Non-banking Financial Institution

(NBFC)

Group- “E”

S.Y.B.M.S.

Sydenham College Of Commerce And Economics

Acknowledgement

We the members of group no. “E” would like to acknowledge Dr.Bharat Pithadia , who gave us this immense opportunity and his support to gain knowledge in the field of NBFC in order to accomplish our project.

Thank You !

Group Members

Name of the Member Roll no.

• Ashit Rajoria 851

• Deepti Prajapat 849

• Jai Aivole 812

• Kushank Makwana 836

• Pallavi Dethe 819

• Sumit Mehta 840

Areas Covered

• Introduction

• Eligibility criteria

• Difference between NBFC and Bank

• Types of NBFC

• Overview

• Role of NBFC

• Role of RBI in NBFC

• Problems faced

• Solutions

• Suggestions

• Case study

Introduction

• Fast emerging as an important segment of Indian financial system

• It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways

▫ Accepting deposits, making loans and advances, leasing, hire purchase, etc

• The Reserve Bank of India regulates and supervises the Non-Banking Financial Companies as per Chapter III B of the RBI Act, 1934

Definition (as per RBI)

A NBFC is one which is:

• Company registered under the companies act, 1956

• Engaged in the business

▫ 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

• Does not include any institution whose principal business

▫ Agriculture activity, industrial activity sale/purchase/ construction of immovable property

Meaning

• A non banking finance company basically means an institution, which mobilizes the savings of the community and diverts them for financing different activities

Approved credit rating as per RBI

Rating company Minimum investment grade

CRISIL FA –(FA minus)

ICRA Ltd. MA –(MA minus)

CARE Ltd. CARE BBB

Fitch Rating In – BBB –( BBB minus)

Eligibility criteria of NBFC

• 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

▫ obtaining a certificate of registration from RBI

▫ having a Net Owned Funds of Rs. 25 laths (Rs two crore since April 1999).

• However, certain categories of NBFCs which are regulated by other regulators viz.

▫ Venture Capital Fund/Merchant Banking companies/Stock broking companies by SEBI

▫ Insurance Company by IRDA

Difference between NBFC & Banks

• NBFCs lend and make investments and hence their activities are akin to that of banks

• However there are a few differences as given below:

▫ NBFC cannot accept demand deposits

▫ NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself

• NBFC doesn’t maintain CRR, SLR etc

• NBFC can't borrow money from RBI

• NBFC can finance certain activities which banks can’t

▫ e.g. finance to acquire land

Types of NBFCWith effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as :

NBFC

Asset Finance

Company Investment Company

Loan Company

Infrastructure Finance Company

Others

Systemically Important

Core Investment Company

Infrastructure Debt Fund

Micro Finance

Institution

Asset Finance Company (AFC)

• A financial institution carrying its principal business of financing physical assets that supports productive/ economic activity

▫ Automobiles

▫ Tractors

▫ Lathe machines

▫ Generator sets

▫ Earth moving

▫ Material handling equipments

▫ General purpose industrial machines

Investment Company (IC)

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

• An investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses

Loan Company (LC)• 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

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) CRAR of 15%

Infrastructure Debt Fund (IDF-NBFC) • It is a company registered as NBFC to facilitate the flow of long

term debt into infrastructure projects• IDF-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

Systemically Important Core

Investment Company• An NBFC carrying on the business of acquisition of shares and

securities which satisfies the following conditions:-

▫ 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

▫ Investments in the equity shares in group companies constitutes not less than 60% of its total assets

▫ 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

▫ Asset size is Rs. 100 crore or above

▫ Accepts public funds

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

• A non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria▫ Loan disbursed by an NBFC-MFI to a borrower with a rural household

annual income not exceeding rest. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000

▫ Loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles

▫ Total indebtedness of the borrower does not exceed Rs. 50,000▫ Tenure of the loan not to be less than 24 months for loan amount in

excess of Rs. 15,000 with prepayment without penalty▫ Loan to be extended without collateral▫ Aggregate amount of loans, given for income generation, is not less than

75 per cent of the total loans given by the MFIs▫ Loan is repayable on weekly, fortnightly or monthly installments at the

choice of the borrower

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 % of its total assets and its income derived from factoring business should not be less than 75 % of its gross income

Others

• It includes:

▫ Chit-Fund Companies

▫ Nidhis or Mutual Benefit Finance companies etc

NBFCs : OVERVIEW

• 13000+ players registered under RBI : A & B categories

▫ Spread all across the country

▫ Approx. 570 NBFCs authorized to accept public deposits

(Category A)

▫ Assets worth Rs. 15000 Crore financed annually & growing

steadily

• Asset financing▫ Commercial vehicles▫ Passenger cars▫ Multi-utility & multi-purpose vehicles▫ Two-wheelers & Three-wheelers▫ Construction equipments▫ Consumer durables

Role of NBFCs • As recognized by RBI & Expert Committees / Taskforce

▫ 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

Role of NBFCs (Contd..)• 70-80% of Commercial Vehicles are finance driven

▫ Indian economy is more dependent on roads

▫ Heavy Govt. outlay for mega road projects

▫ Heavy replacement demand anticipated – 30 lacs commercial vehicles by the year 2007

▫ Another Rs.6000 Crores required for phasing out old commercial vehicles

▫ CRISIL in its study has placed commercial vehicle financing under “low risk” category

▫ Each commercial vehicle manufactured, sold and financed gives employment to minimum 20 persons (direct and indirect)

Customer Service• The key factor for our survival & growth

▫ NBFCs provide prompt, tailor made service with least hassles. This

more than compensates for the higher lending rates of NBFCs as

compared to Banks & FIs

▫ All customers get direct and easy access to and individual attention

of the top management

▫ NBFCs cater to a class of borrowers who :-

- Do not necessarily have a high income

- But have adequate net worth

- Are honest and sincere (gauged by the personal touch maintained

with them)

Role of RBI in NBFC

• Entrusted with the responsibility of regulating and supervising the NBFC by virtue of powers vested in Chapter III B of the RBI Act, 1934

• The regulatory and supervisory objectives

a) ensure healthy growth of the financial companies

b) Ensure companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations

c) Quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system

Role of RBI in NBFCs (Contd..)

• Towards this end, a four-pronged supervisory strategy comprising

(a) on-site inspection based on CAMELS (capital, assets, management, earnings, liquidity, systems and procedures) methodology

(b) computerised off-site surveillance through periodic control returns

(c) an effective market intelligence network, and

(d) a system of submission of exception reports by auditors of NBFCs, has been put in place

Problems faced

• High cost of funds

• Slow industrial growth

• Small balance sheet resulting in low asset profile

• Non performing assets

• Competition

▫ Other NBFC’s

▫ Banks

Solutions/Remedies

• Categories of NBFCs and the practicality of differentiated regulations by type of activity

• Regulatory arbitrage and convergence in regulation

• Liquidity ratio should be introduced for all registered NBFCs

• Asset classification and provisioning norms be made similar to that of banks for all registered nbfcs

• The tax treatment for provisions made by NBFCs should be similar to that for banks.

• Implement macro prudential measures to address systemic risk to NBFCs

Recommendations

• RBI should review the accounting norms prescribed for NBFCs and apply the same norms for them as laid down for banks

• Regulation between stock broking firms, merchant banks and NBFC

• Liquidity management of NBFC

• Issues in corporate governance

• Disclosures for NBFC

• Supervisory framework for the NBFC sector

Case Study

Infrastructure Development Financial CorporationThink Infrastructure.

Think IDFC.

Introduction

• Established 15 years ago

• Central Idea

▫ To induce private investment to infrastructure projects

• Deals in both infra as well as non infra financing

▫ infrastructure, power and telecom sector

• Non-deposit taking NBFC

History• Born out of the need for a specialized financial intermediary for

infrastructure

• In 1994, the Department Of Economic Affairs, recognize the need to develop the country's infrastructure

▫ Established an expert group on commercialization of infrastructure projects under the chairmanship of Dr. Rakesh Mohan

• Announcement for the setting up of IDFC by union Finance minister's budget speech in July 1996.

• Incorporated on January 30, 1997 in Chennai

• In 2002, to attract private sector investment in infrastructure projects & supplement public investment

▫ Finance minister of India in 2002-03, proposed the setting up of 10,000 million infrastructure equity fund, to be managed by IDFC, to help in providing equity investment in infrastructure projects

Overview• An integral part of the country's development story since

1997• Vision is to be the 'one firm' that looks after the diverse

needs of infrastructure development• Growth has been driven by

▫ Substantial investment requirements of the infrastructure sector in India

▫ Growth in the Indian economy over the last several years

• Commitment to building India's infrastructure goes beyond business▫ Work closely with government entities and regulators to

advise & assist them in formulating policy and regulatory frameworks

▫ Support private investment and public-private partnerships in infrastructure development

Working

Documents given by borrower

Risk department

Committee of senior managers

Preparation of documentation

Resources department

Competitors

Conclusion

• Existing governance system with laws and updated guidelines issued by RBI is doing justice

▫ Indian Economy

Existing guidelines have pace with dynamic commercial economy

RBI comes up with updated guidelines as and when it is required

▫ Public

RBI guidelines and the different laws governing NBFCs have many powers and procedures which enables the depositors of these NBFCs to enforce their rights

▫ NBFCs RBI guidelines and the laws governing have generally given bright

prospects to the NBFC

Bibliography

• Primary sources

• Secondary sources

▫ Wikipedia

▫ Investorpedia

▫ Government of India, Ministry of Finance, Department of Revenue, issued a notification dated July 1, 2005 in the Gazette of India, notifying the Rules

▫ www.rbi.org

Notification issued by Department of Non Banking Supervision, RBI (w.e.f April 21, 1999)

Notification issued by Department of Non Banking Supervision, RBI (w.e.f January 2005 )