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MBFI Lecture Notes # 15

Non Banking Financial Companies

Started as a regulation of the deposit acceptance activities


In 1975, it was decided that regulation of deposit acceptance
activities of Non-Banking Non-Financial Companies should be
taken over by the Government of India. Accordingly, the
Companies Act, 1956 was amended by insertion of Section 58A
In 1977, revised sets of directions These directions stipulated,
inter alia, a ceiling on the quantum of deposits, minimum and
maximum period of deposits, liquid assets requirements, the
manner and procedure for receipt of deposit and upkeep of records
therefor, submission of annual statutory returns and financial
statements etc.
A ceiling on the rate of interest payable on deposit was imposed for
the first time in 1981
Inadequacy of legislative framework setting up of Shah Working
Group
In April 1993, the definition of regulated deposits was widened to
include inter-corporate deposits, deposits from shareholders and
directors and borrowings by issue of debentures secured by
immovable property.a scheme of registration of Non-Banking
Financial Companies having net owned funds of Rs.50 lakh and
above was introduced.
In June 1994, the Bank issued prudential guidelines on income
recognition, asset classification, provisioning for bad and doubtful
debts, credit/investment concentration norms, etc. for the
registered companies
Amendments to Reserve Bank of India Act in 1997
o Compulsory registration and minimum Net Owned Funds (NOF)
of
o Rs.25 lakh for commencing/ carrying on business of NBFCs.
The minimum NOF requirement has been raised to Rs.200 lakh
for NBFCs who commence business on or after April 21, 1999.
o Maintenance of liquid assets in Government securities and
Government guaranteed bonds, equivalent to not less than 5
per cent which could be increased upto 25 per cent of deposits.

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o Transfer of at least 20 per cent of the profits to their reserve


fund as an in-built safeguard for sound financial health.
o Vesting in Reserve Bank of India powers to give directions
regarding prudential norms encompassing capital adequacy,
income recognition, asset classification, provisioning and
lending policy as a step towards asset-side regulation of the
NBFCs.
o Reserve Bank has been given powers to issue directions to the
companies and their auditors on matters relating to balance
sheet, profit and loss account,disclosure of liabilities in the
books of accounts etc. The Bank has also been empowered to
direct special audit if considered necessary. A penalty can also
be imposed on the auditors for their failure in discharging their
obligations.
o The Bank has also been empowered to prohibit NBFCs, from
accepting any deposit if they fail to adhere to the directions
issued to them and/or any provisions of the Act. Bank can also
direct them not to alienate any assets except for repayment of
the deposits.
o The Bank has been given powers to file a winding up petition
against erring NBFCs under certain circumstances.
o For the first time Reserve Bank has been empowered to impose
penalties directly on erring NBFCs for violation of the provisions
of the directions and/or the provisions of Reserve Bank of India
Act.
TYPES OF NBFCS
Equipment Leasing Companies and Hire Purchase Finance
companies
Loan Companies, Investment companies
Miscellaneous non-banking companies
Residuary non-banking companies
Mutual Benefit Finance Companies
Non-Banking Financial Company to be eligible for being classified
as an equipment leasing company or a hire purchase finance
company was not to have less than sixty per cent of its assets and
was to derive not less than sixty per cent of its income from
equipment leasing and hire purchase activities taken together
PRESENT REGULATORY FRAMEWORK FOR NBFCs

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MBFI Lecture Notes # 15

Categorisation of Companies
Non-Banking Financial Companies accepting public
deposits;

Non-Banking Financial Companies not accepting public


deposits;

Non-Banking Financial Companies not accepting public


deposits and having acquired shares/ securities in their
own group/ holding/ subsidiary companies of not less
than 90 per cent of their total assets and are not trading
in these shares/ securities.
While the Non-Banking Financial Companies accepting public
deposits will be subjected to all the provisions of the directions,
those which do not accept public deposits will be supervised in a
limited manner.
Prohibition from Accepting Public Deposits
Non-Banking Financial Companies having net owned funds of less
than Rs.25 lakh would not be entitled to accept public deposits.
However, they could raise borrowings from other sources.
The deposit acceptance norms for NBFCs linked to NOF and rating
Net owned Quantum of public Deposits for
Quantum of public
Leasing/Hire deposits for Loan
Fund Equipment
Companies/ Investment
Purchase
Companies
Finance Companies
Below Rs. 25 NIL NIL
lakh with or
without credit
rating
Rs.25 lakh Public deposits not exceeding NIL
and above 1.5 times of NOF or public
without credit deposits upto Rs.10 crore
whichever is less provided the
rating
company has capital adequacy
ratio of 15 per cent or above.
Rs.25 lakh 4 times of NOF provided the Public deposits not
and above company has capital adequacy exceeding 1.5 times of
with ratio of 12 per cent or above. NOF provided the

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MBFI Lecture Notes # 15

minimum company has capital


investment adequacy ratio of 15 per
grade credit cent or above.
rating

Interest Rate Ceiling on Public Deposits


Compliance of Prudential Norms
o The Non-Banking Financial Companies including Residuary
Non-Banking Companies accepting public deposits would be
required to comply with all the prudential norms
encompassing income recognition, accounting standards,
asset classification, provisioning for bad and doubtful debts,
capital adequacy and credit/investment concentration.
o The Non-Banking Financial Companies engaged in leasing ,
hire purchase finance, loan and investment activities and
not accepting public deposits were required to comply with
prudential norms other than norms on capital adequacy and
credit /investment concentration. They would, however, not
be required to submit the prudential norm return to Reserve
Bank of India.
o The investment companies holding not less than 90 percent
of their assets being the securities of their
group/holding/subsidiary companies and not accepting
public deposits were exempted from the prudential norms.
Maintenance of liquid assets
o The liquid asset requirement is applicable to public deposits
only. The ratio of liquid assets to public deposits would be
15 per cent for all Non-Banking Financial Companies other
than RNBCs accepting public deposits. Out of the 15 per
cent, NBFCs are allowed to maintain upto 5 per cent in the
form of unencumbered term deposits with any scheduled
commercial bank. For RNBCs, the stipulation stands at 10
per cent.
Application forms for deposit acceptance

Regulation of Non-Banking Financial Companies not accepting


public deposits

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o The Non-Banking Financial Companies not accepting/


holding public deposits were to be regulated in a limited
manner. These companies were exempted from all the
provisions of the directions relating to acceptance of public
deposits and the requirements of capital adequacy as also
credit/ concentration norms. However, in order to avail of
the exemptions from the regulations, these Non-Banking
Financial Companies were required to get a resolution
passed by their Board of Directors to the effect that they
would not accept any `public deposit'. The
o Board resolution in the case of Investment Companies not
accepting public deposits and which have acquired shares of
not less than 90 per cent of their assets in their
group/holding/subsidiary companies would also specifically
include the names of their holding/group/subsidiary
companies whose shares/securities they hold or propose to
invest during the ensuing year.

MUTUAL BENEFIT COMPANIES


Only such of the Non-Banking Financial Companies as had been
specifically notified under Section 620A of the Companies Act,
1956, by the Government of India would be classified as nidhi
companies.
A category of finance companies known as mutual benefit finance
companies (MBFCs) or `Nidhis' which mobilise deposits from and
lend to their members had hitherto been exempted from most of
the core regulations set out in the Non-Banking Financial
Companies (Reserve Bank) directions 1977 relating to quantum,
tenure, ceiling on rate of interest, liquidity requirements, etc
Unincorporated bodies
As per the amended provisions of Section 45S of the Act,
unincorporated bodies such as, individuals, firms or
unincorporated associations of individuals, have been prohibited
from accepting any deposit, if:

o business of such unincorporated bodies either wholly or


partly includes any of the activities of financing, or
acquisition of securities, letting or delivering of goods under
hire purchase agreement, managing, conducting or
supervising, as foreman of chits or kuries.

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Residuary Non-Banking Companies (Reserve Bank) directions, 1987

o The term Residuary Non-Banking Companies (RNBCs)


generally refers to the companies which tap the public
savings under some scheme or arrangement mostly akin to
recurring deposit schemes of the banking system. These
companies have been operating under certain regulations
which were revoked on the commencement of The Prize Chits
and Money Circulation Schemes (Banning) Act, 1978.
However, the Supreme Court in its judgement stated that the
schemes conducted by these companies are not hit by the
said Act and in consonance with the directions of the said
court, the Reserve Bank issued Residuary Non-Banking
Companies (Reserve Bank) directions, 1987 to such
companies in May 1987.

Regulation for Housing Finance Companies (HFCs)

o In 1987, the Parliament enacted the National Housing Bank


Act and established the National Housing Bank (NHB) to
operate as an agency to promote Housing Finance
Companies both at local and regional levels and to provide
financial and other support to them. On June 26,1989, the
National Housing Bank issued Housing Finance Companies
directions almost on the same lines of Reserve Bank of India
directions to regulate the deposit acceptance activities of
Housing Finance Companies. Simultaneously, the Reserve
Bank of India amended its Non-Banking Financial Company
directions and excluded Housing Finance Companies from
their purview.

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