nbfc

A Report on NBFCs in India

A REPORT ON NBFCs IN INDIA

SUBMITTED BY:GEETIKA

MBA (GB)

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ROLL NO:338

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TABLE OF CONTENTS

Executive Summary.................................................................................................3

Non-Banking Financial Institutions (NBFIs)...............................................................4

Non-Banking Financial Company (NBFC).................................................................5

NBFCs: Why are they required?................................................................................5

Re-classification of NBFCs.......................................................................................6

NBFCs are different from Banks...............................................................................7

Residuary Non-Banking Companies (RNBCs)............................................................8

Ceiling on RNBCs taking Deposits............................................................................8

Interest Payment on Deposits....................................................................................8

Eligibility Criteria for Starting NBFC........................................................................9

Capital Requirement...............................................................................................10

Net Owned Fund....................................................................................................10

Classification of NBFCs according to RBI................................................................10

Regulations on NBFCs taking Deposits....................................................................11

Ceiling on NBFC-D (Taking Public deposits)...........................................................12

Ongoing Regulations: NBFCs-D (Holding Public Deposits).......................................13

Other Regulations: NBFCs-ND (Not Holding Public Deposits)..................................13

Directions given to NBFCs and its Auditors by RBI..................................................15

A Special Mention : FDI in NBFC sector.................................................................16

Annexure..............................................................................................................20

References…………………………………………………………………………......24

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Executive Summary

India growth story is most talked about and why not? The country’s GDP is pegged to

grow at a rate of more than 7.5%. India’s Stock market has given the best returns in the

last 6-8 months of more than 60%. The household savings continues to be as high as 35%

inspite of slowdown and recessionary pressures. Forex reserves have increased by more

than 10billion $ in the 1st quarter and the total reserves are up, to 262 billion $. Current

Budget focuses on reducing fiscal deficit by the measures of disinvestments and

improving the infrastructure of the country. Overall the country is all set to grow at a

rapid pace and the government has laid a strong foundation for this. Having realized this,

one can strongly say that sufficient liquidity has to be maintained in the system to

enhance credit and economic growth.

NFBIs (Non Banking Financial Institutions) play an important role in realizing the

economic growth. They have access to larger markets and provide financing for almost

all activities.

Think of buying an automobile, and one will find financing companies that provide EMIs

at the doorstep. Think of buying any electronics, one would be amazed the number of

financing companies that one can approach to make a deal. Thus the competitiveness of

the companies combined with fierce penetration across the length of the country enables

NBFIs to grow at a rapid pace.

In the following document, NBFIs in India are discussed with a focus on NBFCs. The

total assets managed by NBFCs amount to 95,727 crore as on June 2009. This accounts

for around 9.1 % of assets of the total financial system [1]. Hence the business carried out

by NBFCs is of great importance for overall development of the country. Thus RBI is

implementing various schemes and policies for maintaining enough liquidity for funding

requirements. Also various regulations are levied on NBFCs for making the overall

system robust.

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Non-Banking Financial Institutions (NBFIs)

Non-Banking Financial Institutions (NBFIs) play an important role in the Indian financial

system given their unique position of providing complimentary and competitiveness to

banks. They score over the traditional banks by providing enhanced equity and risk-based

products.

Fig1.The Hierarchy of NBFCs in India

Non-Banking

Financial Company (NBFC)

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Equipment Leasing

Development Finance Institutions (DFIs)

Non-bankingfinancial companies (NBFCs)

Insurance companies

NBFIs

Primarydealers (PDs)

Mutual Funds

Hire Purchase Leasing

Loan Company

Investment Company


Non-Banking Financial Company (NBFC) is a company registered under the Companies

Act, 1956. It is engaged in the business of loans, securities, insurance, chit funds etc

They also provide products/services that includes margin funding, leasing and hire

purchase, corporate loans, investment in non-convertible debentures, IPO funding, small

ticket loans, venture capital etc.

As in the diagram, NBFCs are classified into four categories

1. Hire- Purchase Leasing

2. Loan Company

3. Investment Company

4. Equipment Leasing Company

Some of the prominent NBFCs in India are

Infrastructure Development Finance Corporation (IDFC)

Rural Electric Corporation ( REC)

Industrial Finance corporation of India (IFCI )

GE Capital

Till March 2009 there were 12,739 NBFCs out of which 336 NBFCs were permitted to

accept public deposits [2]

[2]Source: RBI Annual Report 2008-2009

NBFCs: Why are they required?

NBFCs are required as they have a greater reach to various markets and have great

efficiency in mobilizing funds. Generally banks to reduce their operational costs establish

NBFC. NBFC enjoys many liberal policies by RBI in comparison with the commercial

banks. However this scenario is changing. RBI now has strict measures for NBFCs also.

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Re-classification of NBFCs

From December 6, 2006 NBFCs registered with RBI have been reclassified as

1. Asset Finance Company (AFC)

2. Investment Company (IC)

3. Loan Company (LC)

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.

Eg: 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

Eg: 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

Eg: Mannapuram Gold Finance, HDFC

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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 60 months.

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

Fig2:

Source:RBI, Note: The figures for 2009 & 2010 are estimated figures

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Pulic Deposits in NBFCs & RNBCs

0

5000

10000

15000

20000

25000

30000

35000

1998

2000

2002

2004

2006

2008

2010

Year

INR

(C

rore

s) Public Deposits

Expon. (PublicDeposits)


Residuary Non-Banking Companies (RNBCs)

They form a part of NBFCs however their functioning is different from the regular

NBFCs Residuary Non-Banking Company is a class of NBFC whose principal business

is receiving of deposits, under any scheme or arrangement. The deposits received do not

involve investment, asset financing, or loans.

These companies are required to maintain investments as per directions of RBI, in

addition to liquid assets. The functioning of these companies is different from those of

NBFCs in terms of method of mobilization of deposits and requirement of deployment of

depositors' funds

Sahara Mutual Fund was the first RNBC started in India.

Ceiling on RNBCs taking Deposits

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

To ensure the safely of public investments RNBCs 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 Payment on Deposits

The amount payable by way of interest, premium, bonus or other advantage, by a

RNBC in respect of deposits received shall not be less than 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, an 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.

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Eligibility Criteria for Starting NBFC

Initial Procedure

The Start up NBFC should be incorporated under the Companies Act, 1956

It should be registered with RBI, under Section 45-I of the RBI Act, 1934

The company is required to submit the application for registration in the

prescribed format along with necessary documents for RBI's consideration. RBI

then issues certificate of registration after satisfying itself that the conditions as

enumerated in Section 45-IA of the RBI Act, 1934 are satisfied

For registration with RBI, the company is required to fill the application, which

can be downloaded from www.rbi.org.in/scripts/BS/viewforms.aspx.

After downloading the EXCEL based application form, data should be keyed in, it

can be uploaded in the RBI's Secure website https://secweb.rbi.org.in. Once

uploaded, the company will get a CoR (Company Application Reference

Number). Subsequently, the company should take the hard copy of the same with

the supported documents and submit it to the concerned regional office.

NOTE: Certain category of NBFCs like Venture Capital Fund/Merchant Banking

Companies/Stock Broking Companies etc need not be registered with RBI they are

governed by SEBI. Insurance companies holding a valid certificate of registration are

regulated by IRDA, Housing finance companies regulated by National Housing Bank.

Nature of Business

The company should not have its principal business as

(a) Agricultural operations

(b) Industrial activity

(b) The purchase or sale of any goods (other than securities) or the providing of any

services

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(c) The purchase, construction or sale of immovable property, Moreover no portion of the

income should be derived from the financing of purchases, constructions or sales of

immovable property by other persons

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Capital Requirement

The start up company should have a minimum net owned fund (NOF) of Rs 25 lakh

which is raised to Rs 200 lakh from April 21, 1999.

Net Owned Fund

Paid-up capital and free reserves, minus accumulated losses, deferred revenue

expenditure and other intangible assets

Less,

(i) Investments in shares of subsidiaries/companies in the same group/ all other NBFCs

(ii) The book value of debentures/bonds/ outstanding loans and advances, including hire

purchase and lease finance made to, and deposits with, subsidiaries/ companies in the

same group, in excess of 10% of the owned funds.

Note: NBFCs that were in existence who had previously NOF of Rs25 Lakhs (before the

act) are given a time period of 3 years to attain a NOF of 200 Lakhs. However RBI can

still extend this time period for an additional 3 years subject to the condition that such

NBFCs should intimate the RBI about attaining the NOF within 3 months from the date

of attainment

Classification of NBFCs according to RBI

NBFCs are classified into two categories

(i) NBFC accepting deposits from customers

(ii) NBFC which does not take deposits from customers

NBFCs taking deposits from public are referred to as NBFC-D and those who

dont take public deposits are referred to as NBFC- ND

Those NBFCs NBFCs-ND with an asset size of Rs.100 crore and above (as per

the last audited balance sheet) are designated as systemically important NBFCs-

ND (NBFCs-ND-SI)

NBFCs-ND-SI are advised to attain minimum CRAR of 12 per cent by March 31,

2010 and 15 per cent by March 31, 2011

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Regulations on NBFCs taking Deposits

1. 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

2. 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

3. 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

4. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI

from time to time. The present ceiling is 12.5 per cent per annum. The interest

may be paid or compounded at rests not shorter than monthly rests.

5. 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.

6. NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with or without

credit rating) are not entitled to accept public deposits

7. Evaluation of the quality of management in respect of the promoters/directors is

taken into consideration while giving allowance for taking public deposits

Minimum Investment Level Credit Rating:

The symbols of minimum investment grade rating of the Credit rating agencies are:

Name of rating agencies Level of minimum investment grade credit

rating (MIGR)

CRISIL FA- (FA MINUS)

ICRA MA- (MA MINUS)

CARE CARE BBB (FD)

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FITCH Ratings India Pvt. Ltd tA-(ind)(FD)

Ceiling on NBFC-D (Taking Public deposits)

(i) NBFCs having Net Owned Fund (NOF) of more than 200 Lakhs

Category of NBFC Ceiling on public deposits

AFCs maintaining CRAR of 15%

without credit rating

1.5 times of NOF or Rs 10 crore

whichever is less

AFCs with CRAR of 12% and having

minimum investment grade credit rating4 times of NOF

LC/IC with CRAR of 15% and having

minimum investment grade credit rating1.5 times of NOF

AFC= Asset Finance Company

LC/IC= Loan Company/ Investment Company

(ii) NBFCs having NOF more than 25 lakhs but less than 200 Lakhs

Category of NBFC Ceiling on public deposits

AFCs maintaining CRAR of 15%

without credit ratingEqual to NOF (1xNOF)

AFCs with CRAR of 12% and having

minimum investment grade credit rating

1.5 times of NOF

LC/IC with CRAR of 15% and having

minimum investment grade credit rating

Equal to NOF( 1xNOF)

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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

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

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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

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o Income Reconition

o Accounting Standards

o Classification of Assets

o Provision for NPA (Non Performing assets)

o Capital Adequacy

o Declaration of Purpose, Quantum & Advances of Loan

Directions given to NBFCs and its Auditors by RBI

RBI is empowered to give directions to NBFCs and their auditors in 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

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A Special Mention : FDI in NBFC sectorFDI/NRI investments allowed in the following 19 NBFC activities shall be as per levels

indicated below:

Merchant banking Credit Reference Agencies

Underwriting Credit rating Agencies

Portfolio Management Services Leasing & Finance

Investment Advisory Services Housing Finance

Financial Consultancy Forex Broking

Stock Broking Credit card business

Asset Management Money changing Business

Venture Capital Micro Credit

Custodial Services Rural Credit

Factoring

Regulations for FDI in NBFCs

Minimum Capitalization Norms for Fund based NBFCs:

For FDI up to 51% - US$ 0.5 million should be brought upfront

For FDI above 51% and up to 75% - US $ 5 million should be brought upfront

For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5

million should be brought upfront and the balance in 24 months

Minimum capitalization norms for Non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all

permitted non- fund based NBFCs with foreign investment

Foreign investors to set up 100% operating subsidiaries without the condition to

disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in

US$ 50 million as per minimum capitalization norms above (without any

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restriction on number of operating subsidiaries without bringing in additional

capital)

Joint Venture operating NBFC’s which have 75% or less than 75% foreign

investment will also be allowed to set up subsidiaries for undertaking other NBFC

activities, subject to the subsidiaries also complying with the applicable minimum

capital inflow

FDI in the NBFC sector is put on automatic route subject to compliance with

guidelines of the Reserve Bank of India.

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ANNEXURE FORM-I

[see rule 4(1)]APPLICATION FOR PERMISSION TO FORM A NON – BANKING FINANCE

COMPANYDated:_______________ ToThe Securities and ExchangeCommission of Pakistan,Islamabad.Dear Sir,We hereby apply for grant of permission under rule 4 of the Non-Banking Finance Companies(Establishment and Regulation) Rules, 2003, to form a Non-Banking Finance Company under the nameand style of *-- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- -- The informationand documents as required in the Annexure to this form duly verified and signed by all promoters andproposed directors along with five spare copies of this application and an affidavit by them as to thecorrectness of the details, is submitted. We undertake to keep this information upto date by communicatingchanges or modifications therein within fourteen days of such changes or modifications.A receipt of rupees one hundred thousand (Rs. 100,000/-) being the processing fee, deposited in-------------- on- --- --- --- --- --- --- --- --is enclosed. Yours faithfully,

------------------------

Verification by

Oath Commissioner.

Name of the company

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ANNEXURE TO FORM-I[see rule 4]

INFORMATION TO BE SUPPLIED FOR OBTAININGPERMISSION TO FORM A NON – BANKING FINANCE COMPANY

AND SUBSEQUENT CHANGE IN DIRECTORSHIP AND CHIEF EXECUTIVE1. Full name, former name if any, father’s or husband’s name, nationality, residential and business address, national tax number, present occupation of each sponsor, proposed director, proposed chief executive and proposed chairman of the Board. (Institutional sponsors shall mention their names and addresses only instead of giving all these particulars of their nominee directors). 2. Names and addresses of companies, firms and other organizations of which the aforesaid sponsors,proposed chief executive and proposed chairman are or have been directors, partners or office holdersduring the last ten years. Copies of annual accounts of such companie s and firms for the last three yearsalongwith summary of their paid-up share capital, free reserves, profit after tax and dividend payment to beprovided.3. Financial standing, educational as well as professional qualifications and experience of persons mentioned in paragraph 1 above, supported by documentary evidence.

4. Percentage of capital, each sponsor proposes to contribute in the proposedcompany.

5. Feasibility report of the proposed company.

6. Evidence of payment of income tax and wealth tax by the sponsors in individual

capacity as well as bythe companies, firms, etc., wherein they are or have been directors during the preceding five years. 7. Net-worth certificate of each sponsor supported by a duly authenticated copy of the latest wealthstatement filed with the taxation department. In the case of sponsors or directors residing in countries wherefiling of wealth statement is not the requirement of law, a certificate of personal net-worth and generalreputation issued by a bank of international repute shall be acceptable.8. Names of the bankers of the sponsors alongwith their account numbers. 9. Draft of the Memorandum and Articles of Association.

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10. Affidavit from each person mentioned in paragraph 1 above, stating that-

(a) he has not been associated with any illegal banking business, deposit taking or

financial dealings;

(b) he and companies in which he is a director or major shareholder have no over-

due loans or installments

outstanding towards banks or other financial institutions;

(c) neither he nor companies in which he is a director or major shareholder has

defaulted in paying taxes as

on the date of application;

(d) he has not been sponsor, director or chief executive of a defaulting cooperative

finance society or

finance company;

(e) he has never been convicted of fraud or breach of trust or of an offence

involving moral turpitude or

removed from service for misconduct;

(f) he has neither been adjudged an insolvent nor has defaulted in making

payments, to his creditors; and

(g) his net-worth is not less than twice the amount to be subscribed by him

personally (not applicable to a

nominee director).

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FORM-II[see rule 5(1)]

APPLICATION FOR OBTAINING LICENCE TO UNDERTAKE OR CARRYOUT *_________________ AS NON – BANKING FINANCE COMPANY

Dated, the-------------- To,The Securities and ExchangeCommission of Pakistan,Islamabad.Dear Sir,We hereby apply for grant of licence under rule 5 of the Non-Banking Finance Companies (Establishmentand Regulation) Rules, 2003, to undertake__________* as a Non-Banking Finance Company.2. We hereby furnish the following information,__(a) date of incorporation as a limited company;(b) authorised, subscribed and paid-up share capital of the company (sponsors' equity indicated separately);(c) names and addresses of directors and number of shares held by each of them;(d) directors' interest, direct or indirect, in any other company with details of such interest;(e) details of persons or group controlling the company including major shareholders with number andvalue of shares held;(f) names of holding, subsidiary and associated undertaking, if any;(g) details of qualified staff engaged;(h) reasons for selecting the proposed place of business with statistical data; and(i) additional facts in support of this application.3. Certified copies of the memorandum and articles of association and certificate of incorporation are enclosed. 4. An affidavit as to the correctness of the above information by the chief executive and two directors is also furnished herewith. We undertake to keep this information upto date by communicating changes or modifications therein within fourteen days of such change or modifications5. A receipt of rupees one hundred thousand (Rs. 100,000/-) being the processing fee, deposited in

__________on ________ is enclosed.

Yours faithfully,

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References

Web References

www.rbi.org.in

nbfc.rbi.org.in ,

www.economywatch.com ,

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http://www.economywatch.com/

http://www.rbi.org.in/

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