Role of NBFCs in Financial Inclusion-Mayank Arya
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Transcript of Role of NBFCs in Financial Inclusion-Mayank Arya
Role of NBFCs in Financial Inclusion
SUMMER TRAINING PROJECT
Role of NBFCs in Financial Inclusion
Undertaken at
“ Reserve Bank of India, New Delhi ”Submitted in the partial fulfillment for the award of the degree ofMASTER OF BUSINESS ADMINISTRATION
Under the Supervision Submitted by
and Guidance of MBA 3RD Semester
Prof. Rajesh Bajaj Mayank Arya
(Project Guide) Enroll No. - 03517003909
SESSION: 2010 - 2011
TECNIA INSTITUTE OF ADVANCED STUDIES
(Approved by AICTE, Ministry of HRD, Govt. of India)Affiliated To Guru Gobind Singh Indraprastha University, Delhi
INSTITUTIONAL AREA, MADHUBAN CHOWK, ROHINI, DELHI- 110085E-Mail: [email protected], Website: www.tecniaindia.org
Fax No: 27555120, Tel: 27555121-24
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Role of NBFCs in Financial Inclusion
TECNIA INSTITUTE OF ADVANCEDSTUDIES
(Approved by AICTE, Ministry of HRD, Govt. of India)Affiliated To Guru Gobind Singh Indraprastha University, Delhi
INSTITUTIONAL AREA, MADHUBAN CHOWK, ROHINI, DELHI- 110085E-Mail : director.tecniaindia@ gmail.com, Website: www.tecniaindia.org
Fax No: 27555120, Tel: 27555121-24
Declaration
I Mayank Arya (03517003909), MBA 3rd Semester of the Tecnia Institute of Advanced
Studies, Delhi hereby declare that the Summer Training Report entitled “Role of NBFCs in Financial Inclusion” is an original work and the same has not been
submitted to any other Institute for the award of any other degree. A seminar
presentation of the Summer Training Report was made on _______________________ and the suggestions as approved by the faculty were duly incorporated.
Signature of Researcher
CountersignedSignature of faculty Guide
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Role of NBFCs in Financial Inclusion
Acknowledgement
It gives me immense pleasure and sense of achievement in preparing and presenting this project
report as per the requirements for the completion of Summer Internship project.
This project would have not have been possible without the expert guidance of Mr. Nirmal
Chand, (GM-DNBS) and his continued assistance to make sure that the company-visits I
conducted were fruitful. He has been a great mentor and helped me structure the project in a way
that there was mutual benefit for both RBI and me, as an MBA student. He was very flexible and
approachable throughout my stay at RBI.
I would also like to greatly thank Mr. Anandi Paswan(Manager-DNBS) and Mr. Chandan
Kumar Rukhaiyar, (Manager-DNBS) without whose help I would never have gained an
immensely thorough understanding of the section. He assisted me on a day-to-day basis, helping
me match the time-schedule I had prepared as well as engaging in healthy discussions with me
on the project topic.
I am deeply indebted to my faculty guide Prof. Rajesh Bajaj from Tecnia Institute of
Advanced Studies(GGSIPU), whose help, stimulating suggestions and encouragement helped
me in all the time of research and for competing this project
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Role of NBFCs in Financial Inclusion
Preface
Financial services actively contribute to the human & economic development of the society.
These lead to social safety net & protect the people from economic shocks. Hence, each & every
individual should be provided with affordable institutional financial products/services popularly
called “Financial Inclusion”.
Despite witnessing substantial progress in financial sector reforms in India, it is disheartening to
note that nearly half of the rural households even today do not have any access to any source of
funds- institutional or otherwise. Hardly one-fourth of the rural households are assisted by
NBFCs and banks. Hence the major task before banks is to bring most of those excluded, i.e.
75% of the rural households, under banking fold. There is a need for the formal financial system
to look at increasing financial literacy and financial counseling to focus on financial inclusion
and distress amongst farmers. Indian banks and financial market players should actively look at
promoting such programs as a part of their corporate social responsibility.
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Role of NBFCs in Financial Inclusion
Table of Content Introduction --------------------------------------------------------------------------------------- 8
Company Profile --------------------------------------------------------------------------------- 9 Problem Statement ------------------------------------------------------------------------------ 29
Objective ------------------------------------------------------------------------------------------ 30
Scope ---------------------------------------------------------------------------------------------- 30
Review of Literature ---------------------------------------------------------------------------- 32
Financial Inclusion ------------------------------------------------------------------------------ 35
Non Banking Financial Companies ----------------------------------------------------------- 37
NBFCs go for the Rural and Urban Growth in India --------------------------------------- 50
Role of Micro Finance – NBFCs in Financial Inclusion ----------------------------------- 52
Objective Analysis------------------------------------------------------------------------------- 54
Role of NBFCs in Financial Inclusion ------------------------------------------------------- 58
Data Analysis ------------------------------------------------------------------------------------ 63
Finding ----------------------------------------------------------------------------------------------------- 71
Recommendation -------------------------------------------------------------------------------- 72
Conclusion ---------------------------------------------------------------------------------------- 73
Limitation ----------------------------------------------------------------------------------------- 75
Bibliography -------------------------------------------------------------------------------------- 76
Annexure -------------------------------------------------------------------------------------- 49
Learning Summary -------------------------------------------------------------------------- 81
List of Charts
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Role of NBFCs in Financial Inclusion
Figure Page No.
Figure 1: Difficulties in Procuring Banking License 63
Figure 2: Link up of NBFCs with banks for achieving Financial Inclusion 64
Figure 3: Awareness Level 65
Figure 4: Customer Segment Focus 65
Figure 5: Range of Products and services offered by NBFCs 66
Figure 6: Target Segment Expansion Plans 67
Figure 7: Level of Competition 68
Figure 8: Implementing New Innovative Ideas 68
Figure 9: Special Staff Training in view of Financial Inclusion 69
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CHAPTER - 1
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IntroductionThe World is moving at an amazing pace but due to the advances in technologies, distances have
become meaningless. Globalization has enabled the rise of global trade leading to wealth
generation in developed as well as developing countries. Wealth can be created in any part of the
world with a single click of the mouse. Developing nations, like India have immensely benefited
from the globalizing economy. Wealth has been pouring into the country as investments (both
direct and institutional). Indian companies are acquiring companies all over the world, hence
benefitting from expansion. This has directly affected the lives of many citizens in our country.
For many, there has been a dramatic increase in the disposable income. The savings,
consumption and investment patterns have changed in the past few years. This has meant that
there has been an increase in demand for many financial services from different financial firms.
The market has responded to this soaring demand with making attractive offers and services for
the customers at affordable rates. The liberalization of the economy in the 1990s has brought in
new players into the field which has not only brought in some much needed fresh air to the
stagnant financial sector but also competition for the same market space which was relatively
unknown in the financial sector till then. Since then, there have been progressive reforms in the
financial sector allowing for better and easier facilities and options to the poor and disadvantage
people. An increasing financially aware middle class have realized the importance of financial
services. Banks and NBFCs(Non Banking Financial companies) have streamlined and
rationalized themselves to meet with the changing demands of the people. Banks and NBFCs
have become partners in growth for many offering them a safer and secure future.
India is the fourth largest economy in the world on a purchasing power parity (PPP) basis
and twelfth on a nominal basis. With the real GDP forecasted to grow by 5.7% in the year 2009-
10, the Indian economy is marching ahead. This rapid expansion is expected to continue as
growth in the services and high technology manufacturing sector accelerates. Agriculture, which
continues to support around 60% of the population, has grown by a mere 2.7% in the second
quarter of 2008-09. In addition, the organized sector employment presently comprises less than
10% of the workforce, leaving the vast majority of the working population with irregular income
streams. In India the focus of the financial inclusion at present is confined to ensuring a bare
minimum access to a savings bank account without frills, to all. There could be multiple levels of
financial inclusion and exclusion. At one extreme, it is possible to identify the ‘super-included’,
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i.e., those customers who are actively and persistently courted by the financial services industry,
and who have at their disposal a wide range of financial services and products. At the other
extreme, we may have the financially excluded, who are denied access to even the most basic of
financial products.
In between are those who use the banking services only for deposits and withdrawals of money.
But these persons may have only restricted access to the financial system, and may not enjoy the
flexibility of access offered to more affluent customers.
Without a formal and a legally recognized financial system in which all sections of the
population are a part of, it would be impossible even for the most efficient of the governments to
reach out to all sections of the people. A stable and healthy financial service sector creates trust
among the people about the economy and only with this trust (which has legal validity) could a
strong, stable and an inclusive economy be created.
Notwithstanding the rapid increase in overall GDP and per capita income in recent years, a
significant proportion of the population in both rural and urban areas still experiences difficulties
in accessing the formal financial system. There is currently a perception that there are a large
number of rural, urban and semi urban people, potential entrepreneurs, small enterprises and
others, who may not have adequate access to the financial services, which could lead to their
marginalization and denial of opportunity to grow and prosper.
Company ProfileName of the organization: - Reserve Bank of India
Organization Type: - National
Address:- Regional Director for Delhi
Reserve Bank of India,
6, Sansad Marg,P.B.No.696,
New Delhi -110 001.
Telephone No. - 011- 23710538, 011-23710542
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Email Id:- [email protected]
Reserve Bank of India(RBI) Head Office Address :
Main Bldg. P. B. No. 901 Shahid Bhagat singh Road
Mumbai : 400001
Maharashtra ,India .
Phone No. : (22) - 22601500, 22660500
Website: www.rbi.org.in
The total workforce of Reserve Bank of India is approx. 21000 till 2009
Geographical Area of working: - RBI has 22 regional offices spread in different states of India.
Diagrammatic views of all 22 regions are as follows:-
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Nature of Organization and its Business
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially
established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is
where the Governor sits and where policies are formulated. Though originally privately owned,
since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
Since 1935, RBI has began the operations, they have stood at the centre of India’s financial
system, with a fundamental commitment to maintaining the nation’s monetary and financial
stability in India.
From ensuring stability of interest and exchange rates to providing liquidity and an adequate
supply of currency and credit for the real sector; from ensuring bank penetration and safety of
depositors funds for promoting and developing financial institutions and markets, the Reserve
Bank of India plays a crucial role in the economy. The decision taken by them touches the daily
life of all Indians and helps the country’s current and future economic and financial course. Over
the years, They performs specific roles and functions which are very important for maintaining
the financial stability in the system.
The origin of the Reserve Bank can be traced to 1926, when the Royal Commission on Indian
Currency and Finance—also known as the Hilton-Young Commission— recommended the
creation of a central bank to separate the control of currency and credit from the government and
to augment banking facilities throughout the country. The Reserve Bank of India Act of 1934
established the Reserve Bank as the banker to the central government and set in motion a series
of actions culminating in the start of operations in 1935. Since then, the Reserve Bank’s role and
functions have undergone numerous changes—as the nature of the Indian economy has changed.
Today’s RBI bears some resemblance to the original institution, although their mission has
expanded along with their deepened, broadened and increasingly globalised economy
The Reserve Bank of India performs this function under the guidance of the Board for Financial
Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central
Board of Directors of the Reserve Bank of India.
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Role of NBFCs in Financial Inclusion
Objective
Primary objective of BFS is to undertake consolidated supervision of the financial sector
comprising commercial banks, financial institutions and non-banking finance companies.
Constitution
The Board is constituted by co-opting four Directors from the Central Board as members for a
term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank
are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of
banking regulation and supervision, is nominated as the Vice-Chairman of the Board.
BFS meetings
The Board is required to meet normally once every month. It considers inspection reports and
other supervisory issues placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit
and internal audit functions in banks and financial institutions. The audit sub-committee includes
Deputy Governor as the chairman and two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of
Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions
on the regulatory and supervisory issues.
Functions
Some of the initiatives taken by BFS include:
i. Restructuring of the system of bank inspections
ii. Introduction of off-site surveillance,
iii. Strengthening of the role of statutory auditors and
iv. Strengthening of the internal defences of supervised institutions.
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Role of NBFCs in Financial Inclusion
The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms
of empanelment and appointment of statutory auditors, the quality and coverage of statutory
audit reports, and the important issue of greater transparency and disclosure in the published
accounts of supervised institutions.
Current Focus
Supervision of financial institutions
Consolidated accounting
Legal issues in bank frauds
Divergence in assessments of non-performing assets and
Supervisory rating model for banks.
How RBI functions
The Reserve Bank is wholly owned by the Government of India. The Central Board of Directors
oversees the Reserve Bank’s business.
About the Central Board
The Central Board has primary authority for the oversight of the Reserve Bank. It delegates
specific functions to its committees and sub-committees.|
1. Central Board: Includes the Governor, Deputy Governors and the nominated Directors
and a government nominee-Director.
2. Committee of Central Board: Oversees the current business of the central bank and
typically meets every week, on Wednesdays. The agenda focuses on current business,
including approval of the weekly statement of accounts related to the Issue and Banking
Departments.
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Role of NBFCs in Financial Inclusion
3. Board for Financial Supervision: It regulates and supervises commercial banks, Non-
Banking Finance Companies (NBFCs), development finance institutions, urban co-
operative banks and primary dealers.
4. Board for Payment and Settlement Systems: It regulates and supervises the payment
and settlement systems.
5. Sub-committees of the Central Board: It includes those on Inspection and Audit; Staff;
and Building. Focus of each subcommittee is on specific areas of operations.
6. Local Boards: In Chennai, Kolkata, Mumbai and New Delhi, representing the country’s
four regions. Local board members, appointed by the Central Government for four-year
terms, represent regional and economic interests and the interests of co-operative and
indigenous banks.
The RBI is made up of:
1. 26 Departments: These focus on policy issues in the Reserve Bank’s functional areas
and internal operations.
2. 26 Regional Offices and Branches: These are the Reserve Bank’s operational arms and
customer interfaces, headed by Regional Directors. Smaller branches / sub-offices are
headed by a General Manager / Deputy General Manager.
3. Training centres: The Reserve Bank staff College at Chennai addresses the training
needs of RBI officers; the College of Agricultural Banking at Pune trains staff of co-
operative and commercial banks, including regional rural banks. The Zonal Training
Centres, located at regional offices, train non-executive staff.
4. Research institutes: RBI-funded institutions to advance training and research on
banking issues, economic growth and banking technology, such as, National Institute of
Bank Management (NIBM) at Pune, Indira Gandhi Institute of Development Research
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Role of NBFCs in Financial Inclusion
(IGIDR) at Mumbai, and Institute for Development and Research in Banking Technology
(IDRBT) at Hyderabad.
5. Subsidiaries: Fully-owned subsidiaries include National Housing Bank (NHB), Deposit
Insurance and Credit Guarantee Corporation (DICGC), Bharatiya Reserve Bank Note
Mudran Private Limited (BRBNMPL). The Reserve Bank also has a majority stake in the
National Bank for Agriculture and Rural Development (NABARD).
Main Functions of RBI
The Reserve Bank is the network of numerous activities and all are related to the nation’s
financial sector, encompassing and extending beyond the functions of a typical central bank. An
overview of primary activities performed by Reserve Bank of India are as follows:
Monetary Authority
It helps in formulating, implementing and monitoring the monetary policy.
The main objective is to maintain the price stability and ensuring adequate flow of credit
to productive sectors.
Regulator and supervisor of the financial system
It prescribes the broad parameters of banking operations within which the country's
banking and financial system functions.
The main objective is to maintain public confidence in the system, protect depositor’s
interest and provide cost-effective banking services to the public.
Manager of Foreign Exchange
It manages the Foreign Exchange Management Act, 1999.
The main objective is to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
Issuer of currency
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Role of NBFCs in Financial Inclusion
Main task is to issues and exchanges or destroys currency and coins which are not fit for
circulation.
The main objective is to give the public adequate quantity of supplies of currency notes
and coins and in good quality.
Developmental role
Main task is to perform wide range of promotional functions to support national
objectives.
Related Functions
Banker to the Government:-It performs merchant banking function for the central and
the state governments; also acts as their banker.
Banker to banks:- It maintains banking accounts of all scheduled banks.
Mission and Vision of RBI
Mission Statement of RBI is:
“To regulate the issue of Bank Notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage.”
Vision statement of RBI is:
“The Vision of RBI is to maintain the stability in Growth and aslo Control the Inflation in
the Indian Economy .”
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Role of NBFCs in Financial Inclusion
Product at Glance
In order to bring home the advantages of electronic transactions and putting to use the advantages of technology in banking, RBI introduced various payment products like: -
ECS (Electronic Transfer Mode)
ECS is a mode of electronic funds transfer for transactions that are repetitive and
periodic in nature. ECS is used by institutions for making bulk payment of amounts
towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of
amounts towards telephone / electricity / water dues, cess / tax collections, loan
instalment repayments, periodic investments in mutual funds, etc. Essentially, ECS
facilitates bulk transfer of monies from one bank account to many bank accounts or vice
versa using the services of a ECS Centre at a ECS location.
There are two variants of ECS - ECS Credit and ECS Debit.
ECS Credit is used for affording credit to a large number of beneficiaries having
accounts with bank branches at various locations within the jurisdiction of a ECS Centre
by raising a single debit to an account of a bank (that maintains the account of the user
institution). ECS Credit enables payment of amounts towards distribution of dividend,
interest, salary, pension, etc., of the user institution.
ECS Debit is used for raising debits to a large number of accounts maintained with bank
branches at various locations within the jurisdiction of a ECS Centre for single credit to
an account of a bank (that maintains the account of the user institution). ECS Debit is
useful for payment of telephone / electricity / water bills, cess / tax collections, loan
instalment repayments, periodic investments in mutual funds, etc., that are periodic or
repetitive in nature and payable to the user institution
EFT (Electronic Fund Transfer)
EFT is a Scheme introduced by Reserve Bank of India (RBI) to help banks offering their
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Role of NBFCs in Financial Inclusion
customers money transfer service from account to account of any bank branch to any
other bank branch in places where EFT services are offered. The EFT system presently
covers all the branches of the 27 public sector banks and 55 scheduled commercial banks
at the 15 centres (viz., Ahmedabad, Bangalore, Bhubneshwar, Kolkata, Chandigarh,
Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Mumbai, Nagpur, New Delhi, Patna and
Thiruvananthpuram). Funds transfer is possible from any branch of these banks at these
centres to other branch of any bank at these centres both inter-city and intra-city.
NEFT (National Electronic Funds Transfer)
National Electronic Funds Transfer (NEFT) is a nation-wide system that facilitates
individuals to electronically transfer funds from any bank branch to any other bank
branch in the country. Individuals, firms or corporates maintaining accounts with a bank
branch can transfer funds using NEFT. Even such individuals, firms or corporates who do
not have a bank account (walk in customers) can also deposit cash at the branch with
instructions to transfer funds using NEFT. A separate Transaction Code (No. 50) has
been allotted in the NEFT system to facilitate walk-in customers to deposit cash and
transfer funds to a beneficiary. Such customers have to furnish full details including
complete address, telephone number etc. NEFT, thus, facilitates originators or remitters
to initiate funds transfer transactions even without the need for having a bank account.
RTGS (Real Time Gross Settlement)
The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds
transfer mechanism where transfer of money takes place from one bank to another on a
'real time' and on 'gross' basis. This is the fastest possible money transfer system through
the banking channel. Settlement in 'real time' means payment transaction is not subjected
to any waiting period. The transactions are settled as soon as they are processed. 'Gross
settlement' means the transaction is settled on one to one basis without bunching with any
other transaction. Considering that money transfer takes place in the books of the Reserve
Bank of India, the payment is taken as final and irrevocable.
The objective behind the introduction of these products was to bring about further
reduction in the length of the settlement cycle to enhance the efficiency of payment
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Role of NBFCs in Financial Inclusion
system. Although RBI has succeeded in bringing about a change in the approach to
adoption of technology in payment and settlement systems, the cost of these services is
militating against wider adoption of these technological products.
INFINET (Indian Financial Network): - The INFINET is essentially an Internet
Protocol (IP) network and hence all the applications should be built around TCP/IP. In
order to make optimum use of the communication resources and to facilitate smooth
implementation of the applications on the network, the RBI had constituted a few sub-
groups for standardisation of different information technology components like
networking products, system software, and messaging standard.
ORGANISATION STRUCTURE OF RBI
The organization of RBI can be divided into three parts:
1) Central Board of Directors.
2) Local Boards
3) Offices of RBI
1. Central Board of Directors
The organization and management of RBI is vested on the Central Board of Directors. They are
responsible for the management of RBI. Central Board of Directors consists of 20 members.
They are constituted as follows:-
One Governor: - It is the highest authority of RBI. He is appointed by the Government of
India for a term of 5 years. He can be re-appointed for another term.
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Role of NBFCs in Financial Inclusion
Four Deputy Governors: - Four deputy Governors are nominated by Central Govt. for a
term of 5 years.
Fifteen Directors: - Other fifteen members of the Central Board are appointed by the
Central Government. Out of these, four directors, one each from the four local Boards are
nominated by the Government separately by the Central Government.
Ten directors nominated by the Central Government are among the experts of commerce,
industries, finance, economics and cooperation. The finance secretary of the Government of
India is also nominated as Govt. officer in the board. Ten directors are nominated for a period
of 4 years. The Governor acts as the Chief Executive officer and Chairman of the Central
Board of Directors. In the absence of deputy Governor nominated by the Governor, he acts as
the Chairman of the Central Board. The deputy governors and government’s officer nominee
are not entitled to vote at the meetings of the Board. The Governor and four deputy
Governors are full time officers of the Bank.
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Role of NBFCs in Financial Inclusion
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ORGANISATION STRUCTURE : CENTRAL BOARD OF DIRECTORS
Executive Directors
Shri V.K. Sharma
Financial Markets Department
(Shri P.Krishnamurthy
, CGM)
Department of Currency
Management(Shri R
Gandhi, CGM)
Rural Planning & Credit
Department (Shri
B.P.Vijayendra, CGM)
Urban Banks Department
(Shri A. Udgata,CGM)
Customer Service
Department (Shri Kaza Sudhakar,
CGM)
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Role of NBFCs in Financial Inclusion
Shri. C. Krishnan
Inspection Department(including
Internal Audit)(Shri Karuna
Sagar CGM-in-Charge)
Right to Information Act(First Appellate
Authority)Shri Anand
SinhaFinancial Stability
Unit(Dr.
Rabi.N.Mishra, General Manager
& Officer-in-Charge)
Department of Banking
Operations and Development
(Shri. B. Mahapatra,
CGM-in-Charge)
Department of Expenditure& Budgetary
Control (Smt Deepa Srivastava
CGM-in-Charge)
Shri V.S. Das Secretary's Department
(Smt. Grace E. Koshie, CGM &
Secretary)
Department of Administration &
Personnel Management(Shri Prabal
Sen, Principal CGM)
Human Resources
Development Department
(Shri Deepak Singhal, CGM)
Rajbhasha Department
(Ms. Roopam Mishra, General
Manager-in-Charge)
Department of Communication
(Alpana Killawala, CGM)
Shri G.Gopalakrishn
a
Department of Non-Banking Supervision
Premises Department
(Shri
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Role of NBFCs in Financial Inclusion
(Smt Uma Subramaniam, CGM-in-Charge)
S.Venkatachalam, CGM,
Technical )
Department of Banking
Supervision(Dr. N. Krishna Mohan, CGM-in-Charge)
Central Security Cell
(Major General (Retd.)
Soli N. Pavri, Security Adviser)
Shri H.R. KhanDepartment of Government
& Bank Accounts (Shri
S.V.Raghavan, CGM in - Charge)
Department of External
Investments & Operations(Smt. M
Hemachandra,CGM)
Internal Debt ManagementDepartment
(Shri K.K.Vohra, CGM)
Foreign Exchange Department(Shri Salim
Gangadharan,CGM-in-Charge)
Shri D.K.Mohanty
Alternate Appellate
Authority (under RIA)
Monetary Policy Department
(Dr.Janak Raj, Adviser-in-
Charge)
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Role of NBFCs in Financial Inclusion
Department of Economic Analysis
& Policy(Shri K.U.B.Rao,
Officer-in-Charge)
Department of Statistics & Information
Management (Dr. A.M.
Pedgaonkar, Principal Adviser)
Shri H.N.Prasad,
Chief Executive Officer
Deposit Insurance and Credit Guarantee Corporation
2. Local Boards
Besides the central board, there are local boards for four regional areas of the country with their
head-quarters at Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist of five
members each, appointed by the central Government for a term of 4 years to represent territorial
and economic interests and the interests of co-operatives and indigenous banks. The function of
the local boards is to advise the central board on general and specific issues referred to them and
to perform duties which the central board delegates.
3. Offices of RBI
The Head office of the bank is situated in Mumbai and the offices of local boards are
situated in Delhi, Kolkata and Chennai. In order to maintain the smooth working of banking
system, RBI has opened local offices or branches in Ahmedabad, Bangalore, Bhopal,
Bhubaneswar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna,
Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open its offices with
the permission of the Government of India. In places where there are no offices of the bank, it is
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Role of NBFCs in Financial Inclusion
represented by the state Bank of India and its associate banks as the agents of RBI.
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Role of NBFCs in Financial Inclusion
CHAPTER – 2Job Specific Analysis
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CHAPTER – 2(I)Research Problem and Purpose
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Role of NBFCs in Financial Inclusion
Research ProblemNon Banking Financial Companies (NBFCs) in India were having golden days during 1990s.
Their heady days were fueled with the rapid industrial growth due to liberalization in 1991,
simple resource-raising regulations and eager & greedy investors ready to put their saving into
any finance company. As has been said, when you have ample amount of something you do not
care for it, NBFCs too have invested heavily but unwisely. Growth-at- any-cost was the
strategies of some of the NBFCs. Moreover, due to this many weak NBFCs could not pay the
hefty interest during the industrial slowdown during 1997 bringing to an end the golden period of
NBFCs.
Now the question before us is whether the NBFCs, which have traditionally
dominated the market of retail finance (like car finance business), can meet the challenges of the
future. If yes, then how and what should be the role of NBFC in Financial Inclusion.
The forte of NBFCs is to analyze how to provide credit delivery to areas which are not covered
by banks and financial institution (FIs). By virtue of there past experience NBFCs know the tacit
needs of retail customers much better and with more sensitivity than others do. As traditional
boundaries between different categories of financial intermediaries are disappearing, NBFCs
have to face stiff competition in retail financing specially from banks and FIs. The fact is that the
banks' and top Financial Institutions have ability to raise funds at low cost and if NBFCs want to
compete head-on, then they have to monitor their high cost of mobilizing funds.
In the market of retail finance and financial loans, in order to the compete with other financial
player, NBFCs have to increase the quality of their service which is described as the convenience
offered to the customer in terms of speed, accuracy and product features. NBFCs stands a good
chance to succeed as they have an advantage of being lower in operating cost as compared with
other financial intermediaries because of their small size, efficient operation and fast decision
making. NBFC's aggressive collection mechanism and lower proportion of big corporate loans
gives them an edge in containing risk and also results in less amount of Non Performing
Assets(NPAs) which is critical factor for better financial performance of the NBFCs. So the
main problem is that how NBFCs kept on searching for new products and services at low prices
(also known as Financial Inclusion) in order to compete in this challenging economic
environment
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Role of NBFCs in Financial Inclusion
Objective of StudyObjective of the Research Project are classified as follows:-
To study the barriers and opportunities for financial inclusion by NBFCs (Non Banking
Financial companies)
Initiatives and developmental activities undertaken by NBFCs in achieving financial
Inclusion.
To study the role of NBFCs in various financial services like Financing, remittances,
asset creation, entrepreunial credit, funding etc.
ScopeThe question that is before us is how to extend the scope of financial products and services of an
organized financial system to include low income groups. The institutions which currently
provide financial services in the rural areas include branches of commercial banks, regional rural
banks, cooperative societies and micro-finance institutions, NBFCs (Non Banking Financial
Companies). What is required now is not creating new institutions for extending their outreach
but finding ways and means to effect improvements within the existing formal credit delivery
mechanism and evolve new models for extending out-reach. In a broad sense, we need to address
issues on the supply side as well as demand side. The financially excluded sections require
products which are customized to meet their needs. Financial exclusion is also caused by demand
side issues. Unless steps are taken on the demand side, that is in the "real sectors", mere supply
side solutions from the financial sector will not work. Credit is necessary for this, but not
sufficient. Credit has to be an integral part of an overall programme aimed at improving the
productivity and income of small farmers and other poor households. Putting in place an
appropriate credit delivery system to meet the needs of marginal and sub-marginal farmers must
go hand in hand with efforts to improve the productivity of such farm households.
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Role of NBFCs in Financial Inclusion
CHAPTER – 2(II)Review of Literature
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Role of NBFCs in Financial Inclusion
Literature Review
According to Deputy Governor, Reserve Bank of India, Smt. Usha Thorat (June 2009),
discussed the dynamics between financial inclusion and financial regulations for ensuring a
formal financial system that delivers affordable financial services to the excluded population
without compromising on acceptable levels of safety and reliability. She is Focusing on the
approach of regulating non-bank intermediaries so that they can provide financial services to the
weaker and poor section of society. Ms. Usha discussed the issue of allowing NBFCs especially
microfinance companies to provide savings facilities and deposit products for their clients.
According to Shubhashish Dubey, Associate Director at Pipal Research(March 2009),
Financial inclusion is turning into a profitable venture for non-banking finance companies
(NBFCs), as they are scurrying to fill the gap left by banks in rural markets that offer better
margins. Various NBFCs are emerging with their different roles and contribute their healthy
efforts towards achieving financial inclusion like Srei BNP Paribas is entering the agriculture
equipment finance market by April 2009 and hopes to disburse around Rs 500 crore in one year
under the vertical. Similarly, Shriram Transport, which has been for long focusing on used truck
finance, has also created a separate vertical for farm equipment finance, and hopes to disburse as
much as Rs 5,000 crore in the next two years. Similarly, L&T Finance, which has been more
focused on infrastructure finance, is expanding its rural network through products such as Kisan
Bandhu, a product specially launched with a view on the Prime Minister Gram Sadak Yojana
(PMGSY), a rural road construction scheme. The product is targeted at entrepreneurs who need
funding for the acquisition of small-sized transport vehicles.
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Role of NBFCs in Financial Inclusion
CHAPTER – 2(III)Current Scenario
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Role of NBFCs in Financial Inclusion
Current Scenario
The financial system comprises of financial institutions, financial instruments and financial
markets that provide an effective payment and credit system and thereby facilitate channelising
of funds from savers to the investors of the economy. In India considerable growth has taken
place in the Non-banking financial sector in last two decades. Over a period of time they are
successful in rendering a wide range of services for attaining financial Inclusion to the maximum
extent.
Initially NBFCs at present providing financial services partly fee based and partly fund based.
Their fee based services include portfolio management, issue management, loan syndication,
merger and acquisition, credit rating etc. their asset based activities include venture capital
financing, housing finance, equipment leasing, hire purchase financing factoring etc. In short
they are now providing variety of services.
NBFCs intended to cater to the needs of savers and investors but later on they developed into
institutions that can provide services similar to banks.. Comprehensive regulation of the banking
system and absence or relatively lower degree of regulation over NBFCs have been some of the
main reasons for the growth momentum of the latter. It has been revealed that economic
development and growth of NBFCs are positively related. In this regard the World Development
Report has observed that in the developing countries banks hold a major share of financial assets
than they do in the industrially developed countries. As the demand for financial services grow,
countries need to encourage the development of NBFCs and securities market in order to
broaden the range of services and stimulate competition and efficiency.
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Role of NBFCs in Financial Inclusion
Financial InclusionAccess to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and
social cohesion. This has to become an integral part of our efforts to promote inclusive growth.
Financial Inclusion denotes delivery of financial services at an affordable cost to the vast
sections of the disadvantaged and low-income groups. The various financial services include
credit, savings, insurance and payments and remittance facilities. The objective of financial
inclusion is to extend the scope of activities of the organized financial system to include within
its ambit people with low incomes. Through graduated credit, the attempt must be to lift the poor
from one level to another so that they come out of poverty.
Financial Inclusion should include access to Financial Products and Services Like -
No frill Bank accounts – check in account
Micro Credit
Savings products
Remittances & Payment services
Insurance - Healthcare
Mortgage
Financial advisory services
Entrepreneurial credit
Pension for old age
Business correspondence & self help group
Branchless banking
Micro finance & micro credit facility
Investment plan for child's education
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Role of NBFCs in Financial Inclusion
Anatomy of Various Product and services and Institutional Structures
Who are financially excluded?
• Small and marginal farmers
• Landless labourers, oral lessees
• Self employed and unorganized sectors enterprises
• Urban slum dwellers, migrants, ethnic minorities and socially excluded groups
• Senior citizens, women, etc.
Objective of Financial Inclusion There are mainly two objectives of Financial Inclusion:-
The access to various mainstream financial services e.g. saving bank account, credit,
insurance, payments and remittance and financial and credit advisory services.
The main objective is to provide the benefit of vast formal financial market,& protect
them from exploitation of informal credit market, so that they can be brought into the
mainstream
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Role of NBFCs in Financial Inclusion
Measurement of Financial Inclusion/Exclusion
While the importance of financial inclusion has been widely accepted, much less is known about
how inclusive the financial systems are and who has access to which financial services.
Individual indicators, viz. number of bank accounts and access to various branches are generally
used as measures of financial inclusion, can provide only partial information on the level of
financial inclusion in an economy. Financial services or products rendered by banks, NBFCs,
postal savings banks, credit unions, finance companies, micro-finance institutions (MFIs), and
other formal and quasi-formal non-bank institutions generally form the basis for measuring the
financial inclusion.
Core and headline indicators place a given population along a continuum of access,
depending on its usage of formal, semi-formal, and informal financial services, and those
excluded from the use of financial services. The access to finance could be divided into five
segments:
(i) The proportion of the population that uses a bank or some other Institution
(ii) The population which uses service from non-bank ‘other formal’ financial
institutions, but does not use bank services
(iii) The population which only uses services from informal financial service providers
(iv) The proportion of the population transacting regularly through formal financial
instruments
(v) The population which uses no financial services.
There exists no single comprehensive measure that can be used to indicate the extent of financial
inclusion across economies.
Benefits of Financial InclusionImprovements in access to financial institutions accrue several benefits to the consumer,
regulator and the economy alike. Establishment of an account relationship can pave the way for
the customer to avail the benefits of a variety of financial products. The bank accounts can also
be used for multiple purposes, such as, making small value remittances at low cost and making
purchases on credit.
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Role of NBFCs in Financial Inclusion
Furthermore, the regulator benefits, as the audit trail is available and transactions are conducted
transparently in a medium that can be monitored. The economy benefits, as greater financial
resources become transparently available for efficient intermediation and allocation, for uses that
have the highest returns. Promoting financial inclusion can also help in the regeneration of local
areas if money saved by increased access to financial services can be re-invested in the
community. Inclusive finance - safe savings, appropriately designed loans for poor and low
income households and for micro, small and medium sized enterprises, and appropriate insurance
and payments services - can help people help themselves to increase incomes, acquire capital,
manage risk, and work their way out of poverty. Increasing the inclusiveness of financial sectors,
fuelled by domestic savings to the greatest extent possible, will, over time, bolster the poorer
segments of the population as well as those segments of the economy that most affect the lives of
poor people. Holding a bank account itself confers a sense of identity, status and
empowerment and provides access to the national payment system. Therefore, having a bank
account becomes a very important aspect of financial inclusion
Mainstream Financial Services
Some of the necessary financial Services are as follows: -
1. Basic saving bank account- an account with all basic feature of saving account.
2. Payment and remittances services
3. Entrepreneurial credit – this means, to run/expand small scale business/shop or any
economic activity, easy credit should be provided, so that financial dependence can be
created amongst households.
4. Housing finance- funding for purchasing new residential or reconstruction
5. Insurance – life\healthcare- to plan future better
6. Financial education\credit counselling centres – to guide them which product suits
them better, where to go credit needs, what are various services available to better their
personal financial planning.
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Role of NBFCs in Financial Inclusion
NON BANKING FINANCIAL COMPANIES (NBFCs)
According to Reserve Bank (Amendment act, 1997) “A Non Banking Finance Company
(NBFC)” means-
1. A financial institution which is a company
2. A non banking institution which is a company and which has as its principal business the
receiving of deposits under any scheme or arrangement or in other manner a lending in any
manner
3. Such other non banking institution or class of such institutions as the bank may with the
previous approval of the central government specify.
The definition excludes financial institutions which carry on agricultural operations as their
principle business. NBFCs consists mainly of finance companies which carry on functions like
hire purchase finance, housing finance, investment, loan, equipment leasing or mutual benefit
financial operations, but do not include insurance companies or stock exchange or stock broking
companies.
In other words NBFCs 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.
NBFCs are classified into four categories
1. Hire- Purchase Leasing
2. Loan Company
3. Investment Company
4. Equipment Leasing Company
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)
4. Infrastructure Financing Companies( Since 12 February 2010)
Some of the prominent NBFCs in India are
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Role of NBFCs in Financial Inclusion
Infrastructure Development Finance Corporation (IDFC)
Rural Electric Corporation ( REC)
Industrial Finance corporation of India (IFCI )
GE Capital
Till March 2010 there were 15,167 NBFCs .
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.
NBFCs are different from Banks are as follows:-
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
The banking sector has undergone major transformation since the liberalisation process and the
implementation of the key recommendations of the reports of the M Narasimhan headed
Committee on Banking Sector Reforms in 1991 and 1998. The announcement by the finance
minister during the Budget speech that the Reserve Bank of India (RBI) will issue additional
banking licences to private sector players, including non banking financial companies (NBFC)
that meet the RBI eligibility criteria, came as a cheer to several market participants, especially
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Role of NBFCs in Financial Inclusion
the large NBFC players. The government hopes that the policy liberalisation will extend the
geographic coverage of banks and improve access to banking services to the unbanked Indian
population.
It is widely expected that the RBI will revise the eligibility criteria for entry of new banks in the
private sector including the conversion of NBFCs into private sector banks. The present
guidelines for conversion of NBFCs into banks were laid down by the RBI in 2001. The key
criteria for conversion of NBFCs into banks included for instance good track record of
performance and compliance, minimum net worth of Rs 200 crore to be increased to Rs 300
crore within three years of conversion, the NBFC should not have been promoted by a large
industrial house or owned/controlled by public authorities, capital adequacy of at least 12% and
net NPA of less than 5%. The guidelines also stipulated that the NBFC on conversion into a bank
will have to comply with capital adequacy ratio and all other requirements such as lending to
priority sector, promoters’ contribution, lock-in period for promoters’ stake, etc, as applicable to
banks.
Evolution of the NBFC sector
Although NBFCs have a legacy in India, they came into the limelight in the late 1980s.
Liberalization and fresh avenues of operations in areas such as housing and investment spurred
growth of NBFCs in the country. Non-banking financial companies or NBFCs have become an
integral part of India’s financial system. In recent times, NBFCs have emerged as lenders to both
companies and individuals. When it comes to lending, NBFCs are generally regarded to be
complementary to banks and are often able to offer better services and products to their
customers. Initially intended to cater to the needs of the small investors and savers, NBFIs have
developed into institutions that can provide services similar to those of commercial banks.
In the sixties, the reach of the institutional financial intermediaries was quite limited, wherein the
magnitude of deposits with the banks and NBFCs was of small order. While the commercial
banks have expanded their reach in the post-Nationalization era, because of the special features
of the NBFCs, a large segment of the borrowers looked upon them for their credit needs. It was
NBFCs which fuelled the automobile sector growth because banks ventured into auto-financing
only about 5 years back. Besides the lending risk associated with different segments vary widely.
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Role of NBFCs in Financial Inclusion
For instance, risks are perceived to be higher in the automobile finance sector, where the
collateral is movable, and the consumer finance business.
NBFC-AFCs have demonstrated that their strength has been in creation of productive national
assets through leasing and other modes of financing. In fact, most developed economies have
relied heavily on lease financing route in their developmental process. NBFC-AFCs have been
playing a major role in promoting leasing, hire-purchase, loan disbursals etc. in different
economic activities, be it infrastructure creation or developing key support services for such
infrastructure.
The Indian economy today is observing a phase of phenomenal growth. We have seen year on
year growth rate of about 8-9% in last 3-4 years. Financing requirement is also increasing
commensurately and will continue to increase in order to support and sustain the tremendous
economic growth led by asset creation. NBFCs have been playing a complementary role to the
other financial institutions including Banks in meeting the funding needs of the economy. In fact
diversification of financial markets is an important component of financial sector reforms. The
increased consumerism in the Indian economy in past decade or so has been possible only
because of the availability of credit to retail customers which has been largely supported by
NBFCs and banks later joined the league.
NBFC-AFCs play a very useful role in channelizing funds towards acquisition of commercial
vehicles and consequently aid in the development of the road transport industry. They are
engaged in creation of assets like financing transportation and infrastructure construction
equipments and projects. Road Transport Sector today is the lifeline of our economy and is
responsible for creating self-employment opportunities – both direct and indirect - in semi-urban
and rural areas. The Road Transport Industry carries a major chunk of freight and passengers.
NBFC-AFCs provide 80% to 90% of funding for the Road Transport Sector. Almost 95% of the
Commercial Vehicles are acquired under financing.
NBFC-AFCs hence have a strong presence in the rural markets where they are engaged in
financing farming machinery such as tractors, and LCVs and three-wheelers used for
transportation of agricultural produce. Given the necessity of increasing agricultural growth
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Role of NBFCs in Financial Inclusion
through improvements in productivity and also of generating employment in rural areas, asset-
financing companies will continue to play a vital role in meeting these objectives.
Regulatory arbitrage potential has been frowned upon both at international level and national
level. IMF has framed principles for regulation of the financial sector, where it suggests that
institutions performing similar functions should be subject to similar regulations and there should
be no scope of taking advantage on the basis of this disparity.
Factors that lead to growth of NBFCs
NBFCs are characterized by their ability to provide niche financial services in the Indian
economy to customers who have not availed any loans with banks (and are often referred
to as ‘unbankable’ customers). Hence they work complementary to banks, catering to a
market not supported by these commercial money-lending institutions.
They fulfill the need of all customers for ‘financial inclusion’ by providing them a source
of funds beyond the traditional money-lender.
They are able to provide fast customized services to suit every need of their client.
Due to the relatively lower degree of regulation over NBFCs as compared to banks, there
is less documentation and uncomplicated terms while processing the loan.
NBFCs are believed to be the more ‘customer-oriented’ version of the commercial banks,
which are primarily seen as ‘profit-making machines’ even if it comes at the cost of the
customer’s interest.
NBFCs were majorly boosted due to the higher return on deposits that they offered as
compared to banks.
Also the monetary and credit policies in place in the early seventies marginalized some of
the small borrowers from the banking system.
Product innovation in the form of used vehicles financing, small ticket personal loans,
three wheeler financing, etc. has given a competitive edge to most NBFCs.
Substantial employment generation can be contributed to the NBFCs, which has lead to
increased wealth creation, as well as economic development.
The economy needs atleast two pillars for ensuring that even if 1 pillar falls, the economy
is not drastically affected so both Banking and Non-Banking system are equally relevant.
(e.g. The South-East Asian crisis resulted from a downfall of the banking system)
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Role of NBFCs in Financial Inclusion
RBI Perspective
RBI governs NBFCs depending on whether they are deposit-taking, non- deposit-taking or are
systemically important NBFCs. Systemically important NBFCs are governed more strictly by
RBI compared with other non-deposit-taking NBFCs. Systemically important NBFCs are
required to comply with Capital to Risk (Weighted) Assets Ratio, single/group borrower limits,
single/group investment exposure limits, etc., which are not applicable to NBFCs not accepting
public deposits.
As part of the overall NFBC sector, the comments in some of the government and panel reports
are outlined below:-
1) Observations made by the Parliamentary Standing Committee on Finance in their 45 th
Report on The Financial Companies Regulation Bill, 2000
a) NBFCs have higher level of customer orientation, fewer pre and post sanction
requirements and provide simple and speedy tailor made services.
b) NBFCs have become an integral part of the Indian Financial System in view of
their complementary as well as competitive role.
c) Non-Bank credit cover 70% of the requirements for the Trading activity and more
than 50% of the requirement of unregistered manufacturing.
2) Observations of the Task Force on NBFCs (Vasudev Committee) appointed by
Government of India in 1998.
a) Financial intermediaries like NBFCs perform the function of being a link between
savers in the society and users of the savings.
b) NBFCs have greater reach and flexibility in tapping resources and they provide
retail services to small and medium level business and road transport operators.
c) NBFCs constitute an important link between banks and the requirer of services and
are an important component of a diversified financial market.
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Role of NBFCs in Financial Inclusion
Timeline of significant Regulatory Changes in the NBFC Sector:
Page 45
1963- RBI Act was amended by the Banking Laws Act and a new Chapter III B ‘Provisions related to Non-Banking Institutions receiving deposits and FIs’ was inserted.
1966- First set of directions issued by RBI to NBFC’s and NBNFCs 1973- First set of directions issued to MNBCs
1975- RBI withdrew its directions to NBNFCs and these companies are since then regulated by the MCA.
1977- The directions issued in 1966 and 1973 were repealed due to the recommendations of the study group appointed under the Chairmanship of Shri. James S. Raj and a fresh set of directions were issued by RBI.
1982- Chit Funds Act was passed by the Parliament.
1983- Chapter III C on ‘Prohibition of acceptance of Deposits by unincorporated bodies’ was added in the RBI Act.
1987- RBI issued the RNBC Directions.1987- Parliament enacted the NHB Act, established the NHB to regulate HFIs
Role of NBFCs in Financial Inclusion
Page 46
1993- Scheme of voluntary registration of NBFCs having NOF of Rs. 50 lakhs and above was introduced.
1994- RBI prescribed prudential norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful assets, etc.
1996- Scheme of Rationalization/ Liberalization was announced by RBI under which NBFCs registered with RBI and complying with the prudential norms were granted freedom from the ceiling on interest-rates and quantum of deposit mobilization.
1997- Department of Non-Banking Supervision (DNBS) was created in RBI.1997- Any company wanting to do NBFI activity had to have a minimum NOF of Rs. 25 lakhs (Made Rs. 2 crores in April’99) and obtain a COR from RBI before commencing the business of a NBFC.
1995- Supervision of the NBFC sector was brought under the jurisdiction of the Board for Financial Supervision (BFS).
2001- The Asset Liability Management (ALM) guidelines were issued for NBFCs.
Role of NBFCs in Financial Inclusion
Functioning of the Department of Non-Banking Supervision (DNBS), RBI
NBFCs have been classified as follows on the basis of their deposit activity and asset-base:
The DNBS at RBI consists of the following six sections:
Registration: All fresh cases seeking a Certificate of Registration (COR) for
commencing NBFI activity need to fill an online form, which once filled generates a
code. [The Oracle-based online submission came into effect from 1st January’ 2009] Then
the company needs to submit 2 copies of this form, (mentioning the unique code) to the
RBI wherein 1 copy is kept at the regional office (RO) while the other is sent to the
central office (CO). Along with the application forms certain documents need to be
submitted like the Balance-Sheet and Profit and Loss Account for the past 3 years,
certified copies of the Memorandum and Articles of Association, the Certificate of
Incorporation, certain Auditors Certificates and Board Resolutions, etc. The company
should maintain a minimum NOF of Rs. 2 Crores and the management should have a
clear conduct and profile (due-diligence).
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Role of NBFCs in Financial Inclusion
After receiving these documents, they are thoroughly scrutinized by the RO-DNBS
officials and once the CO approves, the COR is issued to the applicant company. If there
are facts in the documents that appear wrong/ misleading or there is any form of non-
compliance or all documents prescribed have not been submitted, the application is
rejected and the company has to fill a fresh online submission, generate a new-code and
reapply.
Review: Once the company has commenced business, it needs to file returns as per the
regulations regularly and after two years of operations, the company financial records and
returns are checked again to ascertain their operations in the two years. This is done by
the review section, which then regularizes the COR of the NBFC, provided that its
performance is satisfactory and there are no supervisory concerns.
Supervision is undertaken via two-forms on an on-going basis, primarily On-site
Monitoring (Snap Scrutiny and Full-Fledged Scrutiny) and Off-Site Monitoring (via
filing of periodic returns by the NBFCs to check their capital adequacy, compliance with
regulations, asset-quality, etc.)
Legal: This section deals with the legal aspects which arise in case there is non-
compliance by any company or in case of serious customer complaints or in case there is
any NBFC which has ‘vanished’ (i.e. which cannot be traced at its contact address
provided to RBI) after attaining the COR.
Market-Intelligence (MI): MI is defined as a process of collection, collation and
analysis of information obtained through methods and instrumentalities other than,
Regular Inspection, Offsite Surveillance or Auditors’ Reports. The MI officials have to
access all public sources of information to capture any unregistered companies inviting
deposit or any NBFC making false claims to lure depositors or any news about vanished
companies, etc. They are the ones who gather all market information related to the NBFI
companies on a daily basis.
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Role of NBFCs in Financial Inclusion
Complaints: The complaints section deals with grievances written by the NBFC
depositors/ customers directly to RBI which can be about excessive rate of interest being
charged by NBFCs or harassment by recovery-agents or discrepancies in repayment
schedules etc. The bank then writes to the respective NBFC to resolve the issue by
forwarding them the complaint as well as asking for a detailed explanation. The bank
then writes to its client and forwards a copy of the same to RBI (DNBS) at the earliest.
Computer-Cell: The officials of this section input the physical returns data on a periodic
basis into the Oracle-based COSMOS system as well as maintain the latest database of
companies contact details, auditors’ names and contact-details, etc.
NBFCs go for the Rural and Urban Growth in India
Financial inclusion is turning into a profitable venture for non-banking finance companies
(NBFCs), as they are scurrying to fill the gap left by banks in rural and Urban markets that offer
better margins like Srei BNP Paribas is entering the agriculture equipment finance market by
April and hopes to disburse around Rs 500 crore in one year under the vertical.
Similarly, Shriram Transport, which has been for long focusing on used truck finance, has also
created a separate vertical for farm equipment finance, and hopes to disburse as much as Rs
5,000 crore in the next two years.
L&T Finance, which has been more focused on infrastructure finance, is expanding its rural
network through products such as Kisan Bandhu, a product specially launched with a view on the
Prime Minister Gram Sadak Yojana (PMGSY), a rural road construction scheme. The product is
targeted at entrepreneurs who need funding for the acquisition of small-sized transport vehicles.
Magma Fincorp, which has around 70 per cent of its branches in semi-urban and rural areas, is
looking at expanding its high-yield portfolio comprising tractors and loans to small and medium
enterprises and used commercial vehicle finance.
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Role of NBFCs in Financial Inclusion
Even micro-finance institutions (MFIs), most of which are registered as NBFCs, are now looking
at agriculture equipment finance. Bandhan, an MFI based in West Bengal, has started a pilot
project aimed at lending for investments of over Rs 50,000.
The rush for rural finance is showing in the overall numbers. While credit flow to most sectors
slowed down last year, fund flows to the farm sector remained largely unaffected.
According to the latest data from the Reserve Bank of India, during the year up to November 20,
2009, 23.7 per cent of non-food credit (y-o-y) was absorbed by the agricultural sector, compared
with 9.3 per cent a year ago. Similarly, within non-food credit, bank loan to agriculture and allied
activities increased by Rs 60,505 crore in the year up to November 20, 2009, against Rs 49,994
crore in the corresponding period last year. The growth rate remained around 21.5 per cent, while
non-food credit growth slowed down to 10.4 per cent from 28 per cent in the year up to
November 20, 2008.
A part of the reason for the rural push is in the margins. In urban areas, the net interest margin
(NIM) for NBFCs was 3-4 per cent, and in rural markets, it was close to 8 per cent, said the head
of a Kolkata-headquartered NBFC. With local money lenders, who lend at exorbitant rates, being
the only competition in most villages, NBFCs charge anywhere between 15 per cent and 25 per
cent on loans offered by them. The high rates even prompted RBI Governor D Subbarao to
express concern recently.
The finance companies also admit that a part of the reason for the rural focus are: -
High margins.
Gradually, the agriculture equipment finance market is moving towards maturity and is
becoming competitive. The margins in the market are high because of low competition,
high interest rates and dealers support.
Rural markets are generally unorganised and there is no competition. The growth in
these markets has been very good, and we want to create it as a very strong vertical.
Apart from margins, strong rural demand has prodded banks and finance companies to
focus on this market. While the sale of commercial vehicles declined by 21 per cent
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Role of NBFCs in Financial Inclusion
during 2008-09, for the tractor industry, the decline was marginal. Tractor sales declined
marginally from 346,000 units in 2007-08 to 343,000 last year.
Role of Micro Finance – NBFCs in Financial Inclusion
Inadequacies in rural access to formal finance and the usurious terms of informal finance for the
poor provide a strong need and ample space for innovative approaches to serve the financial
needs of India‟s rural poor. The efforts have been made by the government, financial institutions
like MF- NBFCs, and Non-government Organizations (NGOs), often in co partnership, to
develop new financial delivery approaches. These microfinance approaches have been designed
to combine the safety and reliability of formal finance with the convenience and flexibility that
are typically associated with informal finance. They typically involve providing thrift, credit and
other financial services and products of very small amounts to the poor, with the aim to raise
income levels and improve living standards.Micro Finance (MF) - NBFCs could play a
significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the
rural poor. Many of them operate in a limited geographical area, have a greater understanding of
the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have
flexibility in operations providing a level of comfort to their clientele. There is a need to
recognize a separate category of Micro finance – Non Banking Finance Companies (MF–
NBFCs), without any relaxation on start-up capital and subject to the regulatory prescriptions
applicable for NBFCs. Such MF-NBFCs could provide thrift, credit, micro-insurance,
remittances and other financial services up to a specified amount to the poor in rural, semi-urban
and urban areas. Such MF-NBFCs may also be recognized as Business Correspondents of banks
for providing only savings and remittance services and also act as micro insurance agents.
In the recent years, the range, the range of microfinance products has widened considerably.
Remittance services have been recognized as a critical service for the poor, many of which migrate
temporarily and support their families from far. Micro-insurance as a road to reduce vulnerability and
not at least to reduce repayment risks of micro-loans, is an important financial service for the poor.
Currently about 15 million poor are at least rudimentarily covered, mostly loan-linked.
Key Factor for NBFCs Survival and GrowthSome key factor for NBFCs survival & growth are as follows: -
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Role of NBFCs in Financial Inclusion
NBFCs provide prompt, tailor made service with least hassles.
All customers get direct and easy access
NBFCs cater to a class of borrowers who :-
o Do not necessarily have a high income
o But have adequate net worth
o Are honest and sincere
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Role of NBFCs in Financial Inclusion
Objective AnalysisFinancial Exclusion may also have resulted from a variety of structural factors such as
unavailability of products suiting their requirements, stringent documentation and collateral
requirements and increased competition in financial services. The Barriers of financial inclusion
can be identified broadly in two categories, first the demand side and the second supply side.
A. DEMAND SIDE BARRIERS
The people who have the requirement\need but still not demanding\availing the financial
services\products which can be due to the following reasons:
i. Low Income: A higher share of population below the poverty line results in lower demand for
financial services as the poor may not have savings to place as deposit in savings banks; hence
the market lacks incentives in providing financial service/products.
Most the people belonging to financially excluded group are having irregular/seasonal income.
Hence opening of a bank account and operating it i.e. deposit and withdrawal in very small
denominations with high frequency will increase the cost of transaction, adding to that they also
anticipate that bank and NBFCs will refuse if they transact with so small amount.
Further provided that, as they have low earning they cannot maintain minimum balance
requirements of a normal saving bank account which ranges from Rs. 500 to Rs 10000(Rs. 500
in case of PSB and Rs. 10000 for Pvt. Sector Banks) and various annual maintenance
charges(AMC) levied by banks.
ii. Transaction cost: Vast number of rural population resides in small villages which are often
located in remote areas does not have access to financial services. Consequently, the overall
transaction cost in terms of both time and money proves to be a major deterrent for visiting
financial institutions. The excluded section of the society find informal sector more reachable
due to proximity and ease of transaction.
iii. Financial Services Being Very Complex In Nature: Various excluded sections of the
society find dealing with organized financial sector cumbersome.
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Role of NBFCs in Financial Inclusion
iv. Easy access to alternative credit: For a good amount of low income people, the alternative
credit provided by NBFCs and pawn shop owners are far more attractive and hassle free
compared to getting a loan from a commercial bank.
Some of the poor that do not have property find it impossible to get credit without the collateral.
The uneducated poor would rather put their trust in NBFCs who provide easy non-collateral
credit than on the well established commercial banks. There might also be cultural reasons for
trusting a moneylender like NBFCs rather than a bank.
Distance from bank branch, branch timings, cumbersome documentation/procedures, unsuitable
products, language, staff attitude are common reasons – Higher transaction cost
v. Low literacy level: The lack of financial awareness about the benefits of the Non banking
services and also illiteracy act as stumbling blocks to financial inclusion. The lack of financial
awareness maybe the single most risk in financial inclusion as those who are newly included in
the financial sector have to maintained within the formal financial sector.
vi. Legal identity: Lack of legal identities like identity cards, birth certificates or written records
often exclude women, ethnic minorities, economic and political refugees and migrant workers
from accessing financial services.
vii. Sophisticated Financial Terminologies: Bankers often use complex financial
terminologies, which the masses are unable to comprehend and hence do not approach for
financial services voluntarily.
viii. Terms and conditions: Terms and conditions attached to products such as minimum
balance requirements and conditions relating to the use of accounts as in the case of bank
account often dissuade people from using such products/services
Further, term and conditions and its framework is generally so tedious and detailed that
understanding it is not possible for those who cannot even write their name or are less literate
and do not understand English or Hindi(in case of some regional rural areas).
B. Supply side barriers
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Role of NBFCs in Financial Inclusion
Some of the important causes of relatively low extension of institutional credit in the rural areas
are risk perception, cost of its assessment and management, lack of rural infrastructure, and vast
geographical spread of the rural areas with more than half a million villages, some sparsely
populated
i. Miniscule margin in handling small transactions: As the majority of rural population resides
in small villages that too in remote areas, NBFCs find small transactions cost ineffective.
ii. KYC requirements: The KYC requirements of independent documentary proof of identity
and address can be a very important barrier in having a bank account and providing variety of
services like loans and insurances especially for migrants and slum dwellers.
iv. Unsuitable products: One of the most important reasons for the majority of rural population
not approaching the formal sector for financial services is the unsuitability of products and
services being offered to them. For example, most of their credit needs are in form of small lump
sums and NBFCs and banks are reluctant to give small amounts of loan at frequent intervals.
Consequently, they have to resort to borrowing money from NBFCs at usurious rates.
vi. Poor market linkage: It is often argued that we may have been growing second fastest in the
world, but still our 40-55% of people living in rural and semi-urban areas do not have access to
basic necessities of life. 75% of villages in rural areas have no electricity arrangement, so it can
be imagined that how much penetration market would be having especially when it comes to
providing financial services/products, this may be that they are reluctant or there is no
institutional as well as physical. Therefore there is no institutional infrastructure available in the
rural area. Poor market linkage or say penetration of service providers also constitutes the major
factors of financial exclusion.
vii. Lack of interest: There is a lot of criticism on the NBFCS because of their inherent tendency
to think that poor people are not worthy of being banked on. Due to high transaction costs on
smaller transactions and the speculated high risk in lending credit to the lower strata of the
society, they see banking with poor as unviable. There is also a perception of people for NBFCs
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Role of NBFCs in Financial Inclusion
that the money they deposit in NBFCs are not secured and this risk creates a feeling of lack of
interest in mind of people for NBFCs.
xi. Poor credit record: Areas with poor credit record, bad past experience, socially unstable and
poor recovery of previous loan/credit given are observed.
Opportunities for Financial Inclusion by NBFCs
i. Address Poverty & Racism: If the NBFCs provides various financial services to the lower
income group people without doing any racism, then it helps in overcoming poverty from our
country. This leads to the development of nation and economy by providing the attractive
services within the reach of lower class people who have created the perception that they can’t
afford these services to fulfill their basic necessities of living.
ii. Improve Information: Providing the financial literacy to the various masses will lead to
increase in the knowledge of the people. This not only creates the interest of the people in the
products and services offered by NBFCs by educating them but also help to remove illiteracy
from lower class people. The fair trade practices should be used. The fair disclosure must be
given to grab the trust of people for NBFCs. The Staff member of the NBFCs will explain the
benefits offered to the customer if he avail any product and service from the registered NBFCs
and various hidden transparent information related to the product should be cleared at the time of
interaction with the customers.
Improve Access: For improving the access to various financial services various branches will
be opened so that the distance between the product offerings by NBFCs and customers will
reduces to maximum. This will help the lower income group people to go their near by branches
and avail various services. This not only reduces the travel cost but also saves lot of time. The
operating hours of NBFCs will be increased. If NBFCs will improve the access to various
financial services then they will open up the doors to become recognized like banks and expand
their business to large extent.
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Role of NBFCs in Financial Inclusion
•Improve Institutional Culture: The NBFCs can create culture by giving the advertisement
in the newspaper for the attractive products and services offered by them for their customer with
fair disclosures. This will create a Institutional culture in the working of NBFCs.
•Reduce Restrictions: If RBI will open up the restriction on the NBFCs then this will create a
opportunity for them to expand their business like banks and provide their various financial
services with in the ambit of the people by offering more attractive incentive schemes.
Improve Incentives: If NBFCs provides new innovating products for low-income (e.g.
secured loans) then this will helps in grabbing the interest of the consumer toward their attractive
schemes and creates a opportunities to earn more profits and side by side expanding their
business operation in the whole country
Role of NBFCs in Financial Inclusion
A robust banking and financial sector is important for activating the economy and facilitating
higher economic growth. Financial intermediaries like NBFCs have a definite and very important
role in the financial sector, particularly in a developing economy like ours. They are a vital link
in the system. NBFCs play their role in various areas:-
Financing in Manufacturing and Services Sector
After the proliferation phase of 1980s and early 90s, the NBFCs witnessed consolidation and
now the number of NBFCs eligible to accept deposits are 317 only, down from 40000 in early
1990s. The number of asset financing NBFCs would be even lower, around 350, the rest are
investment and loan companies. Almost 90% of the asset financing NBFCs are engaged in
financing transportation equipments and the balance are in financing equipments for
infrastructure projects. Therefore, the role of non-banking
sector in both manufacturing and services sector is significant.
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Role of NBFCs in Financial Inclusion
Facilitating Flow of Credits
NBFCs play the role of an intermediary by facilitating the flow of credit to end consumers
particularly in transportation, SMEs and other unorganized sectors. NBFCs due to their inherent
strengths in the areas of fast and easy access to market information for credit appraisal, a well-
trained collection machinery, close monitoring of individual borrowers & personalized attention
to each client as well as minimum.
Asset Creation
The role of NBFCs in creation of productive national assets can hardly be undermined. This is
more than evident from the fact that most of the developed economies in the world have relied
heavily on lease finance route in their developmental process, e.g., lease penetration for asset
creation in the US is as high as 30% as against 3-4% in India. A conducive and enabling
environment has been created for the NBFC industry globally, which has helped it grow and
become an essential part of the financial sector for accelerated economic growth of the countries.
This is not the case in our country. It is, therefore, obvious that the development process of the
Indian economy shall have to include NBFCs as one of its major constituents with a very
significant role to play.
Channelising Funds
NBFCs, as an entity, play a very useful role in channelising funds towards acquisition of
commercial vehicles and consequently, aid in the development of the road transport industry.
The road transport sector accounts for nearly 70% of goods movement and 80% of passenger
movement across the length and breadth of the country and the role of NBFCs in the growth and
development of this sector has been historically acknowledged by several committees set up by
the Government and RBI, over the years.
Providing Niche Financial Services
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Role of NBFCs in Financial Inclusion
NBFCs are characterized by their ability to provide niche financial services in the Indian
economy. Because of their relative organizational flexibility leading to a better response
mechanism, they are often able to provide tailor-made services relatively faster than banks and
financial institutions. This enables them to build up a clientele that ranges from small borrowers
to established corporates. While NBFCs have often been leaders in financial innovations, which
are capable of enhancing the functional efficiency of the financial system, instances of
unsustainability, often on account of high rates of interest on their deposits and periodic
bankruptcies, underscore the need for reinforcing their financial viability.
Financing in Rural and Social Sectors
NBFCs play a crucial and prominent role in the rural and social sectors of the economy by
providing finance for the acquisition of trucks, buses and tractors, which operate mainly in rural
and semi-urban India. In fact, the exposure to the rural / social sectors is
direct and pronounced, since financing for acquisition of vehicles provides a spin-off benefit by
creating jobs and opportunities in the rural parts of our country. NBFCs have a proven track
record in financing the acquisition of vehicles in rural India for over six decades. Any finance for
a second hand or used vehicle is, in reality, working capital finance and the borrower who avails
such finance often deploys it towards improving business in the rural sector. The security is the
vehicle in question and this is the comfort factor for NBFCs to lend to the prospective borrower
who is very often an agriculturist. NBFCs are also involved in financing earthmoving equipment,
which aid the development of infrastructure and in the process, provide employment to
thousands of
persons in the rural sector. The reach and location of these entities in remote corners of the
country has enabled them to stay in close touch with the customers and they have the necessary
knowledge and skills in credit appraisal and understanding the needs of the borrowers.
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Role of NBFCs in Financial Inclusion
CHAPTER – 2(IV)Research Methodology
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Role of NBFCs in Financial Inclusion
Research Methodology:
The internship started with gaining knowledge about the sections that make up the Department of
Non-Banking Supervision (DNBS) and what are their functions. This helped me assess the
regulators’ role in the sector. Then I went through certain published articles and RBI-issued
circulars to get a better understanding of areas where there was scope for improvement. I had
sent the Questionnaire to a different category of NBFCs like NDSI-ND, Category A and B
NBFCs, wherein the Directors and Branch managers were contacted to get their viewpoint on the
project topic.
Sample Size:Out of total universe 60 respondents from various NBFCs have been taken for convenience.Data Type:
The data type can be Statistical as well as Theoretical
Area Covered:The area covered for the research study is the Delhi Region.
Sampling Method:
The sample procedure chosen for this are random sampling method. Here randomly some of the
Directors and Branch Managers from different NBFCs are selected for interview and some of
them replied through emails. Information, which I collected, was based on the questionnaires
filled up by the sample Directors and Branch Managers.
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Role of NBFCs in Financial Inclusion
Data AnalysisI have done a detailed survey in Delhi to understand and study the mindset of directors and the
branch mangers of NBFCs in view of Financial Inclusion. The primary data was collected
through questionnaires. This questionnaire was mainly formulated to target the NBFCs to see
their role in achieving Financial Inclusion as early as possible. The sample size of the survey was
60.
From the survey I came to know that most of the NBFCs does not have banking license and
only very few NBFCs have Banking license. Some of them are kotak Mahindra, Yes bank
etc .
The next question asked is that whether they are facing any difficulties in procuring the
license?
Out of 100 %, 80% of the NBFCs are facing many hindrances in procuring Banking License and
20 % does not face any difficulties.
80%
20%
0102030405060708090
100
Yes No
Figure 1: Difficulties in Procuring banking License
The hindrances faced by NBFCS in procuring the Banking License are:
The NBFC who are seeking for the Banking License shoul have minimum paid-up capital
of Rs 200 crore, which must be increased to Rs 300 crore with in 3 years of conversion
into a bank.
NBFC which is converted into a Bank have to invest large funds in fixed assetss and
information technology to facilitate financial inclusion, risk management, anti-money
laundering etc.
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Role of NBFCs in Financial Inclusion
For NBFCs, to adopt universal banking, the staff needt o be multi-skilled in all banking
functions.
There are some restriction on the bank set by RBI, that is the minimum statutory
requirement towards CRR and SLR. Banks have deposit some amount of money to the
RBI depending upon the percentage of CRR.
Remaining 40% has to be statutory lent towards the priority sector as defined by RBI.
The next question is to find out whether they are linked with any bank in view of achieving
financial inclusion?
Around 90% of the NBFCs replied that they are not linked with any bank and only 10% have
said that they are linked up with the bank for achieving Financial Inclusion.
10%
90%
0102030405060708090
100
Yes No
Figure 2: Link up of NBFCs with banks for achieving Financial Inclusion
Above diagram shows that most of the NBFCs want to maintain it s unique identity in the
financial system and apply their best possible initiatives in view of achieving Financial Inclusion.
The next question asked is to check the awareness level of product and services offered by
particular NBFC among the customer?
The replies are as follows:-
40% have replied that the customer have Medium awareness level
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Role of NBFCs in Financial Inclusion
60% have replied that the customer have high awareness level
40% 60%
0102030405060708090
100
Low Medium High
Figure 3: Awareness Level
The next question asked to find out the focus of NBFCs is on which segment of customers
and why?
The main focus of NBFCs is 45% for Rural customers and 35% for semi urban customers and
rest 20% for Urban customers
20%
35%
45% UrbanSemi RuralRural
Figure 4: Customer Segment Focus
Main reason for focusing on the Rural and Semi Urban area because of:-
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Role of NBFCs in Financial Inclusion
Gradually, the agriculture equipment finance market is moving towards maturity and is
becoming competitive. The margins in the market are high because of low competition,
high interest rates and dealers support.
Rural markets are generally unorganized and there is no competition. The growth in these
markets has been very good, and NBFCs want to create it as a very strong vertical.
Main reason for not focusing more on Urban areas are :-
Low margins
Higher competition in the market.
Scope of expansion is less
The next question asked is to find out what is the range of products and services that the
NBFCs are offering to the customers?
It is came to know from the survey that percentage of different product and services are as
follows:
Loan and advances-40%
SBI cards-26%
Insurance-24%
60%
26% 24%
0102030405060708090
100
Loans andAdvances
SBI Cards Insurances
Figure 5: Range of Products and services offered by NBFCs
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Role of NBFCs in Financial Inclusion
The next question asked to find out whether they are planning to broaden your target
segment in near future?
Most of the NBFCs are planning to broader their target segment and offer more innovative
products in front of the customers at very competitive prices in the near future. From the it came
to know that 95% are planning for expansion and 5% who replied negatively because either they
are facing the liquidity crunch or they are not earning good profits form the current segment.
95%
5%
0102030405060708090
100
Yes No
Figure 6: Target Segment Expansion Plans
The question asked to find out the level of competition the NBFCs are facing in the market
and strategies they are adopting to compete with their competitors?
Most of the NBFCs replied that they are facing tough competition because the number of other
NBFCs and banks are increased and the banks are giving a cut throat challenge to NBFCs by
giving more reliable and safe product to their customer. So, to maintain its reputation and
existence in the market, it is very necessary for any NBFC to grab their customers by launching a
new innovative and attractive product.
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Role of NBFCs in Financial Inclusion
15%
35%
50%MinimalModerateTough
Figure 7: Level of Competition
The Strategies adopted by NBFCs are as follows:
Increasing the Power of Financing.
Reducing the cost of Financial Services.
More focus on Rural Segment.
Launching the New innovative products to attract the customers.
The next question asked to find out whether they are implementing new innovative ideas
for achieving Financial Inclusion?
Around 85% of the NBFC replied positively and rest 15% replied negatively.
85%
15%
YesNo
Figure 8: Implementing New Innovative Ideas
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Role of NBFCs in Financial Inclusion
The next question asked to find out whether the NBFCs providing special staff training in
view of achieving financial inclusion as early as possible?
60%
40%YesNo
Figure 9: Special Staff Training in view of Financial Inclusion
Here also around 60% of NBFCs replied positively and 40% replied that they are not providing
any special training to their staff members.
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Role of NBFCs in Financial Inclusion
CHAPTER – 2(V)
Discussion and Finding
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Role of NBFCs in Financial Inclusion
Findings
NBFCs are characterized by their ability to provide niche financial services in the Indian
economy to customers who are often treated as unbankable by commercial banks, and
cater to that segment of the population which is not supported by the commercial money-
lending institutions like rural segment.
The customers of NBFCs in rural areas are mostly illiterate and also unfamiliar with
technology and new financial services launched in the market but their effort of providing
financial literacy will really going to help in achieving Financial Inclusion as early as
possible.
The core strength of NBFCs is their strong customer relationships, good understanding of
regional dynamics, service orientation and ability to reach out to the customers. Because
of their niche strengths, local knowledge and presence in remote topographies, they are in
a position to service those segments of population whose only source of funding would
otherwise have been moneylenders charging usurious rates of interest.
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Role of NBFCs in Financial Inclusion
Recommendation
An initiative can be taken by RBI to create customer awareness on current regulations
relating to NBFCs and the rights of customers. Various media like advertisements in
prominent news channels and news papers, distribution of educational literature in the
form of pamphlets, booklets, comics and through discussion forums at the village gram
panchayat level could help in creating awareness.
RBI need to develop alternative low cost funding sources for NBFCs which will facilitate
in their asset - growth as well as in asset diversification. Bringing NBFCs within the
purview of SARFAESI Act, 2002 will help in protecting the interest of investors.
Customer Awareness on current regulations and their rights, etc. can be increased using
channels like advertisements in prominent news channels and newspapers, having tie-ups
with post-offices to distribute comics (like ‘Raju and the Money Tree’), pamphlets, etc.
and through village gram-panchayats by conducting discussion forums.
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Role of NBFCs in Financial Inclusion
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.
Micro Financing in rural & semi urban areas is a huge untapped market. NBFCs can diversify
and act as distribution backbone for Insurance Companies, Mutual Fund Products and even Co-
branded Credit Cards.
Nearly 80% of all trucks sold in India today are through Hire Purchase schemes. Nearly 99% of
second hand trucks and taxis exchange hands through NBFC support. Not less than 75% of two
wheelers and 25% of white Goods are sold with NBFC Finance. If NBFCs stop their lending
activities there would be a demand recession in each of these industries so the relevance of this
sector is definitely there.
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’. 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.
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Role of NBFCs in Financial Inclusion
The NBFCs are taking initiatives to establish a self-regulatory organization (SRO). Although
NBFCs are working as standalone entities and giving competition to banks by catering to a
particular segment of society - if RBI ensures level playing field for NBFCs, these could prove to
be good partners for banks. This could result in strengthening of the financial system in India.
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Role of NBFCs in Financial Inclusion
Limitations of Study
The following are the potential limitations of this study:
Due to the time-frame of the study, it was not possible to access as many companies and
customers that I had expected so the sample had to be revised.
Being a fairly amateur sector (as compared to commercial banking), there was relatively
less secondary sources of information available.
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Role of NBFCs in Financial Inclusion
Bibliography
www.rbi.org.in
www.google.com
www.economictimes.com
www.livemint.com
www.wikipedia.com
Statutory Guide for Non-Banking Financing Companies’ 2008(Taxmann)
Universal Financial Inclusion in India: The Way Forward by S.Ramesh and Preeti Sahai
Annual Policy Report 2005-2006
C Rangarajan – Report of the Committee on Financial Inclusion, Jan 2008
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Role of NBFCs in Financial Inclusion
Annexure
Questionnaire for Directors and Branch Managers
Name of NBFC:- Location: -Phone. No.:- No. of years of functioning of branch:-
1. Which category of NBFC does your organization belongs to? _______________________________________________________
2. Does your organization have a banking license?
(a) Yes (b) No
If yes, then go to question no. 5 else go to question no. 3
3. Does your organization have any plans to apply for the same in the near future? (a) Yes (b) No If Yes (Reason) __________________________________________________
_____________________________________________________________
4. What are the factors that hinder you for applying the same? _________________________________________________________________ _________________________________________________________________ _________________________________________________________________
5. Since when you have got the license? ____________________________
6. Did you face any difficulties in procuring the license? (a) Yes (b) No If Yes(Please Specify)_______________________________________________ _________________________________________________________________
7. Is your organization linked up any of the Bank for achieving Financial Inclusion? (a) Yes (b) No If Yes (Please Specify)____________________________
8. What is the awareness level of your product and services among your customers?
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Role of NBFCs in Financial Inclusion
(a) Low (b) Medium (c) High
9. Your main focus is on which segment of the customers? (a) Urban (b) Semi-Urban (c) Rural
10. What are the reasons that inspired you to select the above customer segment? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________
11. What is range of the product and services your organization is offering?(a) Loans (b) SBI Card(c) Insurance
12. Are you planning to broaden your targeted segment in the near future? (a) Yes (b) No
13. How many No-frills a/c your organization had opened in different areas? (a) Rural ___________ (b) Urban ____________ (c) Semi urban Areas ______________
14. What is the level of competition your organization is facing in the market? (a) Minimal (b) Moderate
(c) Tough
15. What are the strategies that your organization has adopted to compete with your competitors? ___________________________________________________________
___________________________________________________________
16. What are the various opportunities that you wishes to make use of?___________________________________________________________
___________________________________________________________
17. Do you see any growth opportunities for your organization in this field? (a) Yes
(b) No
18. Are you implementing any innovative ideas for achieving financial inclusion? (a) Yes
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Role of NBFCs in Financial Inclusion
(b) No If Yes (Please Specify) __________________________________________ _____________________________________________________________ _____________________________________________________________
19. Is there any special training given to staff in view of financial inclusion? (a) Yes
(b) No
20. What are types of loan your organization is offering to the people?(a) Housing Loan(b) Business Loan(c) Education Loan(d) Vehicles Loan(e) Other Loan. (Please Specify)_____________________________________ ____________________________________________________________
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Role of NBFCs in Financial Inclusion
CHAPTER – 3Learning Summary
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Role of NBFCs in Financial Inclusion
My Experiences and Learning
My Summer Internship Project (SIP) at Reserve Bank of India has been an extremely enriching
one. My SIP was divided into two main parts. One was the project work and the other was the
evaluating the Financial Statements of NBFCs for the company. Apart from that, I have to see
the legal claim of various NBFCs and give my suggestions to my senior personnel’s. I have
faced a lot of hurdles but at the end we took it as a challenge and moved forward
I have gained lot of information about various rules and regulation of my Department, that is
Department of Non Banking Supervision (DNBS). I have visited the chest vault, where the
currency is stored under high security measures.
Summarize my experience in one line I would say that my experience was a really great learning
experience with a lot of new things learnt and as I also wish to specialize in Major-Finance and
Minor-Marketing, this experience is really a big bonus for me
.
The Learning’s I gained during my SIP are mentioned below:
I came to know about the various Department in Reserve Bank of India.
Interactions with staff members of RBI really going to help me in enhancing my
Financial concepts and skills.
I learnt in a more detailed way about the nature of work performed in RBI, the kind of
deadlines they have to meet, the kind of pressure and levels of stress which they work
under and the kind of recognitions given to them after they meet or exceed their
deadlines.
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