Non Banking Financial Companies (NBFCs) in India

Prof.S.P.Garg Jaipuria Institute of Management JAIPUR(India) spgarg@jimj.ac.in

 Important segment as Financial intermediates NBFCs are incorporated under the Companies Act, 1956. Facilitate Capital Formation & Supplement the role of Banks Clause (3) of section 45-1 RBI Act 1934: A non Banking financial company has been defined vide clause (b) of section 45-1 of chapter IIIB of the Reserve Bank of India Act,1934,as (i) a financial institution, which is a company: (ii) a non-banking institutions, which is a company and which has as its principal business the receiving of deposits under any schemes or arrangement or in any other manner or lending in any manner; (iii)such other non banking and other institutions or class of such institutions, as the bank with the previous approval of the central government and by notification in the official gazette, specify.

 Reserve Bank of India as regulator of the Non-Banking Financial Companies under the provisions of Chapter III B of the Reserve Bank of India Act, 1934. With the amendment of the Reserve Bank of India Act, 1934 in January 1997, in terms of Section 45 IA of the Act, all NonBanking Financial Companies have to be mandatorily registered with the Reserve Bank of India.

 NBFCs not requiring Registration with RBI

Insurance Companies registered under Section 3 of the Insurance Act, 1938; ii) Nidhi Companies notified under Section 620A of the Companies Act, 1956; iii) Chit Fund Companies carrying on Chit Fund business as their principal business iv) Stock Broking Companies / Merchant Banking Companies registered under Section 12 of the Securities & Exchange Board of India Act; and v) Housing Finance Companies being regulated by the National Housing Bank (NHB)

Non Banking Financial Companies (NBFCs)

Regulations in NBFCs :
1960 : Guidelines/directions from RBI 1977 :RBI guidelines on acceptance of deposits 1994 : Dr Shah Committee to regulate asset side 1997 :Amendment in RBI Act to provide comprehensive powers to RBI TO REGULATE NBFCs (Development of comprehensive system) 1998 :C M Vasudev Task Force 2000 :Financial Companies Regulation Bill for implementation of Statutory changes for depositors protection

Non Banking Financial Companies (NBFCs)

A NBFC cannot accept demand deposits; It is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and Deposit insurance facility of DICGC is not available for NBFC depositors as in case of banks.

 Range of Services : high purchases, equipment lease finance, loans, Investments

Types of NBFCs : Hire purchase finance company(HPFC) Investment company (IC ) Loan company(LC) Mutual benefit financial company(MBFC/MBC) Equipment leasing company(ELC) Chit Fund company Miscellaneous non-banking company(MNBC) Residual non banking company (RNBC) Micro finance companies/institutions (MFC/MFI)

Non Banking Financial Companies (NBFCs)

With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as (i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC) Core Infrastructure Company NBFC ( since 2009): CIC Malegam Committee : NBFC MFIs

 Regulatory Authorities : a) Equipment Leasing, Hire Purchase Loan Companies, Investment Companies ,RNBC, Chit Funds : RBI b) Misc. Non-Banking Finance Companies (Chit Funds) : Registrar of Chit Funds & RBI c) Mutual Benefits Companies (Nidhis): Department ofCompany Affairs, GOI d) Micro Finance Companies : NABARD e) Housing Finance Companies :NHB f) Stock Broking Companies : SEBI g) Merchant Banking Companies: SEBI

Non Banking Financial Companies (NBFCs)

Residuary Non-Banking Company a class of NBFC with its principal business of receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. Required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilisation of deposits and requirement of deployment of depositors' funds as per Directions. Prudential Norms Directions are applicable Floor limits on interest prescribed by R B I

Non Banking Financial Companies (NBFCs)

RNBCs to offer a rate of interest of not less than 5% per annum on term deposits and 3.5% on daily deposits, both compounded annually, under existing directions. -RNBCs cannot accept deposits for a period less than 12 months and more than 60 months. -RNBCs cannot offer any gifts/incentives to solicit deposits from public NBFCs including RNBCs can accept deposit only against issue of proper receipt.

Mutual Benefits Financial Companies (Nidhis) Notified under section 620 A of the Companies Act Exempted from core provisions of the RBI Act Entry Point Barriers :minimum Capital Funds, Liquid assets requirement, Restrictions on dividends ,ceiling on interest rates, regulation on managerial aspects, disclosure norms, role of auditors & protection of depositors Misc Non Banking (MNBCs): engaged in chit fund business Governed by state Govt. Can accept deposits up-to 25% and 15% of the net owned funds ( NOF) from public & shareholders respectively for a period of 6 months to 36 months can not accept deposits repayable on demand /notice

Important Provisions of Chapter III B of RBI Act: Certificate of registration Minimum NOF Rs 200 lacs( earlier Rs25 lacs) NOF : the aggregate of paid up capital and free reserves accumulated balance of loss ,deferred revenue expenditure and other intangible assets, as disclosed in the balance sheet Maintenance of liquid assets Creation of Reserve fund :not less than 20 %of its net profit every year, before any dividend is declared Board for Financial Supervision (BFS ) to direct, formulate, and oversee implementation of policies & supervision

Non Banking Financial Companies (NBFCs)

An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public deposits. Credit rating must An exception is made in case of unrated AFC companies with CRAR of 15% which can accept public deposit up to 1.5 times of the NOF or Rs 10 crore whichever is lower without having a credit rating. A NBFC may get itself rated by any of the four rating agencies namely, CRISIL, CARE, ICRA and FITCH Ratings India Pvt. Ltd.

Non Banking Financial Companies (NBFCs)

Applicability of all norms of asset classification, income recognition , provisioning including on standard assets @0.25%, capital adequacy ,disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares. ALM SYSTEM must All NBFCs having assets of Rs 50 crores to have Audit Committee of the Board Auditors Report as per RBI directions

 Adherence to CAR w e f 1998:15% wef March 2012 ( earlier 12%) Restrictions on bank funding to NBFCs Disclosure in the Balance Sheet Capital to Risk Assets Ratio (CRAR) Exposure to real estate sector, both direct and indirect; and Maturity pattern of assets and liabilities

Non Banking Financial Companies (NBFCs)

In terms of Section 45-IB of the RBI Act, 1934 the minimum level of liquid asset to be maintained by NBFCs is 15 per cent of public deposits outstanding as on the last working day of the second preceding quarter. Of the 15%, NBFCs are required to invest not less than ten percent in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. The liquid assets may consist of Government securities, Government guaranteed bonds and term deposits with any scheduled commercial bank.

Non Banking Financial Companies (NBFCs)

A company incorporated under the Companies Act, 1956 and desirous of commencing business of nonbanking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs.200 lakh (raised from Rs25 lakh w.e.f April 21, 1999). The company is required to submit its application for registration in the prescribed format alongwith necessary documents for RBI consideration. R B I issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied

Non Banking Financial Companies (NBFCs)

all NBFCs (both deposit taking and non-deposit taking) with asset size of Rs 100 crore and above to furnish the information about downgrading / upgrading of assigned rating of any financial product issued by them to RBI NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. 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. Can open branch(es) / appoint agents to collect deposits.

Non Banking Financial Companies (NBFCs)

NBFCs cannot grant any loan against a public deposit or make premature repayment of a public deposit within a period of three months (lock-in period) from the date of its acceptance. However in the event of death of a depositor, the company may, even within the lock - in period, repay the deposit at the request of the joint holders with survivor clause / nominee / legal heir only against submission of relevant proof, to the satisfaction of the company.

Non Banking Financial Companies (NBFCs)

Important Issues/Developments: RBI (Amendment) Act 1997 provides for compulsory registration with RBI by all NBFCs Entry point net owned funds:Rs25 lakhs w.e.f 21st April1999 (now raised to Rs 2 crores) All NBFC PROHIBITED FROM GRANTING LOANS AGAINST THEIR OWN SHARES To avoid concentration of credit ,NBFCs cannot lend more than 15 and 20 % of theur net owned funds to a single borrower or a group of borrowers Restriction on investment in land and building ,except for own use /unquoted shares MAXIMUM 10 % OF NOF

Non Banking Financial Companies (NBFCs)

RECENT DEVELOPMENTS
Changes in ECB POLICY : With effect from 1st JULY,2009,with the approval of RBI,NBFCs can avail infracture loans from Multi Lateral Financial Institutions (MLFIs) for financing infrastructural projects Under FDI Policy, investment in any NBFC with 74% foreign stake is permitted subject to $ 50 million capitalisation to be brought within a period of 24 months NBFCs with minimum balancesheet size of Rs 10000crores and gross NPAs of less than 5% to be permitted to set up as Banks

 Self Regulatory Organization : Finance Industry Development Company (FIDC) ,Set up in 2004

Non Banking Financial Companies (NBFCs)

Acceptance of deposits by companies engaged in activities including plantation activities, commodities trading, multilevel marketing, manufacturing activities, housing finance, nidhis (mutual benefit financial companies), and potential nidhis (mutual benefit company) and companies engaged in collective investment schemes do not come under the purview/regulations of the RBI.

Non Banking Financial Companies (NBFCs)

LEASING is a process by which a firm can obtain the use of a certain fixed asset for which it must make a series of contractual periodic tax deductible payments (lease rentals). LESSOR is the owner of the asset that is being leased. LESSEE is the receiver of the services of the asset under a lease contract. LEASE TERM is the period for which the lease agreement remains in operation. LEASE RENTAL is the consideration which the lessee pays to the lessor for the lease transaction