NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

CHAPTER-1
INTRODUCTION
1.1INTRODUCTION TO NON-BANKING FINANACIAL
COMPANIES
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,
securities, leasing, hire-purchase, insurance business, and chit business.
Non-banking financial companies, or NBFCs, are financial institutions that provide banking
services, but do not hold a banking license. These institutions are not allowed to take deposits
from the public. Nonetheless, all operations of these institutions are still covered under
banking regulations.
NBFCs do offer all sorts of banking services, such as loans and credit facilities, retirement
planning, money markets, underwriting, and merger activites. The number of non-banking
financial companies has expanded greatly in the last several years as venture capital
companies, retail and industrial companies have entered the lending business
Non-Banking Financial Companies (NBFC) have rapidly emerged as an important segment
of the Indian financial system. Moreover, NBFCs assume significance in the small business
segment as they primarily cater to the credit requirements of the unorganised sector such as
wholesale & retail traders, small-scale industries and small borrowers at the local level.
NBFC is a heterogeneous group of financial institutions, performing a wide range of
activities like hire-purchase finance, vehicle financing, equipment lease finance, personal
loans, working capital loans, consumer loans, housing loans, loans against shares and
investment, etc. NBFCs are broadly divided into three categories namely (i) NBFCs
accepting deposits from banks (NBFC-D); (ii) NBFCs not accepting/holding public deposits
(NBFC-ND); and (iii) core investment companies (i.e. those acquiring share/securities of
their group/holding/subsidiary companies to the extent of not less than 90% of total assets
and which do not accept public deposits.)
The segment has witnessed considerable growth in the last few years and is now being
recognised as complementary to the banking sector due to implementation of innovative

NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

marketing strategies, introduction of tailor-made products, customer-oriented services,

attractive rates of return on deposits and simplified procedures, etc.
While the functions of NBFCs are just like banks, there are few differences between both the
institutions. These are: (i) NBFC cannot accept demand deposits; (ii) NBFC is not part of the
payment and settlement system as well as it cannot issue cheques drawn on itself and (iii)
deposit insurance facility of Deposit Insurance & Credit Guarantee Corporation is not
available for NBFC depositors unlike in the case of banks.

1.2 HISTORY OF NBFCs

In the wake of failure of several banks in the late 1950s and early 1960s in India, large
number of ordinary depositors lost their money. This led to the formation of the Deposit
Insurance Corporation by the Reserve Bank, to provide guarantee to the depositors. (Later by
adding a credit guarantee element, it became the DICGC). While this provided the necessary
safety net for the bank depositors, the Reserve Bank did note that there were deposit taking
activities undertaken by non-banking companies. Though they were not systemically as
important as the banks, the Reserve Bank initiated regulating them, as they had the potential
to cause pain to their depositors.
. Later in 1996, in the wake of the failure of a big NBFC, the Reserve Bank tightened the
regulatory structure over the NBFCs, with rigorous registration requirements, enhanced
reporting and supervision. Reserve Bank also decided that no more NBFC will be permitted
to raise deposits from the public. Later when the NBFCs sourced their funding heavily from
the banking system, it raised systemic risk issues. Sensing that it can cause financial
instability, the Reserve Bank brought asset side prudential regulations onto the NBFCs.
Non-Banking Financial Company (NBFC) in India began in a small way in the 1960s to
serve the need of the saver and investor whose financial need were not adequate covered by
the existing banking system in India. The NBFCs began to invite fixed deposit from investor
and work out leasing deal for larger industrial firms. In the early decade their operation were
on a limited scale and could not make a significant impact of financial system. However
between 1980s and 1990s the NBFCs were well entered and began to attract a large number
of investors owing to them customer friendly reputation.

NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

The cope of NBFCs is fast growing with multiplication of financial services. Some of
NBFCs are also engaged in underwriting through subsidiary unit and by offering allied
financial services including stock broking, investment banking, assets management and
portfolio management.
Non-Banking Financial Companies are those companies, which are not banking
companies under the banking regulation Act, but carry out financial activities of providing
finance. These companies may or may not accepting deposit from the public. These provide
lease finance,housing finance, trade in share, general loan and advance for share trading, hire
purchase specially against automobile.
In recent times non- baking financial companies (NBFCs) have emerged substantial
contributors to the Indian economics growth by supplementing the effort of banks and other
financial institutions. They pay key role in the direction of saving and investment .in wave of
rapid industrial development &liberalization of the financial sector, key financial institution
and professional have promoted financial institution to create have promoted financial
institution to create a diversified and competitive financial system.
NBFCs intermediate between saver and investor. These companies also know as finance
companies, lease companies, loan companies etc.

1.3MEANING & DEFINITION OF NBFCs

Section

45I of the Reserve Bank of India Act, 1934 defines non-banking financial

company as
(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;
Hence in short an NBFC may be defined as a company registered under the Companies Act,
1956 and also registered under the provisions of Section 45-IA of the Reserve Bank of India
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Act, 1934 and which provides banking services without meeting the legal definition of bank
such as holding a banking license. NBFCs are basically engaged in the business of loans and
advances, acquisition of shares/stocks/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 principle business is that of
agricultural activity or any industrial activity or sale, purchase or construction of immovable
property.

1.4 DIFFERENCE BETWEEN NBFCs AND BANKS

An NBFC cannot accept demand deposits, and therefore, cannot write a checking facility.
It is not a part of payment and settlement system which is precisely the reason why it cannot
issue cheques to its customers.
Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of
banks.
SARFAESI Act provisions have not currently been extended to NBFCs. Besides the above,
NBFCs pretty much do everything that banks do.
NBFCs are doing functions similar to that of banks, however there are a few differences:
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 unlike in case of
banks
A Bank is an organization that accepts customer cash deposits and then provides financial
services like bank accounts, loans, share trading account, mutual funds, etc.
A NBFC (Non Banking Financial Company) is an organization that does not accept customer
cash

deposits

but

provides

all

financial

services

except

bank

accounts.

a) A bank interacts directly with customers while an NBFI interacts with banks and
governments
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

(b) A bank indulges in a number of activities relating to finance with a range of customers,
while an NBFI is mainly concerned with the term loan needs of large enterprises
(c) A bank deals with both internal and international customers while an NBFI is mainly
concerned

with

the

finances

of

foreign

companies

(d) A bank's man interest is to help in business transactions and savings/ investment activities
while an NBFI's main interest is in the stabilization of the currency.

A table comparing the functions/limitations of Banks with NBFCs is as

follows:
BANKS
Definition

NBFCs

Definition: banking is acceptance of NBFCs

are

companies

deposits withdrawable by cheque or carrying financial business

demand; NBFCs cannot accept demand
deposits
Scope of business

Scope of business for banks is limited by There is no bar on NBFCs

se(1) of the BR Act

carrying activities other than

financial activities

Licensing

Licensing requirements are quite

It is quite easy to form an

requirements

stringent. Transfer of shareholding also

NBFC. Acquisition of NBFCs

controlled by RBI

is procedurally regulated but

not approval required

Major limitations on

No non-banking activities can be carried

business
Major privileges

facilities
Can exercise powers of recovery under Do not have powers under
SARFAESI and DRT law

Foreign investment

Cannot provide checking

SRFAESI or DRT law

Upto 74% allowed to private sector Upto 100% allowed

banks
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Regulations

Priority sector

BR Act and RBI Act lay down stringent Controls over NBFCs are
controls over banks

relatively much lesser

Certain minimum exposure to priority

Priority sector norms are not

lending requirements sector required

applicable to banks

SLR/CRR

Banks are covered by SLR/ CRR NBFCs have to maintain a

requirements

requirement

certain ratio of deposits in

specified securities; no such
requirement for nondepository companies

1.5 NEED & IMPORTANCE OF NBFCs

Indias financial services sector is huge. It is not just comprised of commercial banks, but
also non-banking financial companies (NBFCs). These firms offer a wide array of financial
services like loans, chit-funds, and are different from banks. NBFCs are often small players
that largely go unnoticed. However, they are still important to the economy, especially in a
developing country like India where 70% of the population lives in rural areas.
In a speech, P Vijaya Bhaskar, Executive Director of the Reserve Bank of India,
explained NBFC companies are game-changers that are very important to the economy.
Heres how:
Size of sector:
The NBFC sector has grown considerably in the last few years despite the slowdown in the
economy. As of March 2013, it accounted for 12.5% of the countrys Gross Domestic Product
(GDP) a measure of the size of the economy. This is up from 8.4% in March 2006.
However, this only counts NBFCs with assets more than Rs 100 crore. If the assets of all the
NBFCs below Rs 100 crore are reckoned, the share of NBFCs assets to GDP would go
further, Bhaskar said in his speech.

NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Growth:
In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most
years between 2006 and 2013. On an average, it grew 22% every year. Even when the
countrys GDP growth slowed to 6.3% in 2011-12 from 10.5% in 2010-11, the NBFC sector
clocked a growth of 25.7%. This shows, it is contributing more to the economy every year.
Profitability:
NBFCs are more profitable than the banking sector because of lower costs. This helps them
offer cheaper loans to customers. As a result, NBFCs credit growth the increase in the
amount of money being lent to customers is higher than that of the banking sector. Credit
grew an average 24.3% per year for NBFCs as against 21.4% for banks. This shows that
more customers are opting for NBFCs.
Infrastructure Lending:
NBFCs contribute largely to the economy by lending to infrastructure projects, which are
very important to a developing country like India. But they require large amount of funds,
and earn profits only over a longer time-frame. As a result, these are riskier projects. This
deters a lot of banks from lending to infrastructure projects. In the last few years, NBFCs
have contributed more to infrastructure lending than banks. NBFCs lent over one third or
35.8% of their total assets to infrastructure sector as of March 2013. In contrast, banks lent
only 7.6%.
Promoting inclusive growth:
NBFCs cater to a wide variety of customers both in urban and rural areas. They finance
projects of small-scale companies, which is important for the growth in rural areas. They also
provide small-ticket loans for affordable housing projects. All these help promote inclusive
growth in the country.

NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

1.6 MERITS AND DEMERITS OF NBFCs

Though the NBFCs have been around for a long time, they have recently gained popularity
amongst institutional investors, since they facilitate access to credit for semi-rural and rural
India where the reach of traditional banks has traditionally been poor.
NBFCs have also had a major impact in developing small business in rural India through
local presence and strong customer relationships. Usually the loan officers in such NBFCs
know the end customer or have a strong informal understanding of the credibility of the
borrower and are able to structure their loans appropriately. Few of the advantages of NBFC
are listed below:
Provides loans and credit facilities
Supporting investments in property
Trading money market instruments
Funding private education
Wealth management such as Managing portfolios of stocks and shares
Underwrite stock and shares, TFCs and other obligations
Provides retirement planning
Advise companies in merger and acquisition
Prepare feasibility, market or industry studies for companies
Discounting services e.g. discounting of instruments

Disadvantage:
(i) an NBFC cannot accept demand deposits;
(ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot
issue cheques drawn on itself; and
(iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not
available for NBFC depositors unlike in case of banks.

NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

1.7 ROLE OF NBFCs

As recognized by RBI and Expert Committee
Development of sectors like transports & infrastructure
Substantial Employment generation
Help & increase wealth creation
Broad base economic development
Irreplaceable supplement to bank credit in rural segments
Major trust on semi-urban,rural areas & first time buyers/ users
To finance economically weaker section society
Huge contribution to the state exchequer
70-80% of commercial vehicle are finance driven
Indian economy is more dependent on roads
Heavy replacement demand anticipated -30 lacs commercial vehicles by the year 2007
Another Rs 6000 crores required for phasing old vehicles CRISIL in its study has placed
commercial vehicle financing under (low risk) category.
Each commercial vehicle manufactured sold and financed given employment to minimum 20
percent( direct and in-direct)

NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

CHAPTER-2
TYPES,SERVICES,REGULATORY FRAMEWORK &
ACCEPTANCE OF DEPOSIT OF NBFCs
2.1 DIFFERENT TYPES OF NBFCs
NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit
accepting NBFCs, b) non deposit taking NBFCs by their size into systemically important and
other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of
activity they conduct. Within this broad categorization the different types of NBFCs are as
follows:
i.

Asset Finance Company(AFC) : An AFC is a company which is a financial

institution carrying on as its principal business the financing of physical assets
supporting productive/economic activity, such as automobiles, tractors, lathe
machines, generator sets, earth moving and material handling equipments, moving on
own power and general purpose industrial machines. Principal business for this
purpose is defined as aggregate of financing real/physical assets supporting economic
activity and income arising therefrom is not less than 60% of its total assets and total
income respectively.

ii.

Investment Company (IC)

IC means any company which is a financial institution carrying on as its principal
business the acquisition of securities,

iii.

Loan Company (LC):

LC means any company which is a financial institution carrying on as its principal
business the providing of finance whether by making loans or advances or otherwise
for any activity other than its own but does not include an Asset Finance Company.

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

iv.

Infrastructure Finance Company (IFC):

IFC is a non-banking finance company a) which deploys at least 75 per cent of its
total assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs. 300
crore, c) has a minimum credit rating of A or equivalent d) and a CRAR of 15%.

v.

Systemically Important Core Investment Company (CIC-ND-SI):

CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and
securities which satisfies the following conditions:
(a) it holds not less than 90% of its Total Assets in the form of investment in equity
shares, preference shares, debt or loans in group companies;
(b) its investments in the equity shares (including instruments compulsorily
convertible into equity shares within a period not exceeding 10 years from the date of
issue) in group companies constitutes not less than 60% of its Total Assets;
(c) it does not trade in its investments in shares, debt or loans in group companies
except through block sale for the purpose of dilution or disinvestment;
(d) it does not carry on any other financial activity referred to in Section 45I(c) and
45I(f) of the RBI act, 1934 except investment in bank deposits, money market
instruments, government securities, loans to and investments in debt issuances of
group companies or guarantees issued on behalf of group companies.
(e) Its asset size is Rs 100 crore or above and
(f) It accepts public funds

vi.

Infrastructure Debt Fund:

Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered
as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

NBFC raise resources through issue of Rupee or Dollar denominated bonds of

minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor
IDF-NBFCs.
vii.

Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI):

NBFC-MFI is a non-deposit taking NBFC having not less than 85%of its assets in the
nature of qualifying assets which satisfy the following criteria:
a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual
income not exceeding Rs. 60,000 or urban and semi-urban household income not
exceeding Rs. 1,20,000;
b. loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in
subsequent cycles;
c. total indebtedness of the borrower does not exceed Rs. 50,000;
d. tenure of the loan not to be less than 24 months for loan amount in excess of Rs.
15,000 with prepayment without penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not less than 75 per cent
of the total loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the
borrower

viii.

Non-Banking Financial Company Factors (NBFC-Factors):

NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of
factoring. The financial assets in the factoring business should constitute at least 75
percent of its total assets and its income derived from factoring business should not be
less than 75 percent of its gross income.
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

2.2 DIFFERENT TYPES OF SERVICES PROVIDED BY NBFCs

Type of Services provided by NBFCs:

NBFCs provide range of financial services to their clients. Types of services under nonbanking finance services include the following:
1. Hire Purchase Services
2. Leasing Services
3. Housing Finance Services
4. Asset Management Services
5. Venture Capital Services
6. Mutual Benefit Finance Services (Nidhi) banks.
The above type of companies may be further classified into those accepting deposits or those
not accepting deposits.
Now we take a look at each type of service that an NBFC could undertake.

Hire Purchase Services

Hire purchase the legal term for a conditional sale contract with an intention to finance
consumers towards vehicles, white goods etc. If a buyer cannot afford to pay the price as a
lump sum but can afford to pay a percentage as a deposit, the contract allows the buyer to hire
the goods for a monthly rent. If the buyer defaults in paying the installments, the owner can
repossess the goods. HP is a different form of credit system among other unsecured consumer
credit systems and benefits. Hero Honda Motor Finance Co., Bajaj Auto Finance Company is
some of the HP financing companies.

Leasing

Services
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

A lease or tenancy is a contract that transfers the right to possess specific property. Leasing
service includes the leasing of assets to other companies either on operating lease or finance
lease. An NBFC may obtain license to commence leasing services subject to , they shall not
hold, deal or trade in real estate business and shall not fix the period of lease for less than 3
years in the case of any finance lease agreement except in case of computers and other IT
accessories. First Century Leasing Company Ltd., Sundaram Finance Ltd. is some of the
Leasing companies in India.

Housing Finance Services

Housing Finance Services means financial services related to development and construction
of residential and commercial properties. An Housing Finance Company approved by the
National Housing Bank may undertake the services /activities such as Providing long term
finance for the purpose of constructing, purchasing or renovating any property, Managing
public or private sector projects in the housing and urban development sector and Financing
against existing property by way of mortgage. ICICI Home Finance Ltd., LIC Housing
Finance Co. Ltd., HDFC is some of the housing finance companies in our country.

Asset Management Company

Asset Management Company is managing and investing the pooled funds of retail investors
in securities in line with the stated investment objectives and provides more diversification,
liquidity, and professional management service to the individual investors. Mutual Funds are
comes under this category. Most of the financial institutions having their subsidiaries as Asset
Management

Company

like

SBI,

BOB,

UTI

and

many

others.

Venture Capital Companies

Venture capital Finance is a unique form of financing activity that is undertaken on the belief
of high-risk-high-return. Venture capitalists invest in those risky projects or companies
(ventures) that have success potential and could promise sufficient return to justify such
gamble. Venture capitalist not only provides finance but also often provides managerial or
technical expertise to venture projects. In India, venture capital concentrate on seed capital
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

finance for high technology and for research & development. ICICI ventures and Gujarat
Venture are one of the first venture capital organizations in India and SIDBI, IDBI and others
also

promoting

venture

capital

finance

activities.

Mutual Benefit Finance Companies (MBFC's),

A mutual fund is a financial intermediary that allows a group of investors to pool their money
together with a predetermined investment objective. The mutual fund will have a fund
manager who is responsible for investing the pooled money into specific securities/bonds.
Mutual funds are one of the best investments ever created because they are very cost efficient
and very easy to invest in. By pooling money together in a mutual fund, investors can
purchase stocks or bonds with much lower trading costs than if they tried to do it on their
own.

But

the

biggest

advantage

to

mutual

funds

is

diversification.

There are two main types of such funds, open-ended fund and close-ended mutual funds. In
case of open-ended fund, the fund manager continuously allows investors to join or leave the
fund. The fund is set up as a trust, with an independent trustee, who keeps custody over the
assets of the trust. Each share of the trust is called a Unit and the fund itself is called a Mutual
Fund. The portfolio of investments of the Mutual Fund is normally evaluated daily by the
fund manager on the basis of prevailing market prices of the securities in the portfolio and
this will be divided by the number of units issued to determine the Net Asset Value (NAV) per
unit. An investor can join or leave the fund on the basis of the NAV per unit.
In contrast, a close-end fund is similar to a listed company with respect to its share capital.
These shares are not redeemable and are traded in the stock exchange like any other listed
securities. Value of units of close-end funds is determined by market forces and is available at
20-30% discount to their NAV

NBFCs INDUSTRY STRUCTURE

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

2.3 REGULATORY FRAMEWORK OF NBFCs RELATED TO

RBI

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Regulatory Framework
The RBI Act was amended in 1997 to provide for comprehensive regulatory framework for
NBFCs. As per the RBI (Amendment) Act 1997, the RBI can issue directions to NBFCs &
its auditors, prohibit deposit acceptance and alienation of assets by NBFCs and initiate
action for winding up of NBFCs. The new regulations provide:

Compulsory registration for all NBFCs, irrespective of their holding of public

deposits, for commencing and carrying on business of a non-business financial
institution

The amended act also classified NBFCs into three broad categories i) NBFCs
accepting public deposits; ii) NBFCs not accepting/holding public deposits; and iii)
core investment companies (i.e. those acquiring shares/securities of their
group/holding/subsidiary companies to the extent of not less than 90% of total assets
and which do not accept public deposits.)

Minimum entry point net-worth of Rs 2.5 million which was subsequently revised
upwards to Rs 20 million

Deposit mobilisation linked to net-worth, business activities and credit rating

Maintenance of 12.5% of their deposits in liquid assets

Creation of a Reserve Fund and transfer of 20% of profit after tax but before dividend
to the fund

Ceiling on maximum rate of interest that NBFCs can pay on their public deposits

NBFCs with an asset size of at least Rs 1 billion or a deposit base of at least Rs 200
million are required to have Asset-Liability Management systems and constitute an
Asset-Liability Management Committee

Further, in order to monitor the financial health and prudential functioning of NBFCs, the
RBI issued directions regarding acceptance of deposits, prudential norms like capital
adequacy, income recognition, asset classification, provisioning for bad and doubtful assets,
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

exposure norms and other measures. For Instance, capital to risk-weighted assets ratio
(CRAR) norms were made applicable to NBFCs in 1998. As per the CRAR norms, every
deposit taking NBFC is required to maintain a minimum capital, consisting of Tier I and Tier
II capital, of not less than 12% (15% in case of unrated deposit-taking loan investment
companies) of its aggregate risk-weighted assets and of risk-adjusted value of off-balance
sheet items. Besides, before 2000, the prudential norms applicable to banking sector and
NBFCs were not uniform. Within the NBFC sector also, the prudential norms applicable to
deposit taking NBFCs were more stringent than those for non deposit taking NBFCs. Since
2000, the RBI has initiated measures to reduce the scope of regulatory arbitrage between
banks, NBFCs-D (Deposit taking NBFCs) and NBFCs-ND (Non-Deposit taking NBFCs).
The regulatory framework has undergone significant change in the last few years. The
regulatory policies, which mostly focused on NBFCs-D until past few years, are now paying
increasing attention to NBFCs-ND as well. The change in regulatory stance is largely due to
a significant increase in both the number and balance sheet size of NBFCs-ND segment that
gave rise to systemic concerns. In view of these developments, NBFCs-ND with assets size
of Rs 1 bn and above were classified as systemically important NBFCs (NBFCs-ND-SI) and
were subjected to limited norms & regulations such as CRAR and exposure norms
prescribed by the RBI. The CRAR for these companies has been set at 12% since March 31,
2009 and has been raised to 15% upto March 31, 2010

Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can
commence or carry on business of a non-banking financial institution without a) obtaining a
certificate of registration from the Bank and without having a Net Owned Funds of Rs. 25
lakhs (Rs two crore since April 1999). However, in terms of the powers given to the Bank. to
obviate dual regulation, certain categories of NBFCs which are regulated by other regulators
are exempted from the requirement of registration with RBI viz. Venture Capital
Fund/Merchant Banking companies/Stock broking companies registered with SEBI,
Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi
companies as notified under Section 620A of the Companies Act, 1956, Chit companies as
defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies
regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

What are the requirements for registration with RBI?

A company incorporated under the Companies Act, 1956 and desirous of commencing
business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act,
1934 should comply with the following:
i. it should be a company registered under Section 3 of the companies Act, 1954
ii. It should have a minimum net owned fund of Rs 200 lakh. (The minimum net owned fund
(NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated
separately in the FAQs on specialized NBFCs)

Exemption from Registration

Certain category of NBFCs which are regulated by other regulators are exempted from the
requirement of registration with RBI: Venture Capital Fund/Merchant Banking
companies/Stock broking companies registered with SEBI Insurance Company holding a
valid Certificate of Registration issued by IRDA Nidhi companies as notified under Section
620A of the Companies Act, 1956 Chit companies as defined in clause (b) of Section 2 of
the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing
Bank.

2.4 NBFCs ACCEPTING DEPOSITS

Only those NBFCs holding a valid Certificate of Registration with authorisation to accept
Public Deposits can accept/hold public deposits. The NBFCs accepting public deposits
should have minimum stipulated Net Owned Fund and comply with the Directions issued by
the Bank.

Ceiling on Acceptance of Public Deposits

Category of NBFC Ceiling on public deposits EL/HP Companies maintaining CRAR of 1.5
times of NOF or Rs 10 crore 15% without credit rating whichever is less EL/HP Companies
with CRAR of 12% 4 times of NOF and having minimum investment grade credit rating
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

LC/IC with CRAR of 15% and having 1.5 times of NOF minimum investment grade credit
rating
The maximum rate of interest a NBFC can offer is 11% The NBFCs are allowed to
accept/renew public deposits for a minimum period of 12 months and maximum period of 60
months.

Defaults in Repayment of Deposit

If an NBFC defaults in repayment of deposit, the depositor can approach Company Law
Board or Consumer Forum or file a civil suit to recover the deposits.
NBFCs Regulations
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
. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors
The deposits with NBFCs are not insured
The repayment of deposits by NBFCs is not guaranteed by RBI
The NBFCs having assets size of Rs. 500 crore and above but not accepting public deposits
are required to submit Quarterly Return on important financial parameters of the company
the NBFC is required to furnish the information in respect of any change in the composition
of its Board of Directors, address of the company and its Directors and the name/s and
official designations of its principal officers and the name and office address of its Auditors

Overdue Interest
Overdue interest is payable to the depositors in case the company has delayed the
repayment of matured deposits

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Such interest is payable from the date of receipt of such claim by the company or the date of
maturity of the deposit whichever is later, till the date of actual paymenT
If the depositor has lodged his claim after the date of maturity, the company would be liable
to pay interest for the period from the date of claim till the date of repayment. For the period
between the date of maturity and the date of claim it is the discretion of the company to pay
interest.

Depositors of NBFCs
Public deposits are unsecured
A proper deposit receipt which should, besides the name of the depositor/s state the date of
deposit, the amount in words and figures, rate of interest payable and the date of maturity
should be insisted. The receipt shall be duly signed by an officer authorised by the company
in that behalf.
The Reserve Bank of India does not accept any responsibility or guarantee about the present
position as to the financial soundness of the company or for the correctness of any of the
statements or representations made or opinions expressed by the company and for repayment
of deposits/discharge of the liabilities by the company.

Role of Official Liquidator

The liquidator performs duties of winding up becomes custodian of the property of the
company and runs the day-to-day affairs of the company
draw up a statement of affairs of the company in prescribed form containing particulars of
assets of the company, its debts and liabilities, names/residences/occupations of its creditors,
the debts due to the company and such other information as may be prescribed
The liquidator realizes the assets of the company and arranges to repay the creditors
according to the scheme approved by the court
In the newspaper inviting claims from depositors/investors in compliance with court orders

Owned Fund and Net Owned Fund

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Owned Fund means aggregate of the paid-up equity capital and free reserves as disclosed in
the latest balance sheet of the company after deducting there from accumulated balance of
loss, deferred revenue expenditure and other intangible assets
The amount of investments of such company in shares of its subsidiaries, companies in the
same group and all other NBFCs and the book value of debentures, bonds, outstanding loans
and advances made to and deposits with subsidiaries and companies in the same group is
arrived at. The amount thus calculated, to the extent it exceeds 10% of the owned fund, is
reduced from the amount of owned fund to arrive at Net Owned Fund

Responsibilities
Audited balance sheet of each financial year and an audited profit and loss account in
respect of that year as passed in the general meeting together with a copy of the report of the
Board of Directors and a copy of the report and the notes on accounts furnished by its
Auditors;
Statutory Annual Return on deposits - NBS 1;
Certificate from the Auditors that the company is in a position to repay the deposits as and
when the claims arise;
Quarterly Return on liquid assets;
Half-yearly Return on prudential norms;
Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above
or with assets of Rs. 100 crore and above irrespective of the size of deposits
Monthly return on exposure to capital market by companies having public deposits of Rs. 50
crore and above; and
A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns
on prudential norms.

Prepayment of Public Deposits

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

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
. A NBFC subject to above provisions, if it is not a problem company, may permit after the
lockin period premature repayment of a public deposit at its sole discretion, at the rate of
interest prescribed by the Bank.
A problem NBFC is prohibited from making premature repayment of any deposits or
granting any loan against public deposits/deposits, as the case may be. The prohibition shall
not, however, apply in the case of death of depositor or repayment of tiny deposits i.e. up to
Rs. 10000/- subject to lock in period of 3 months in the latter case.

Maintenance of Liquid Asset

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.
Residuary Non-Banking Company (RNBC)
Residuary Non-Banking Company is a class of NBFC which is a company and has as its
principal business the receiving of deposits, under any scheme or arrangement or in any other
manner and not being Investment, Leasing, Hire- Purchase, Loan Company. These companies
are required to maintain investments as per directions of RBI, in addition to liquid assets.

Deposits by RBFCs
There is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure that the
amounts deposited and investments made by the company are not less that the aggregate
amount of liabilities to the depositors. Such companies are required to invest in a portfolio
comprising of highly liquid and secured instruments viz. Central/State Government securities,
fixed deposit of scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units
of Mutual Funds, etc.

Interest rate payable by RNBCs:

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

The amount payable by a residuary non-banking company in respect of deposits received

shall not be less than the amount calculated at the rate of 5% (to be compounded annually) on
the amount deposited in lump sum or at monthly or longer intervals; and at the rate of 3.5%
(to be compounded annually) on the amount deposited under daily deposit scheme. Further, a
RNBC can accept deposits for a minimum period of 12 months and maximum period of 84
months from the date of receipt of such deposit. They cannot accept deposits repayable on
demand.

RBI Regulations on Banking Stakes in NBFCs

Foreign banks operating in India and Local banks will not be permitted to own more than
10% of deposit taking finance company
The restriction would not apply to investment in housing finance companies
Foreigners are eager to enter Indias tightly regulated financial sector to benefit from rapid
growth in consumer and business lending, but RBI is wary of opening up the sector.
With some exceptions banks can typically invest in a finance company, either deposit taking
or non deposit taking, only upto 10 percent of the capital funds. The combined exposure in all
finance companies can go up to 40% of the capital funds.
RBI said systematically important finance companies, classified as non deposit taking must
maintain a capital adequacy ratio of 10 percent
According to RBI, there are around 148 such finance companies with a total asset size of Rs
1.72 trillion

2.5 VARIOUS PRODUCTS OFFERED BY NBFCs & MAJOR

NBFCs COMPANIES IN INDIA
List of major products offered by NBFCs in India:

Funding of commercial vehicles

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Funding of infrastructure assets

Retail financing
Loan against shares
Funding of plant and machinery
Small and Medium Enterprises Financing
Financing of specialized equipment
Operating leases of cars, etc
Major NBFCs in India
Birla Global Finance
Cholamandalam Investment & Finance Co. Ltd
First Leasing Company of India LIC Housing Finance
Sundaram Finance
CanFin Homes
Countrywide Finance
Housing Development Finance CompanySakura Capital India Ltd

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

CHAPTER-3
FINANACIAL PERFORMANCE,TRENDS, PROGRESS,
IMPACT, CHALLENGES& FUTURE OF NBFCs
3.1 FINANCIAL PERFORMANCE OF NBFCs
Financial Performance of NBFCs
Operations of NBFCs, which witnessed sharp contraction during FY04 due to a decline in
resource mobilisation, improved thereafter. During FY08, though expenditure witnessed an
increase of 45.4%, rise in both fund based income and fee based income led to significant
growth in operating profits (263.2% y-o-y during FY08) and net profits (298.3% y-o-y
during FY08). Despite the volatile domestic financial markets, financial performance of
NBFCs in terms of income and net profits remained modest. Expenditure witnessed some
deceleration in growth during FY09. However, the pace at which the expenditure increased
during FY09 was higher than that for income, in turn leading to a 2.2% (y-o-y) decline in
operating profit. Net profit, on the other hand, registered a moderate growth mainly due to
lower provisioning for tax. Given the moderation in income, the cost to income ratio
deteriorated to 74.1% during FY09 from 68.9% during FY08.
Gross NPA as well as net NPA (as percentage of gross advances & net advances
respectively) continued to decline during 2007-08. Among NBFC group, gross NPA as
percentage of gross advances of equipment leasing & hire purchase companies increased
during FY08 on account of reclassification of NBFCs.
In contrast to the trend during the last few years, Gross NPA ratio increased to 2.7% during
FY09 from 2.1% during FY08. Net NPA remained negative with provisions exceeding NPA
at end-March 2009. Amongst the NBFC segments, there was a sharp improvement in the
asset quality (as reflected in various categories of NPAs) of equipment leasing companies
while asset quality of hire purchase companies witnessed sharp deterioration during FY09 as
compared against the previous year.
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

In case of capital adequacy ratio, the number of NBFCs with less than the minimum
regulatory Capital to risk-weighted average ratio (CRAR) of 12% declined to 9 at endMarch 2009 as against 47 as at end-March 2008. Further, at end-March 2009, almost 95.7%
of NBFCs had CRAR of 12% or more as compared with 85.6% of NBFCs during the
corresponding period of the previous financial year. This indicates that compliance with
CRAR requirement has improved in FY09.
The ratio of public deposits to net owned fund4 (NOF) for all categories of NBFC remained
unchanged at 0.2% as at end-March 2009 from the corresponding period of the previous
financial year. Among NBFC group, while the ratio of public deposits to NOF for loan
companies and hire purchase companies declined during FY09, that of remaining categories
registered a marginal increase.

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

3.2 TRENDS & PROGRESS OF THE NBFCs BUSINESS

NBFCs initially cater to the needs of individual and small savings investors and later
developed into financial institutions, providing services similar to those of banks. NBFCs
have many tailor made services for their clients with lesser degree of regulation. They have
offered high rate of interest to their investors and atrracted many small size investors. In
1998, Reserve Bank of India implemented unprecedented regulatory measures to safeguard
the

public

deposits.

The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial
Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions interalia,
prescribe guidelines on income recognition, asset classification and provisioning
requirements applicable to NBFCs, exposure norms, constitution of audit committee,
disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments
in

land

and

building

and

unquoted

shares.

The RBI has issued guidelines for entry of NBFCs into insurance sector in June 2000 .
Accordingly no NBFC registered with RBI having owned fund of Rs.2 Crore as per the last
audited Balance Sheet would be permitted to undertake insurance business as agent of
insurance

companies

on

fee

basis,

without

any

risk

participation.

The focus of regulatory initiatives in respect of financial institutions (FIs) during 2004-05
was to strengthen the prudential guidelines relating to asset classification, provisioning,
exposure to a single/group borrower and governance norms. Business operations of FIs
expanded during 2004-05. Their financial performance also improved, resulting from an
increase in net interest income. Significant improvement was also observed in the asset
quality of FIs, in general. The capital adequacy ratio of FIs continued to remain at a high
level,

notwithstanding

some

decline

during

the

year.

Regulatory initiatives in respect of NBFCs during the year related to issuance of guidelines
on credit/debit cards, reporting arrangements for large sized NBFCs not accepting/holding
public deposits, norms for premature withdrawal of deposits, cover for public deposits and
know your customer (KYC) guidelines. Profitability of NBFCs improved in 2003-04 and
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

2004-05 mainly on account of containment of expenditure. While gross NPAs of NBFCs, as a

group, declined during 2003-04 and 2004-05, net NPAs after declining marginally during
2003-04, increased significantly during 2004-05.
Since late 1980s up to mid 1990s, the number of NBFCs increased substantially on the back
of easy access of funds from capital market IPOs and deposits from the public. In 1981,
there were 7,063 NBFCs. The number went up to 24,009 in 1990 and there were as many as
55,995 NBFCs by 1995. The high deposit rates offered by NBFCs led investors to invest
their funds in NBFCs. The deposit base of the NBFCs grew at an average rate of 88.6% per
annum between the period Apr-91 to Mar-97. However, strong growth in NBFCs could not
be sustained as in the late 1990s several loans granted by the NBFCs turned sticky, leading
some of the large NBFCs to default in repayment to their depositors. This led the RBI to
introduce stringent guidelines in 1997-98 which hampered the ability of NBFCs to raise
deposits. Banks also became wary of lending to NBFCs, which translated into high cost of
funds for NBFCs. Moreover, increasing competition from the banking system that was
opened up for private sector banks in early 1990s affected the NBFCs business. Given these
developments, many NBFCs with asset base in excess of Rs 1 billion had to exit their
operations. NBFCs, however, recovered from this phase and witnessed strong growth during
2000-02

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Financial

Sector Reforms & Liberalization measures for NBFCs

During the period from 1992-93 to 1995-96 Indian Government took many steps to reform
the financial sector like liberalized bank norms, higher ceiling on term loans, allowed to set
their own interest rates, freed to fix their own foreign exchange open position subject of RBI
approval and guidelines issued to ensure qualitative improvement in their customer service.
Foreign equity investments in NBFCs are permitted in more than17 categories of NBFC
activities approved for foreign equity investments such as merchant banking, stock broking,
venture capital, housing finance, forex broking, leasing and finance, financial consultancy
etc. Guidelines for foreign investment in NBFC sector have been amended so as to provide
for a minimum capitalization norm for the activities, which are not fund based and only
advisory, or consultancy in nature, irrespective of the foreign equity participation level.
The objectives behind the reforms in the financial sector are to improve the efficiency and
competitiveness in the systems.

3.3 IMPACT OF GLOBAL FINANCIAL CRISIS ON NBFCs

The deepening of global financial crisis in 2008 led to drying up of external route of
financing for the Indian corporate sector. Further, with rising risk aversion among
international investors, there was a substantial outflow of foreign funds from domestic
equity markets, making it difficult for companies to raise funds domestically. Given the tight
liquidity conditions, companies redeemed their investments in mutual funds to finance their
own funding needs. The wave of redemptions was witnessed in mutual funds which in turn
affected NBFCs segment as mutual funds is the major source of debt financing for NBFCs.
Further, with the deteriorating credit environment, NBFCs providing unsecured personal
loans and consumer finance witnessed rise in their non performing assets. The impact of
slowing domestic demand was primarily felt in automobile sector. The demand for vehicle
finance (especially, commercial vehicle, two-wheeler & three wheeler finance) witnessed
substantial decline. This coupled with increased levels of asset quality slippages, have
adversely impacted profitability of NBFC sector in FY09.

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Given the worsening liquidity conditions of NBFCs, the RBI announced a slew of liquidity
augmentation measures which include:
i.

NBFCs-ND-SI were permitted as a temporary measure to raise short-term foreign

currency borrowings under the approval route subject to fulfillment of certain
conditions. The resources raised were to be used only for refinancing of short-term
liabilities and not for creation of fresh assets. It was also advised that the maximum
amount should not exceed 50% of the NOF or US$ 10 mn (or its equivalent),
whichever was higher. Eleven companies were granted permission under the facility
to borrow funds to the tune of US$ 834.95 mn plus foreign currency equivalent of Rs
15.66 bn (not availed of) out of which seven have borrowed so far to the extent of
US$ 645.58 mn.

ii.

Banks were permitted, on a temporary basis, to avail of liquidity support under the
LAF window through relaxation in maintenance of SLR to the extent of up to 1.5% of
their NDTL, exclusively for meeting the funding requirements of NBFCs and mutual
funds.

iii.

The risk weight on banks exposure to NBFCs-ND-SI was reduced to 100% from
125% irrespective of credit rating, while exposure to Asset Finance Companies which
attracted risk weight of 150% was also reduced to 100%.

iv.

NBFCs-ND-SI were permitted to augment their capital funds by issue of Perpetual

Debt Instruments.

v.

Deferred the proposed increase in the CRAR to be maintained by NBFCs-ND-SI to

12% and subsequently to 15% by one year, i.e. 12% by March 31, 2010 and 15% by
March 31, 2011.

vi.

Provided direct lending facility as a Lender of Last Resort (LOLR) where RBI lends
to NBFCs-ND-SI against their rated CPs through a SPV by subscribing to its bonds.
The facility was operationalised in January 2009 through an SPV called IDBI SASF
Trust to provide liquidity support against investment grade paper of NBFCs, subject
to fulfillment of certain conditions. It was designed as a LOLR facility to facilitate an
orderly downsizing of balance sheet of financially sound NBFCs which faced short

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

term temporary liquidity requirement. The facility has been availed by only one
NBFC so far which has drawn Rs 10.40 been under the scheme and there is no
outstanding balance as on date.
The slew of measures announced by the RBI coupled with reduction in key policy interest
rates, resulted in gradual improvement in domestic liquidity conditions, in turn providing
some support to the NBFCs segment.
In the past few months, domestic and external financing conditions have witnessed a
considerable improvement. Also, there has been some resumption of foreign capital inflows
in the domestic equity market. Liquidity conditions have remained comfortable as indicated
by easing of call money rates and increased recourse of banks to reverse repo window. In
view of the aforementioned developments, the RBI in its Q2 FY10 review of monetary
policy withdrew some liquidity boosting measures that were introduced as a part of
monetary stimulus in FY09. The special term repo facility for SCBs, for funding to NBFCs,
mutual funds, and housing finance companies was terminated. In addition to this, the RBI
initiated few regulatory measures with regards to the NBFCs. These include:

Introduction of a category of NBFCs as infrastructure NBFCs, defined as entities

which hold minimum of 75% of their total assets for financing infrastructure projects.

Linking the risk weights of banks exposure to infrastructure NBFCs to the credit
rating assigned to the NBFC by external credit assessment institutions (ECAIs)

3.4 CHALLENGES & FUTURE OUTLOOK OF NBFCs

While NBFCs have witnessed substantial growth over the years, there are few areas of
concern which need to be addressed. For instance, while NBFCs have enjoyed an edge over
banks in semi-urban & rural markets where banking network is not yet strong, they have
limited spread in urban markets. Nonetheless, in recent years, NBFCs have begun to create
niches for themselves that are often neglected by banks. These primarily include providing
finance to non-salaried individuals, traders, transporters, stock brokers, etc.
In the past few years, the increased competition from banks in the retail finance segment has
led to excess diversification by NBFCS from their core business activities. The sector has

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

witnessed introduction of various innovative products such as used vehicles financing, small
personal loans, three-wheeler financing, IPO financing, finance for tyres & fuel, asset
management, mutual fund distribution and insurance advisory, etc. Besides, NBFCs are
aspiring to emerge as a one-stop shop for all financial services.
NBFCs have also ventured into riskier segments such as unsecured loans, purchase finance
for used commercial vehicles, capital market lending, etc. Moreover, NBFCs customer
profile is concentrated on the self-employed segment. The earlier mentioned factors increase
their risk profile which could have adverse impact on the financial health of NBFCs.
Although some improvement has been witnessed in auto sales in last few months, the
demand for vehicle finance is likely to remain subdued. Besides, given the significant
slowdown in the Indian economy, NBFCs were encountering structural challenges such as
increased refinancing risk, short-term asset-liability mismatch leading to decelerating growth
and declining margins. This is expected to have a bearing on the profitability of NBFCs in
the medium term.
Given that growth in vehicle finance might remain low in the medium term, NBFCs are
expected to focus on rural and semi-urban markets. Credit requirements of rural population
are primarily met by banks from organised sector or local money lenders. Though, in recent
years there has been some penetration of NBFCs in this segment, the market still remains
largely untapped. There is a large section of rural population which does not have access to
credit either because of their inability to meet the lending covenants of banks or due to high
interest rates of local money lenders. This provides a huge opportunity for NBFC sector to
spread their business in the rural & semi-urban markets.

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

CHAPTER-4
SUGGESTIONS&RECOMMENDATIONS
The Reserve Bank of India has released on its website the Report of the Sub-Committee of
the Central Board of Directors of Reserve Bank of India to Study Issues and Concerns in the
MFI Sector.
The Sub-Committee has recommended creation of a separate category of NBFCs operating in
the microfinance sector to be designated as NBFC-MFIs. To qualify as a NBFC-MFI, the
Sub-Committee has stated that the NBFC should be a company which provides financial
services pre-dominantly to low-income borrowers, with loans of small amounts, for shortterms, on unsecured basis, mainly for income-generating activities, with repayment schedules
which are more frequent than those normally stipulated by commercial banks and which
further satisfies the regulations specified in that behalf.
The Sub-Committee has also recommended some additional qualifications for NBFC to be
classified as NBFC-MFI. These are:
a. The NBFC-MFI will hold not less than 90% of its total assets (other than cash and
bank balances and money market instruments) in the form of qualifying assets.
b. There are limits of an annual family income of Rs.50,000 and an individual ceiling on
loans to a single borrower of Rs.25,000
c. Not less than 75% of the loans given by the MFI should be for income-generating
purposes.
d. There is a restriction on the other services to be provided by the MFI which has to be
in accordance with the type of service and the maximum percentage of total income as
may be prescribed.

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

The Sub-Committee has recommended that bank lending to NBFCs which qualify as NBFCMFIs will be entitled to priority lending status. With regard to the interest chargeable to the
borrower, the Sub-Committee has recommended an average margin cap of 10 per cent for
MFIs having a loan portfolio of Rs. 100 crore and of 12 per cent for smaller MFIs and a cap
of 24% for interest on individual loans. It has also proposed that, in the interest of
transparency, an MFI can levy only three charges, namely, (a) processing fee (b) interest and
(c) insurance charge.
The Sub-committee has made a number of recommendations to mitigate the problems of
multiple-lending, over borrowing, ghost borrowers and coercive methods of recovery. These
include :
a. A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability
Group (JLG)
b. Not more than two MFIs can lend to a single borrower
c. There should be a minimum period of moratorium between the disbursement of loan
and the commencement of recovery
d. The tenure of the loan must vary with its amount
e. A Credit Information Bureau has to be established
f. The primary responsibility for avoidance of coercive methods of recovery must lie
with the MFI and its management
g. The Reserve Bank must prepare a draft Customer Protection Code to be adopted by
all MFIs
h. There must be grievance redressal procedures and establishment of ombudsmen
i. All MFIs must observe a specified Code of Corporate Governance
For monitoring compliance with regulations, the Sub-Committee has proposed a four-pillar
approach with the responsibility being shared by (a) MFI (b) industry associations (c) banks
and (d) the Reserve Bank.
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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

While reviewing the proposed Micro Finance (Development and Regulation) Bill 2010, the
Sub- Committee has recommended that entities governed by the proposed Act should not be
allowed to do business of providing thrift services. It has also suggested that NBFC-MFIs
should be exempted from the State Money Lending Acts and also that if the recommendations
of the Sub-Committee are accepted, the need for the Andhra Pradesh Micro Finance
Institutions (Regulation of Money Lending) Act will not survive.
The Sub-Committee has cautioned that while recognising the need to protect borrowers, it is
also necessary to recognise that if the recovery culture is adversely affected and the free flow
of funds in the system interrupted, the ultimate sufferers will be the borrowers themselves as
the flow of fresh funds to the microfinance sector will inevitably be reduced.

CHAPTER-5
CONCLUSION

NBFCs have emerged as an integral part of the Indian financial system by catering to the
credit needs in under-served areas and unbanked customers. Though NBFCs have the rural
network of branches and established rural customer base, their raison detre may be
threatened by new banks entering the rural areas.

To conclude, I may say that the challenge therefore for the NBFC sector is to grow in a
prudential manner while not stopping altogether on financial innovations. The key lies in
having in place adequate risk management systems and procedures before entering into risky
areas. As for the regulator, it is the constant endeavour of Reserve Bank to enable prudential
growth of the sector, keeping in view the multiple objectives of financial stability, consumer
36

NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

and depositor protection, and need for more players in the financial market, addressing
regulatory arbitrage concerns while not forgetting the uniqueness of NBFC sector. The Bank
presently is in the process of reviewing the regulatory framework for NBFCs in the context of
recent developments including the Nachiket Mor Committee and others.
Enhancing the credit delivery mechanisms: The credit delivery mechanism needs to be more
transparent and hassle free. There should be more stringent norms for the defaulters. The
operating cost of NBFCs has increased and it stands much higher than co-operative banks.
This is one area in which improvement is needed. The NBFCs have not been very much
profitable.
Strengthening the professionalism of NBFC sector through education and training, making
them more organised, RBI needs to educate people about NBFC, to reduce interest cost and
hence benefit the ultimate consumer.

CHAPTER-6
BIBLIOGRAPHY
BOOKS&JOURNALS
BOOKS
V.Avadhani, Indian capital market, First Edition, Himalaya publishing Home.
Y.Khan, Indian financial system, Fourth Edition, Tata mcgraw Hill

JOURNALS
HSBC Global Research: India NBFCs October 2013

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NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW

Financial Services IBEF Report

FICCI: Financial Foresights: Role of NBFCs in promoting inclusive growth April 2013
M.R Shollapur, The Indian Journal OF Commerce October- December 2005, p 101
P.C. Jain & S.S Verma Money and Financial System Sahitya Bhawan Publication (2006), P
127.
Sanjiv Shankaran(August),Business Line, Published by THE HINDU,/ I:\NBFCs Banking
on new areas.htm
Gupta, S.K., Aggrawal, N. & Gupta, N. Indian Banking SystemKalyani Publishers, p.
17.23

WEBSITES:
https://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asp
http://india-financing.com/overview-of-the-indian-nbfc-sector.html

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