, sound guidelines may help investors in opting for the reliable NBFCs.
Sheer Singh offers guidelines which have been formulated by Consult Opportune. The things
to look for while investing in NBFCs, according to Consult Opportune, are:
a)
Deposits of NBFCs must have an adequate rating by one of the credit rating agencies
in India.
b)
Preferably invest in deposits of only the top 10-15 NBFCs in India.
c)
Review half-yearly factors such as credentials, market standing, and professionalism

of management and promoters track record of such NBFCs.
d)
Take a close and critical look at the financing activities of such NBFCs to decipher
their long run viability.
52

e)
Beware of glossy and misleading advertisements.
f)
Avoid any NBFC offering unusually high interest rates which seem `significantly
higher' than prevalent rates offered by banks on similar maturity periods.
g)
Must prefer an NBFC with a nationwide network and more oriented towards retail/
consumer finance activities due to significantly lower default rates Apart from these
dos and don'ts, the Reserve Bank of India also offers a good data bank of the NBFCs
which may be trusted. Particularly its website at www.rbi.org. in has a list of over
500 NBFCs all over India which are authorized by the RBI to accept public deposits.
Similarly, the site also gives out the names of hundreds of NBFCs which have been
denied registration. Also, there's substantial information on RBI rules and
notifications in the subject Overall and valuable source of information and
assessment regarding investment in NBFCs. Such an information base could
sometimes prompt investors to even look for alternatives.
Talking about alternatives, Sheer Singh says that private sector banks rapidly expanding their
branch network in urban centers of India may emerge as preferred alternatives to those
NBFCs which are not among the top 20 in India.
He adds that high quality service being offered by new private sector banks; beefing up of
service and product levels by public sector banks; and expansion of networks and product
lines of the top NBFCs should offer investors other alternatives.
On the future of NBFCs, Singh says: ``we foresee a bright future for the top 20 NBFCs in
India.'' But it's not going to be a cakewalk. Says Singh: ``Considering that in the future
consumer-led growth rather than institutional-led growth would be the trend, top NBFCs
which focus on retail lending predominantly can substantially leverage their networks to offer
similar lending products offered by banks.'' The focus has to be on marketing and service
initiatives, he adds. And the mantra for success: Offer cut-throat competition to banks.
53
List of Non-Banking Financial Companies:
A. R. T. LEASING PRIVATE LIMITED.
ADOR FINANCE LTD.
144, M.C.ROAD, CHENGANNUR.
ADOR HOUSE, 6 K DUBASH MARG
ALAPUZHA DISTRICT
MUMBAI - 400 023
KERALA
AL BARR FINANCE HOUSE LTD
AD-MANUM FINANCE LTD
(FORMERLY KNOWN AS ALBARAKA
5, YESHWANT COLONY,
FINANCE HOUSE LIMITED),

INDORE 452 003 (MP)
INDIA HOUSE NO. 2,
KEMPS CORNER,
MUMBAI 400 036.
ADAYAR FINANCE & LEASING LTD.,
ALPIC FINANCE LTD.,
208, BHARATHI SALAI,
NEW EXCELSIOR BLDG.,
ROYAPETTAH,
6TH FLOOR,
CHENNAI 600 014
WALLACE STREET, FORT,
54
MUMBAI - 400 001
ALTA LEASING & FINANCE LTD.
ANMOL FINANCIAL SERVICES LTD
ALTA BHAVAN,
A -66, IST FLOOR,
532, SENAPATI BAPAT MARG DADAR,
GURU NANAK PURA , VIKAS MARG,
MUMBAI - 400 028
DELHI - 110092
ANNA FINANCE LIMITED
ABIRAMI FINANCIAL SERVICES (INDIA)

LTD
16 B/9, DEV NAGAR,

D.B. GUPTA ROAD,
157, HABIBULLAH ROAD, T. NAGAR,

CHENNAI - 600 017
KAROL BAGH,
AMARPREET FINANCE PVT. LTD.,
ANNA FINANCE LIMITED
182, NEW JAWAHAR NAGAR,
16 B/9, DEV NAGAR,
JALANDHR.
D.B. GUPTA ROAD,

KAROL BAGH,
NEW DELHI -110005
55
Conclusion:
NBFCs are gaining momentum in last few decades with wide variety of products and
services. NBFCs collect public funds and provide loan able funds. There has been significant
increase in such companies since 1990s. They are playing a vital role in the development
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 line
50 per cent of the credit requirement of the manufacturing is provided by NBFCs. 65 per cent
of the private construction activities was also financed by NBFCs. Now they are also
financing second hand vehicles. NBFCs can play a significant role in channelizing the
remittance from abroad to states such as Gujarat and Kerala.
56

NBFCs in India have become prominent in a wide range of activities like hire purchase
finance, equipment lease finance, loans, investments, and so on. NBFCs have greater reach
and flexibility in tapping resources. In desperate times, NBFCs could survive owing to their
aggressive character and customized services. NBFCs are doing more fee-based business than
fund based. They are focusing now on retailing sector-housing finance, personal loans, and
marketing of insurance. Many of the NBFCs have ventured into the domain of mutual funds
and insurance. NBFCs undertake both life and general insurance business as joint venture
participants in insurance companies. The strong NBFCs have successfully emerged as
Financial Institutions in short span of time and are in the process of converting themselves
into Financial Super Market. The NBFCs are taking initiatives to establish a self-regulatory
organization (SRO). At present, NBFCs are represented by the Association of Leasing and
Financial Services (ALFS), Federation of India Hire Purchase Association (FIHPA) and
Equipment Leasing Association of India (ELA). The Reserve Bank wants these three industry
bodies to come together under one roof. The Reserve Bank has emphasis on formation of
SRO Particularly for the benefit of smaller NBFCs.
Bibliography
BOOKS:1) Statutory guidances for non- banking financial companies. Taxman.
WEBSITES:-
57
www.NBFC.com
www.RBI.com
www. How Stuff Works.com
www. Wikipedia.com
58

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Non Banking Financial Companies

Non-Banking Financial Companies constitute an important segment of the financial system.

Non Banking Financial Companies

Non Banking Financial Companies

Money refers to the current medium of exchange or means of payment.

Some of the committees and its

Non Banking Financial Companies

1. James Raj Committee (1974)

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

3. Khan Committee (1995)

of the Reserve Bank to be directed in a

Non Banking Financial Companies

Supervision over unregistered NBFCs to be exercised through the off-site surveillance

Need to devise a suitable system for co-coordinating the on-site inspection

Some of the non-banking non-financial companies like industrial/manufacturing units

The committee stressed the need for

identifying an appropriate authority to regulate the activities of these companies,

4. Narasimhan Committee (1991)

Non Banking Financial Companies

NON-BANKING FINANCIAL COMPANY (NBFC)

Non-Banking Financial Company (NBFC) is a company registered under the Companies

Non Banking Financial Companies

UNIT TRUST OF INDIA.

Factors contributing to the Growth of NBFCs:

Non Banking Financial Companies

Non Banking Financial Companies

This classification is in addition to the present classification of NBFCs into deposit-taking

Equipment leasing companies.

Equipment Leasing Company:

Under leasing of equipment business a lessee is allowed to use particular capital

Non Banking Financial Companies

There are two types of leasing arrangements, they are:

Non Banking Financial Companies

Hire-purchase Finance Companies:

Hire-purchase is needed by farmers, professionals and transport group people to buy

Generally, automobile industry needs lot hire-purchase finance.

Non Banking Financial Companies

Housing Finance Companies:

Non Banking Financial Companies

Investment companies in India can be broadly classified into two types:

(1) Holding Companies:

(2) Other Investment Companies:

Non Banking Financial Companies

It does not include a hire purchase finance company or an equipment leasing

Loan company is also known as a Finance Company".

Normally, the loan companies provide loans to wholesalers, retailers, small-scale

Mutual Benefit Financial Company:

Non Banking Financial Companies

They are the oldest form of non-banking financial companies.

It is popularly known as "Nidhis".

How Chit Fund Help?

Non Banking Financial Companies

They are also known as "kuries".

A chit fund organisation is an organisation of a number of people who join together

Non Banking Financial Companies

Residuary Non-banking Companies:

It generally accepts deposits by operating different schemes similar to recurring

Many of these companies operate with very small amount of capital.

They have some adverse (bad) features, such as:

Some do not submit periodic returns to the regulatory authority.

Non Banking Financial Companies

Some of them do not appoint banks, etc.

ROLE OF NON- BANKING FINANCIAL COMPANIES.