Non banking financial companies

By Pinal ShahLecturerL.J.Institute of Management StudiesAhmedabad, Gujarat

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Introduction

NBFC are heterogeneous in nature in terms of activity and size are important financial intermediaries and and integral part of IFS.The main advantage is lower transaction costs, quick decision making, customer orientation and prompt provision of services.

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Contd…

Able to carve niche in meeting credit need of wholesale and retail customers.Their number has gone up from 7,063 in 1981to 51,929 in 1996.The regulated deposits of NBFCs amounted to Rs. 20,428.93 cores in 1993

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Difference between NBFC and Bank

(i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)

(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 of DICGC is not available for NBFC depositors unlike in case of banks.

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salient features of 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.

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Contd…

iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. iv) NBFCs (except certain AFCs) 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.

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NBFC

It means1. A financial institutions that is company2. A non-banking institution that is a

company whose principal business is the receiving of deposits under any scheme or arrangement or lending in any manner

3. Other non banking institutions with prior approval of GOI.It excludes FI which carry on agricultural operations as their principal business.

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Contd…

It is only non-banking institution that is any hire-purchase finance, investment, loan or mutual benefit financial company and an equipment leasing company but excludes and insurance company/stock exchange/stock broking company/ merchant banking company.

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Type of NBFC1. An equipment leasing company (ELC)2. A hire purchase company (HPC)3. A housing finance company (HFC)4. An investment company (IC)5. A loan company(LC)6. A mutual benefit financial companies

(MBFC)I.e. Nidhi companies7. A Miscellaneous non-banking company

I.e. chit fund company (MNBC)Residuary Non – Banking companies

(RNBC) (it is not NBFC)

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MBFCs

MBFCs or Nidhis were exempt from provision of RBI’s NBFCs directions. However, the RBI imposed a ceiling of 15% interest rat on deposits and prohibited from issuing advertisements in any form and paying any brokerage for soliciting deposits.

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MNBCs

A company or FI carrying all or any of following types of business. collection of money in one lump sum/installments by way of Contributions Sale of units/certificates/other instruments In any manner As membership/admission fee/ Service charges to w.r.t MF, any savings,

thrift etc.

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MNBC

Manage to an agreement with the subscribers each one of whom subscribes a certain sum in installment saver definite period.Conduct any other form of chit/.Undertake/carry on/engage any business similar to those referred to above.

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RNBC

All non banking financial institutions other than NBFC, MBFC and MNBCs are known as RNBCs.

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Categorization of NBFC

Accepting public depositsNot accepting public deposits but engaged in loan, Investments, hire purchase, lease finance.Not accepting public deposits and have acquired share/securities in their own group/holding/subsidiary companies of not less than 90% of their total assets and are not trading in these shares.

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Public Deposits

It include FD, Recurring deposits, deposits received from relatives and friends, shareholders by public limited company and money raised by issue of unsecured debentures/bonds. It will not include money raised by NBFCs by way of issue of secured debentures/bonds, borrowings from banks/ financial institutions deposit form directors, foreign citizens, privet limited companies form their shareholders.

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RBI (Amendment) Act, 1997 March

Minimum NOF Rs. 25 lakhCompulsory registration with RBIMaintenance of liquid assetsCreation of reserve fund into with 20% of Net profit should be transferred

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Net Own FundsMinimum NOF must be rs. 25 lakh or such other amount not exceeding Rs 200 lakh.NOF means

1. Paid up capital 2. Free reserves – accumulated losses,

deferred revenue expenditure and other intangible assets

3. Less investments in shares4. Less the book value of

debentures/bonds/outstanding loans and advances including hire-purchase and lease finance.

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NOF

NBFC not having NOF of less than rs. 25 lakh will not be entitled to accept deposit from public.But they can raise borrowings form other resources.

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Registration

With effect from Jan 1997, to commence a new company or to carry on existing company the business of NBFC must obtain certificate of registration from RBI.

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Maintenance of Assets

They have to invest in unencumbered approved Indian securities 5% or more their outstanding deposits at the close of business on the last working day of second preceding quarter.Approved securities – it means securities of any state government or central government and bonds unconditionally guaranteed by them as regards the payment of interest as well as repayment of principal.

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contd…

Included in unencumbered approved securities are approved securities lodged by NBFCs with other institutions for an advance/any other arrangement.The basis of valuation of such securities would be the cost or current market price.

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Reserve Fund

Every NBFC must create a reserve fund to which at least 20% of its net profits must be transferred before the declaration of any dividend.

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Minimum credit ratings

NBFCS that have minimum NOF of 25 lakh can accept public deposits but they must have minimum investment grade for their FD from one of approved rating agencies at least once a year.A copy of rating should be sent to RBI.

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Credit rating agency

Credit rating agency Min rating

Credit Rating Information services of India Ltd. (CRISIL)

FA -

Investment Information and credit rating agency of India Ltd.

MA-

Credit analysis and research ltd.

CARE BBB

FITCH Rating India Private Ltd.

Ind BBB -

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Ceiling on quantum of deposits for ELC/HPC

NOF – Rs. 25 LakhCapital adequacy ratio – 15% (As per last balance sheet)Acceptance of deposits – 1.5*NOF or 10 cr which ever is lower.If they have minimum grade – 4*NOF

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LC/IC

NOF – Rs. 25 lakhMin Investment grade15% adequacy ratio as per last balance sheet.If AAA ratings – ad. Ratio is below 15%- they are prohibited from accepting/renewing deposits in excess of amount outstanding as on Dec 18 1998 or 1.5 NOF – which ever is low.

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Contd..

If grading is AA – but with less than 15% ad ratio than its allowed to accept public deposit upto its NOF till it attains 15%If grading is A – and ad ratio is less than 15% the ceiling on deposit is one half of NOF.

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Interest rate ceiling.

It is the rate of interest on deposits.It is paid or compounded at rests but not shorter than monthly rests.Currently ceiling is 12.5%.

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Brokerage

Brokerage payable by NBFCs on deposit of one year to vie years has at 2% uniformly.

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Other criteria

It must pay its present and future depositors in full when they claim.Its affairs are not detrimental to the interests of its present and public interest of depositors.It has adequate capital structure and earning prospects.

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Power of regulation

RBI can general regulate or prohibit the issue by any NBI of any prospectus or advertisement soliciting deposits of money form the public and also specify conditions subject to which they can be issued.