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NBFCs Slide 2 Financial institution A financial institution is an institution which collects funds from the public, and places them in financial assets, such as deposits, loans and bonds rather than tangible property. FINANCIAL INSTITUTION Banking institution Non banking institution Slide 3 meaning The financial institution which provide various banking facilities but are not termed as banks because they do not hold banking license are known as non banking financial institution. Slide 4 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 / stock / bonds / debentures / securities issued by Government / local authority / other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business stock broking companies merchant banking companies RNBCs Slide 5 NBFC does not include any institution whose principal business is that of : agriculture activity, industrial activity, sale / purchase / construction of immovable property. Slide 6 Features of NBFCs Registration with RBI is mandatory All the NBFC are not entitled to accept public deposits NBFC can accept public deposit for a minimum period of 12 months and maximum 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 NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors Slide 7 CONTD. NBFCs (except certain AFCs) should have minimum investment grade credit rating. The deposits with NBFCs are not insured The repayment of deposits by NBFCs is not guaranteed by RBI There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits If a NBFC defaults in repayment of deposit, the depositor can approach A.Company Law Board or B.Consumer Forum or C.file a civil suit to recover the deposits. Slide 8 NBFIs VERSUS BANKs BANKSNBFIS DefinitionBanking is acceptance of deposits withdraw able by cheque or demand; NBFI cannot accept demand deposits NBFI are companies carrying financial business Scope of businessScope of business of the bank is limited. There is a various types of business regarding financial activities. functionThey generate multiple expansion of credit Only mobilise savings for investment. Need for a licenseLicense norms are tightly controlled and generally it is perceived to be quite difficult to get a license for a bank It is comparatively much easier to get a registration as an NBFI. Types of groupBanks form homogeneous group doing banking business NBFC form a heterogeneous group Slide 9 Difference between Banks & NBFCs NBFCs are doing functions akin to that of banks, however there are a few differences: i. NBFC cannot accept demand deposits; ii. it is not a part of the payment and settlement system and as such cannot issue cheques to its customers ; and iii. deposit insurance facility is not available for NBFC depositors unlike in case of banks. Slide 10 Registration of NBFCs In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934. Slide 11 However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI : (a)Venture Capital Fund / Merchant Banking companies / Stock broking companies registered with SEBI, (b)Insurance Company holding a valid Certificate of Registration issued by IRDA (c)Nidhi companies as notified under Section 620 A of the Companies Act, 1956 (d)Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 (e)Housing Finance Companies regulated by National Housing Bank Slide 12 Working of NBFC Filing of application in prescribed form Submit it in regional office of RBI Processing by RBI RBI issue certificate Slide 13 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 have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh wef April 21, 1999). The company is required to submit its application for registration in the prescribed format along with necessary documents for Banks consideration. The Bank issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. Slide 14 NBFCs and Public 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. The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund and comply with the Directions issued by the Bank. Slide 15 Ceiling on Acceptance of Public Deposits A NBFC maintaining required NOF and complying with the prudential norms can accept public deposits as follows: Category of NBFCCeiling on Public deposits EL / HP Companies maintaining CRAR of 15% without credit rating EL / HP Companies with CRAR of 12% and having minimum investment grade credit rating 1.5 times of NOF or Rs 10 crores whichever is less 4 times of NOF LC / IC with CRAR of 15% and having minimum investment grade credit rating 1.5 times of NOF Slide 16 Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be paid or compounded. 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. Slide 17 Important Regulations relating to Acceptance of Deposits by NBFCs i.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. ii. 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. The interest may be paid or compounded at rests not shorter than monthly rests. iii. NBFCs cannot offer gifts / incentives or any other additional benefit to the depositors. Slide 18 iv. NBFCs (except certain equipment leasing / hire-purchase finance companies) should have minimum investment grade credit rating. v. The deposits with NBFCs are not insured. vi. The repayment of deposits by NBFCs is not guaranteed by RBI. vii. There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits. Slide 19 Submission of Returns to RBI The NBFCs accepting public deposits should furnish to RBI i.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; ii. Statutory Annual Return on Deposits iii. Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise; Slide 20 iv. Quarterly Return on liquid assets; v. Half-yearly Return on prudential norms; vi. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crores and above or with assets of Rs. 100 crores and above irrespective of the size of deposits ; vii. Monthly return on exposure to capital market by companies having public deposits of Rs. 50 crores and above; and viii. A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms as at (v) above. Slide 21 Types of NBFC Slide 22 Different types of NBFCs registered with RBI i. equipment leasing company; ii. hire-purchase company; iii. loan company; iv. investment company; v. Mutual benefit finance company vi. Residuary non banking company Slide 23 INVESTMENT COMPANY Investment Company is any financial intermediary whose principal business is that of buying and selling of securities. It is a company whose main business is holding securities of other companies purely for investment purposes.securitiesinvestment The investment company invests money on behalf of its shareholders who in turn share in the profits and losses. Example : Mutual Fund Companies Slide 24 MUTUAL BENEFIT FINANCIAL COMPANY (MBFC ) Nidhis or Mutual Benefit Finance Companies are one of the oldest forms of non-financial companies. It is a company structure in which the company's owners are also its clients. That is, the mutual company's profits are distributed to its participating customers each year in proportion to their individual exposures to the company. Many insurance companies are structured as mutual companies. Slide 25 Some of the important objectives of Nidhis are to enable the members to save money, to invest their savings and to secure loans at favorable rates of interest. They work on the principles of complete mutuality of interest and are generally well-managed. The Government has granted certain concessions under Section 620A of the Companies Act, 1956. Primarily regulated by Department of Company Affairs (DCA) under the directions / guidelines issued by them under Section 637 A of the Companies Act, 1956. The Government of India constituted an Expert Committee in March 2000 (Chairman: Shri P.Sabanayagam) Slide 26 LOAN COMPANY Loan company means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity). A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. Slide 27 RESIDUARY NON-BANKING COMPANIES (RNBCS) Company which receives deposits under any scheme or arrangement, by whatever name called, in one lump-sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments, or in any manner are called RNBCs. RNBCs are a class of NBFCs which cannot be classified as equipment leasing, hire purchase, loan, investment, nidhi or chit fund companies, but which tap public savings by operating various deposit schemes. The deposit acceptance activities of these companies are governed by the provisions of Residuary Non Banking Companies (Reserve Bank) Directions, 1987 Slide 28 HIRE-PURCHASE COMPANY Any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions. A method of buying goods through making installment payments over time. Under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid. Hire purchase combines elements of both a loan and a lease. You reach an agreement with the dealer to pay an initial deposit, typically anything between 10% and 50%, and then pay off the balance in monthly installments over an agreed period of time. At the end of this period, the product is yours. Slide 29 EQUIPMENT LEASING COMPANY Equipment leasing company is any financial institution whose principal business is that of leasing equipments or financing of such an activity. Leasing Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite period of time (called the term of the lease). The consideration for the lease is called rent.lesseelease termconsiderationrent Slide 30 IMPORTANCE Non banking financial institutions have the following importance in Indian economy. Greater reach. Flexibility in tapping resources. Retail services to small and medium business. Important component of financial market. Slide 31 strategies Development of assets and competencies for sustainable competitive advantage. Selection of appropiate strategies Development of initiatives Drafting of action plan Develop a model Develop internal business plan Develop tracking model Create internal reporting pakage Slide 32 Thank you