BANKING AND FINANCE PROJECT REPORT ON NON-BANKING FINANCE COMPANIES (NBFC) : LATEST TRENDS AND DEVELOPMENT IN INDIA

GROUP NO: 4 GROUP MEMBERS: TANMAY MUKHERJEE PARAMITA BISWAS REEMA BISWAS DIBYOJYOTI CHOUDHURY

ACKNOLEDGEMENT

The feeling to acknowledge something and expressing words are two things apart but we honestly admit that when we truly wish to express our warm gratitude towards somebody concerned ,we are always at loss of words. We gratefully take this opportunity to express our gratitude and indebtness to our HOD and Prof. incharge Mrs Paramita Mukherjee for showing keen intrest ,timely encouragement,unceasing assistance and constructive criticism at every stages of the project work.Without this help this project would have never seen light of the day. We pay our sincere gratitude to the IEM for providing the necessary support and when required.We also thank all the respected faculty and staff member of the institute ,who directly or indirectly helped us in the completion of this project. Last but not the we would like to thank our parents and our classmates for their encouragement and affection to us in completing this project work.

CONTENTS

Aim Introduction NBFIs and NBFCs in India Meaning Defination How NBFCs are different than banks Classification OF NBFCs Re-classification of NBFCs Factors contributing to the Growth of NBFCs Regulation of NBFCs (various norms,practices,regulations and supervision) Contribution of NBFCs in economy of India Conclusion

Aim :
The sole aim of this project work is first to give a basic idea of what an NBFC is and then giving a broad view of NBFCs with respect to India i.e the highlighting the various developments and trends of NBFCs in India including various regulations and norms which are being observed.

Introduction :
Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still exercised under bank regulation. NBFCs perform functions similar to that of banks; however there are a few differences in that an NBFC cannot accept demand deposits; an NBFC is not a part of the payment and settlement system and as such, an NBFC cannot issue cheques drawn on itself; and deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks In India a Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bondsire-purchase, insurance business, or chit business: but does not include any institution whose principal business is that includes agriculture or industrial activity; or the sale, purchase or construction of immovable property.

NBFIs and NBFCs in India:

Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilise the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions. E.g. Unit Trust of India, Life Insurance Corporation (LIC), General Insurance Corporation (GIC).

Apart from these NBFIs, another part of Indian financial system consists of a large number of privately owned, decentralised, and relatively small-sized financial intermediaries Most work in different, miniscule niches and make the market more broad-based and competitive. While some of them restrict themselves to fund-based business, many others provide financial services of various types. The entities of the former type are termed as non-bank financial companies (NBFCs). The latter type is called non-bank financial services companies.

Meaning :

Non-banking Financial Companies (NBFCs) play a vital role in the context of Indian Economy. NBFCs are the intermediaries engaged in the business of accepting deposits and delivering credit. A non-banking financial company is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. They play very crucial role in channelizing the scarce financial resources to capital formation. NBFCs supplement the role of the banking sector in meeting the increasing financial need of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. NBFCs have more flexible structure than banks. Their flexible structure helps in broadening the market by providing the saver and investor a bundle of services on a competitive basis. NBFCs at present providing financial services partly fee based and partly fund based. NBFCs differ widely in their ownership: Some are subsidiaries of large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others are owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital Market Ltd, Muthoot Bankers Muthoot Financial Services Ltd a key player in Kerala financial services. Other financial institutions are IFCIs IFCI Financial Services Ltd or IFCI Custodial Services Ltd.

Some of the prominent NBFCs in India are Infrastructure Development Finance Corporation (IDFC) Rural Electric Corporation ( REC) Industrial Finance corporation of India (IFCI ) GE Capita

Defination :
Non banking Financial Company has been defined under section 45 I(f) of the Reserve Bank Of India as : a financial institution, which is a company; a non-banking institution, which is a company and which has its principal business the receiving of deposits under any scheme or lending in any manner. such other non-banking institutions , as the bank may with the previous approval of the central government and by notification in the official gazette, specify.

It is compulsory for a NBFC to get itself registered with the RBI as a deposit taking company. This NBFC registration authorizes it to conduct its business as an NBFC. For the registration with the RBI, a company incorporated under the Companies Act, 1956 and eager of commencing business of non-banking financial institution, should have a minimum net owned fund of Rs 25 lakh. A company is treated as a NBFC if its financial assets are more than 50% of total assets (netted off against intangible assets) and income from financial assets is more than 50% of the gross income as evidenced from its last audited balance sheet. Both these criteria are required to be fulfilled as the determinant factor for principal business of a company. NBFCs have raised large amount of resources through deposits from public, shareholders, directors, and other companies and borrowing by issue of non-convertible debentures, and so on.

How NBFCs are different from Banks

NBFCs cannot accept demand deposits (Demand deposits are funds deposited in an institution, that are payable immediately on demand e.g.: Savings account, Current account etc). A NBFC cannot issue cheques, to their customers and is not a part of the payment and settlement system. Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation (DICGC) is not available for NBFC depositors. They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60months. They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. (Currently the ceiling rate is 12.5%)

They cannot offer gifts/incentives or any other additional benefit to the depositors. They should have minimum investment grade credit rating, from the credit rating agencies.

Classification OF NBFCs

NBFCs can be classified into different segments depending on the type of activities they undertake: Hire-Purchase Company- It is a company which carries on as its principal business, hire purchase transaction or the financing of such transactions. Investment Company-It means any company which carries on as its principal business the acquisition of securities. Loan Company- It is a company which carries on as its principal business, the providing of finance whether by making loans or advances or otherwise for any activity other than its own. Mutual Benefit Finance Company- It means any company which is notified by the central government under section 620A of the Companies Act, 1956. Equipment Leasing Company-It is a company which carries on as its principal business, the business of leasing of equipments or the financing of such activity. Residuary Non-banking Company- It is a company which receives deposits under any scheme by way of subscriptions/ contributions and does not fall in any of the above categories. E.g. Sahara Mutual Fund was the first RNBC started in India. Miscellaneous Non- banking Company- It is a company which collects from specified number of subscribers periodically and in turn distributes the same as prizes amongst them. Any other form of chit is also included in this category. Housing Finance Company- It is a company which carries on as its principal business, the financing of the acquisition or construction of houses including the acquisition or development of plots of land for construction of houses.

Re-classification of NBFCs
From December 6, 2006 NBFCs registered with RBI have been re-classified as Asset finance Companies (AFC) - AFC are financial institutions whose principal business is of financing physical assets such as automobiles, tractors, construction

equipments material handling equipments and other machines. E.g.: Bajaj Auto Finance corp. , Fullerton India etc Investment Companies (IC) - ICs generally are involved in the business of shares, stocks, bonds, debentures issued by government or local authority that are marketable in nature. E.g.: Stock Broking Companies, Gilt firms. Loan Companies (LC) - LCs are loan giving companies which operate in the business of providing loans. These can be housing loans, gold loans etc. E.g.: Mannapuram Gold Finance, HDFC

Factors contributing to the Growth of NBFCs

A number of factors have contributed to the growth of NBFCs in India. Comprehensive regulation of the banking system and absence or relatively lower degree of regulation over NBFCs has been one of the main reasons for their growth. During recent years regulation over their activities has been strengthened. The merit of non-banking finance companies lies in the higher level of their customer orientation. They involve lesser pre or post-sanction and requirements, their services are marked with simplicity and speed and they provide tailor-made services to their clients. NBFCs cater to the needs of those borrowers who remain outside the purview of the commercial banks as a result of the monetary and credit policy of RBI. In addition, marginally higher rates of interest on deposits offered by NBFCs also attract a large number of depositors. The growing role of NBFCs were recognized by the Second Narasimham Committee (1998), beside Vasudev Committee (1996) and Khanna Committee (1995)

Regulation of NBFCs (various norms,practices,regulations and supervision):

In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing directions to the maximum amount of deposits, the period of deposits and rate of interest they could offer on the deposits accepted. Norms were laid down regarding maintenance of certain percentage of liquid assets, creation of reserve funds, and transfer thereto every year a certain percentage of profit, and so on. These directions and norms were revised and amended from time to time. In 1997, the RBI Act was amended and the Reserve Bank was given comprehensive powers to regulate NBFCs. The amended Act made it mandatory for every NBFC to obtain a certificate of registration and have minimum net owned funds. Ceilings were prescribed for acceptance of deposits, capital adequacy, credit rating and net-owned funds. The Reserve Bank also developed a comprehensive system to supervise NBFCs accepting/ holding public deposits. Directions were

also issued to the statutory auditors to report non-compliance with the RBI Act and regulations to the RBI, Board of Directors and shareholders of the NBFCs. The Task Force constituted by Government of India under the Chairmanship of Shri C.M. Vasudev submitted its report on October 28, 1998, after reviewing the existing regulatory framework for NBFCs. The Govt. of India framed the Financial Companies Regulation Bill, 2000, to implement the recommendations requiring statutory changes, as also consolidate the law, relating to NBFCs and unincorporated bodies with a view to ensuring depositor protection. According to this bill, all NBFCs will be known as Financial Companies instead of NBFCs.

(a) NBFC regulated by RBI act, 1934 After RBI amendment act 1997, registration of NBFC is mandatory. To obtain the certificate of registration it need to have net owned fund of Rs. 25 lakhs or such other amount, not exceeding Rs. 200 lakhs as specified by RBI. For certificate of registration NBFC has to make an application to RBI as prescribed by it. If NBFC is already in existence on the commencement of the RBI (Amendment) act1997 then an application for registration is to be made before the expiry of 6 months from such commencement and such NBFC can carry on its business until a certificate of registration is issued to it or rejection of application for registration is communicated to it. NBFC is in existence on the commencement of the RBI (amendment) act 1997 and having NOF less then Rs. 25 lakhs is given 3 year from such commencement to fulfil the requirement and can continue its business. If further period is required then after recording the reason in writing RBI extends the time period to an additional 3 years with the condition that such company will inform the RBI within 3 months about the fulfilment of this requirement. For considering the application for registration RBI need to inspect the books of NBFC or otherwise fulfill the prescribed conditions of the RBI. the NBFC is in a position to pay its depositors when claim accrue; the general character of the management of the NBFC is not prejudicial to the interest of the depositors/public; it has adequate capital structure and earning prospects; any other condition specified by Reserve Bank. RBI can cancel the certificate of registration if company does not comply with conditions or fail to carry its business. NBFCs have to invest in unencumbered approved securities, valued at a not exceeding current market price, an amount which, at the close of business on any day, shall not be less than 5.0 percent but not exceeding 25.0 percent specified by RBI, of the deposits outstanding at the close of business on the working day of the second preceding quarter. Every NBFC shall create a reserve fund and transfer thereto a sum not less than 20.0 per cent of its net profit every year as disclosed in the profit and loss account and before any

dividend is declared. Such fund to be created by every NBFC irrespective of the fact whether it accepts deposits or not. Further, no appropriation can be made from the fund ft purpose without prior written approval of RBI.

(b) Regulations on NBFCs taking Deposits All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid certificate of registration with authorization to accept public deposits can accept/hold public deposits. New NBFCs are not allowed to raise public deposits for period of two years from the date of registration. After completion of two years, detailed review is taken of the company by the regulator. 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 12.5 percent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR account. NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with or without credit rating) are not entitled to accept public deposits. Evaluation of the quality of management in respect of the promoters/directors is taken into consideration while giving allowance for taking public deposits.

(c) Ongoing Regulations: NBFCs-D (Holding Public Deposits) The NBFCs accepting public deposits should furnish to RBI: 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 (Asset Liability Management) 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 A copy of the Credit Rating obtained once a year along with one of the Half-yearly returns on prudential norms

(d) Other Regulations: NBFCs-ND (Not Holding Public Deposits) The NBFCs-ND having assets size of Rs 100 crore are required to submit a Monthly Return on important financial parameters of the company Board resolution to be passed to the effect that the company have neither accepted public deposit nor would accept any public deposit during the year

(e) General Norms: RBI Maintenance of Liquid Assets: Minimum level of liquid asset to be maintained by NBFCs is 15 % 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 10% in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. Thus, the liquid assets may consist of government securities, government guaranteed bonds and term deposits with any scheduled commercial bank.

Creation and Maintenance of Reserve fund:

All NBFCs are required to create a reserve fund and transfer not less than 20% of their net profit (before declaration of dividend) to the fund.

Submission of Certificate: All NBFCs should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR (Company Application Reference Number) under Section 45-IA of the RBI Act, 1934.

Information Exchange: NBFCs are 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.

Prudential Norms NBFCs should comply with RBIs policies and directions regarding prudential norms and Deployment of funds Income Recognition Accounting Standards Classification of Assets Provision for NPA (Non Performing assets) Capital Adequacy Declaration of Purpose, Quantum & Advances of Loan.

(f) Directions given to NBFCs and its Auditors by RBI

RBI is empowered to give directions to NBFCs and their auditorsin matters related to: 1) Profit and Loss account 2) Balance Sheet 3) Books of Accounts 4) Disclosure of liabilities 5) Any other matters or queries

Special Audits can be done by the RBI of any NBFC and also appoint auditors for the same. RBI can prohibit any NBFC for taking public deposit for violation of any provisions of RBI act. Nomination facility for deposits held by a NBFC is introduced. It is on the lines of bank deposits. If an NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposit, report the position within fifteen working days to the RBI. Once downgraded, within 3 years It has to reduce the amount of excess public deposit to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

(g) Supervision In order to ensure that NBFCs function on sound lines and avoid excessive risk taking, the RBI has developed a four pronged supervisory framework based on: On-site inspection structured on the basis of assessment and evaluation of CAMELS (Capital, Assets, Management, Earnings, Liquidity, and Systems) approach. Off-site monitoring supported by state-of-the-art technology. It is through periodic control reports from NBFCs. Use of Market Intelligence System. An exception reports of statutory auditors of NBFCs the RBI supervises companies not holding public deposits in a limited manner. Companies with asset size of Rs 100 crore and above are subject to annual inspection while other non-public deposit companies are supervised by rotation once in every five years.

Contribution of NBFCs in the economy of India

1. 2. 3. 4. 5. 6. 7. 8. Development of sectors like Transport & Infrastructure Substantial employment generation Help & increase wealth creation Broad base economic development Irreplaceable supplement to bank credit in rural segments Major thrust on semi-urban, rural areas & first time buyers / users To finance economically weaker sections Huge contribution to the State exchequer

Conclusion

NBFCs are gaining momentum in last few decades with wide variety of products and services. NBFCs collect public funds and provide loan able funds. There has been significant increase in such companies since 1990s. They are playing a vital role in the development financial system of our country. The banking sector is financing only 40 per cent to the trading sector and rest is coming from the NBFC and private money lenders. At the same line 50 per cent of the credit requirement of the manufacturing is provided by NBFCs. 65 per cent of the private construction activities was also financed by NBFCs. Now they are also financing second hand vehicles. NBFCs can play a significant role in channelizing the remittance from abroad to states such as Gujarat and Kerala. NBFCs in India have become prominent in a wide range of activities like hire purchase finance, equipment lease finance, loans, investments, and so on. NBFCs have greater reach and flexibility in tapping resources. In desperate times, NBFCs could survive owing to their aggressive character and customized services. NBFCs are doing more fee-based business than fund based. They are focusing now on retailing sector-housing finance, personal loans, and marketing of insurance. Many of the NBFCs have ventured into the domain of mutual funds and insurance. NBFCs undertake both life and general insurance business as joint venture participants in insurance companies. The strong NBFCs have successfully emerged as Financial Institutions in

short span of time and are in the process of converting themselves into Financial Super Market. The NBFCs are taking initiatives to establish a self-regulatory organization (SRO). At present, NBFCs are represented by the Association of Leasing and Financial Services (ALFS), Federation of India Hire Purchase Association (FIHPA) and Equipment Leasing Association of India (ELA). The Reserve Bank wants these three industry bodies to come together under one roof. The Reserve Bank has emphasis on formation of SRO Particularly for the benefit of smaller NBFCs. Thus to conclude in the view of above NBFCs play a important role in economic development.

References :

www.rbi.org.in www.wikipedia.org Regulation of Non Banking financial companies in India. A critical analysis of its role in Economic development :by Irwin Cheema on August 4, 2011