Non Banking Institutes and Norms

INTRODUCTION
A company whose principal business is to receive deposits and lend funds, but not qualified enough to be called as a Bank as qualified in Banking Regulation Act, 1949.

WHAT IS AN NBFC?
As per Sec. 45 I (f) of RBI Act, 1934 A financial institution is an NBFC which has a principle business of receiving deposits under any scheme or an arrangement or lending in any manner, Approved by Central Govt. and Notified by Official Gazette.

NBFC V/s BANK

i. an NBFC cannot accept demand deposits ii. it is not a part of the payment and settlement system - cannot issue cheques to its customers; and iii. deposit insurance facility of DICGC (Deposit Insurance and Credit Guarantee Corporation) is not available for NBFC depositors. iv. U/S 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of nonbanking financial institution

Types of NBFC
i. Asset Finance Company (AFC) ii. Investment Company (IC) iii. Loan Company (LC)

i. Asset Finance Company (AFC)

Its principal business the financing of physical assets supporting productive/ economic activity, e.g. Automobiles, tractors, generators sets, general purpose industrial machines. It is regulated by RBI.

ii. Investment Company (IC)

Company that is a financial institution carrying on, its principal business, the acquisition of securities. e.g. Kotak Mahindra Investment Co. Tata Investment Corp. Ltd. It is regulated by RBI.

iii. Loan Company (LC)

A company that is a financial institution whose principal business is providing finance, whether by making loans or advances or otherwise for any activity other than its own, but does not include an asset finance company. e.g. Birla Financial Corp. ltd. Standard Charted Finance Ltd. Regulated by RBI.

Other Types
Stock broking Co. Merchant banking co. Insurance Co. Housing Finance co.

Regulatory Authority
-SEBI -SEBI -IRDA -National housing bank -Dept. of co. affairs of the Govt. of India.

Micro finance co.

Residuary Non-Banking Companies:

Company which receives deposits under any scheme by whatever name , in one lump-sum or in installments by way of contributions or subscriptions or by sale of units or certificates or other instruments, or in any manner. A type of NBFCs. Governed by the provisions of Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. At present ,there are 4 companies operate as RNBCs in India. Peerless General Finance and investment Company Limited (PGFIL) is the largest RNBC.

 Only class of NBFCs for which the floor rate of interest for deposits is specified by the RBI. Can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. Cannot accept deposits repayable on demand. The amount payable by way of interest, premium, bonus or other advantage, by whatever name called in respect of deposits received: Shall not be less than the rate of 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals; At the rate of 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme.

 To secure the interest of depositor, RNBCs are required to invest in a portfolio comprising of highly liquid and secure instruments like Central/State Government securities, Fixed deposits with scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, Units of Mutual Funds, etc

Mutual Benefit Financial Companies:

A company structure in which the company's owners are also its clients. The mutual company's profits are distributed to its participating customers each year in proportion to their individual exposures to the company. Many insurance companies are structured as mutual companies, meaning that policyholders have the right to receive portions of the company's profits, and often may elect the company's management. Also known as Nidhis.

 Type of NBFCs notified under Section 620 A of Companies Act, 1956. Regulated by the Department of Company Affairs (DCA). Are exempt from the provisions of the RBI Act and NBFC directions Act,1956.

Miscellaneous Non-Banking Companies

Engaged in chit fund business. RBI regulates only the deposits accepted by these companies, not the chit fund business. Chit fund business is administered by the respective state governments.

Regulatory Norms and Directions for NBFCs

A. Important statutory provisions of chapter 3B of the RBI Act as applicable to NBFCs

Subject
Certificate of registration

Particulars
No company can commence or carry on NBFC without obtaining CoR from RBI. Pre-requisite for CoR - Minimum NOF(net owned fund) of 25 lakhs

Maintenance of liquid assets

Investment, in unencumbered approved securities, of an amount not less than 5% but not exceeding 25% of the deposits outstanding at the close of business on the last working day of the second preceding quarter NBFC shall create reserve fund and transfer thereto a sum not less than 20% of net profit as disclosed in P&L account before any dividend is declared

Creation of reserve fund

B. Directions applicable to NBFCs

1. Deposit Acceptance related Regulation

a) Ceiling on quantum of public deposits

Loan and investment companies - 1.56 times of NOF if: 1. NOF- Rs 25 lakhs 2. Minimum Investment Grade (MIG) credit rating 3. Capital to Risk Assets Ratio(CRAR)-15% Equipment leasing and hire purchase finance companies - If company has NOF of Rs 25 lakhs. A. With MIG credit rating and 12% CRAR - 4 times of NOF B. Without MIG credit rating but CRAR 15% or above 1.5 times of NOF, or Rs 10 crore whichever is less

b. Investment in liquid assets

NBFCs - 15 % of outstanding public deposit liabilities of which: a) not less than 10% in approved securities, b) not more than 5 % in term deposits with scheduled commercial banks RNBCs 10%of outstanding deposit liabilities Liquid assets securities are required to be lodged with scheduled commercial bank or Stock Holding Corporation of India Ltd. Or a depository

C. Period of Deposits
NBFCs 12 to 60 months RNBCs 12 to 84 months MNBCs 6 to 36 months

d. Ceiling on deposit rate

NBFCs, MNBCs and Nidhis 12.5% p.a. RNBCs Minimum interest of 4 % on daily deposits and 6 % on other than daily deposits

e. Advertisement and methodology for acceptance deposits/public deposits

Every company accepting deposits by advertisement has to comply with advertisement rules prescribed in this regard, the deposit acceptance form should contain certain prescribed information, issue receipt for deposits, and maintain a deposit register

f. Submission of returns
All NBFCs have to submit periodical returns to RBI at quarterly, half-yearly and annual intervals. Provisional return for the quarter ended March may be submitted within 30 days of the close of the quarter and final return should be submitted within a copy of the audited balance sheet as soon as the same is finalised but not later than Sept. 30 of the year

CRAR
Type of companies Hire purchase finance companies (with MIG credit rating) Hire purchase finance companies (without MIG credit rating) Loan/Investment companies RNBCs CRAR 12% 15% 15% 12%

Restrictive Norms
Acceptance of public deposits Defaulter cant create further assets Investments in real assets prohibited to 10% No investment in real estate or unquoted shares Sufficient adjustment period is allowed

Reporting System
Half yearly return to be submitted Time allowed for submission is 3 months Certified by the statutory auditors

Norms
Income recognition norms NPA norms Restrictive norms Policy on demand/call loans Accounting Standards Asset Classification

Accounting for investments

Investments

Short-term

Long-term

Quoted

Unquoted

Provision for NPA (Loans and Advances)

State of Asset Standard Sub-standard No Provision 10% on outstanding amount Unsecured : 100% Doubtful Loss Provision

Secured : depending on the age of doubtful assets

100% on outstanding amount

Provision for NPA (Equipment Lease & Hire Purchase)

Time period
12 months to 24 months 24 months to 36 months 36 months to 48 months 48 months and more 10% on NBV 40% on NBV 70% on NBV

Provision

100% on NBV

Risk weights Credit Conversion factors

Risk weights are applied to all assets except intangible assets After netting off provisions Risk weights
Assets deducted from own fund to be assigned 0% Exposure to AIFIs at 20% Balance sheet items at 50%

Disclosures
Disclose provision as outlined above Provisions shall not be appropriated from GR Provisions shall be debited to P & L A/c

FINANCIAL HIGHLIGHTS OF NBFCs 2000-2006 SCENARIO

2000-01 Decline in the income of NBFCs
REASON Drop in the fund based income which contributed 94% in this decline

2001-02 Decline trend continued.

Loss of Rs 212 crore reported NBFCs reported profit of Rs 325 crore

2002-03 Decline trend broke

CONTD..
March 2006 NBFCs held Rs 22842 crore of public deposits. Major chunk of public deposits was held by RNBCs ( Residual non-banking companies) which was little over 80%

1998- INTRODUCTION OF CRAR

Following the 1997 scam, capital adequacy norms were made applicable to NBFCs CRAR Capital to risk weighted average ratio According to norms
Every NBFC shall maintain a minimum capital ratio consisting of tier 1 & 2 capital that shall not be less than 12 per cent on or before 31 March 1999, of its aggregate risk weighted assets and of risk adjusted value of off-balance sheet items.

CONTD. .
NBFCs with less than 10 CRAR were existed during 2000-01 Almost 73 % NBFCs had above 30% CRAR as on 31 march 2001 As on 2006, around 94 % NBFCs had achieved capital adequacy norms of more than 12% In march 2006 there were only 19 NBFCs with less than 12 CRAR

2005-THE RBI RESTRICTIONS

The RBI placed restrictions on BANK FUNDINGS TO NBFCs in August 2005. Key features : Banks are not allowed to lend to NBFCs if:
Investments of NBFCs in shares & debentures of any company. Grants of unscheduled loans to and inter-corporate deposits by NBFCs in any company Loans by NBFCs to subsidiaries any group companies and funding to NBFCs for on-lending to individuals for subscribing to IPOs and discounting or rediscounting of bills by NBFCs.

CONTD. .
Shares and debentures can not be accepted as collateral for secured loans granted to NBFCs. Banks funding to RNBFs will be restricted to their net owned funds(NOF) Banks are not allowed to execute guarantees covering intercompany deposits and loans to NBFCs Banks cannot provide bridge loans of any kind against an upcoming equity or bond issue .

CONTD. .
Banks cannot provide bridge loans of any other form such as floating rate bonds. Banks cannot enter into lease agreements with equipment leasing firms .

SMALL & LARGE NBFCs

Small NBFCs focus on deposit taking Large NBFCs focus on asset financing Large NBFCs have specialized skills in credit intermediation and have a collective asset base of Rs 17000 crore. NBFCs are leader in financing commercial vehicles, tractors and autotomobiles They offer personal loans , insurance and various other services

BANKS & NBFCs

Banks are entering the niche markets of NBFCs Banks have edge over NBFCs as they have assess to low cost deposits which NBFCs dont. Foreign banks floated in India as a result of which no of NBFCs increased RBI tightened the norms in 2006 according to which, non-deposit taking NBFCs having assets of Rs 100 crore will be subject to exposure and capital adequacy norms.

NEW GUIDELINES RBI(2006)

RBI tightened the norms in 2006 according to which, non-deposit taking NBFCs having assets of Rs 100 crore will be subject to exposure and capital adequacy norms. Banks will not be able to lend indiscriminately to them . Banks will not be allowed to hold more than 10 percent equity stake in deposit taking NBFCs Foreign banks with NBFC subsidies will be required to include the activities of their NBFC arms in their reporting to Reserve Bank.