NBFCs: Non-Banking Financial Company

(The Core Concepts, working & RBI guidelines for NBFCs.)

Presented By:Jaspreet Singh Rajpal

2012MB13

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Contents• Introduction

• NBFCs in Indian Context

• Types of NBFCs

• Supervision of NBFCs

• Difference between Banks & NBFCs

• An overview of regulation of NBFCs

• Other facts related with NBFCs

• Criticism

• References

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Introduction

• Non-bank financial companies (NBFCs) are financial institutions that

provide banking services without meeting the legal definition of

a bank, i.e. one that does not hold a banking license.

• These institutions are not allowed to take deposits from the public.

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NBFCs in Indian Context

• A Non-Banking Financial Company (NBFC) is a company registered under The Indian

Companies Act, 1956 engaged in the business of loans and advances, acquisition of

shares/stocks/bonds/debentures/securities issued by Government or local authority or

other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit

business but does not include any institution whose principal business is that of agriculture

activity, industrial activity, purchase or sale of any goods (other than securities) or

providing any services and sale/purchase/construction of immovable property.

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Continued…

• A non-banking institution which is a company and has principal business

of receiving deposits under any scheme or arrangement in one lump

sum or in installments by way of contributions or in any other manner, is

also a non-banking financial company (Residuary non-banking company).

• Non-Banking Financial Companies have to be registered with the RBI as

mentioned in Chapter III B of the Reserve Bank of India Act, 1934.

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Types of Non-Banking Financial Company

• Equipment leasing company (EL)

• Hire purchase finance company (HP)

• Investment company (IC)

• Loan company (LC)

• Residuary non-banking company (RNBC)

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Supervision of NBFCs• The RBI has instituted a strong and comprehensive supervisory mechanism for NBFCs.

• The focus of the RBI is on prudential supervision so as to ensure that NBFCs function on

sound and healthy lines and avoid excessive risk taking.

• The RBI has put in place a four pronged supervisory framework based on:

i. On-site inspection;

ii. Off-site monitoring supported by state-of the art technology;

iii. Market intelligence; and

iv. Exception reports of statutory auditors of NBFCs.

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Difference between Banks & NBFCs??Point of difference NBFCs Banks

Demand Deposits Cannot accept. Can accept.

Drawing a Cheque Cannot issue or draw a cheque on its own.

Can issue cheque freely.

Deposit Insurance facility Not available for NBFC depositors Is available for bankers.

Act for regulation They are covered under Indian Companies Act, 1956.

They are covered under The Banking Regulation Act,1949.

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An Overview of Regulation of NBFCsMission: To ensure that

• the financial companies function on healthy lines,

• these companies function in consonance with the monetary policy framework, so that

their functioning does not lead to systemic aberrations, the quality of surveillance and

supervision exercised by the RBI over the NBFCs keeps pace with the developments in

this sector.

• comprehensive regulation and supervision of Asset liability and risk management

system for NBFCs.

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Amendments to the Reserve Bank of India (RBI) Act, 1934

• Entry norms for NBFCs and prohibition of deposit acceptance (save to the extent

permitted under the Act) by unincorporated bodies engaged in financial business,

• Compulsory registration, maintenance of liquid assets and creation of reserve fund,

Power of the RBI to issue directions to an NBFC or to the NBFCs in general or to a

class of NBFCs.

• Comprehensive regulation and Supervision of deposit taking NBFCs and limited

supervision over those not accepting public deposits.

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Basic Structure of Regulatory and Supervisory Framework

• Prescription of prudential norms akin to those applicable to banks,

• Submission of periodical returns for the purpose of off-site surveillance, Supervisory

framework comprising (a) on-site inspection (CAMELS pattern) (b) off-site monitoring

through returns (c) market intelligence, and (d) exception reports by statutory

auditors,

• Co-ordination with State Governments to curb unauthorized and fraudulent

activities, training programs for personnel of NBFCs, State Governments and Police

officials.

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Other steps for protection of depositors’ interest

• Publicity for depositors’ education and awareness, workshops /

seminars for trade and industry organizations, depositors’

associations, chartered accountants, etc.

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Other Facts related to NBFCs

• In terms of Section 45-IA of the RBI Act, 1934,

• No Non-banking Financial company can commence or carry on business of a non-

banking financial institution without :

a) obtaining a certificate of registration from the Bank and without having a Net

Owned Funds of Rs. 25 lakhs (Rs two crore since April 1999). However, in terms of

the powers given to the Bank. to obviate dual regulation, certain categories of

NBFCs which are regulated by other regulators are exempted from the requirement

of registration with RBI.

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• Those other companies are: Venture Capital Fund/Merchant Banking

companies/Stock broking companies registered with SEBI, Insurance Company

holding a valid Certificate of Registration issued by IRDA, Nidhi companies as

notified under Section 620A of the Companies Act, 1956, Chit companies as defined

in clause (b) of Section 2 of the Chit Funds Act, 1982, Housing Finance Companies

regulated by National Housing Bank , Stock Exchange or a Mutual Benefit company.

• Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except

deposits by debit to NRO account of NRI provided such amount does not represent

inward remittance or transfer from NRE/FCNR (B) account. However, the existing

NRI deposits can be renewed.

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Criticism• Recently, microfinance has come under fire in the state of Andhra Pradesh due to

allegations of MFIs using coercive recollection practices and charging usurious

interest rates.

• These charges resulted in the state government's passing of the Andhra Pradesh

Microfinance Ordinance on October 15, 2010. The Ordinance requires MFIs to

register with the state government and gives the state government the power, suo

moto, to shut down MFI activity.

• A number of NBFCs have been affected by the ordinance, including sector

heavyweight SKS Microfinance.

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The References

• http://acronyms.thefreedictionary.com/NBFC

• http://rbi.org.in/scripts/NotificationUser.aspx?Id=3651&Mode=0

• http://www.hindu.com/2004/02/12/stories/2004021203031600.htm

• http://indiamicrofinance.com/andhra-mfi-suicide-972532.html

• http://en.wikipedia.org/w/index.php?search=NBFC+in+India&button=&title=Spec

ial%3ASearch

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Muhammad Yunus

"All human beings are born

entrepreneurs. Some get a

chance to unleash that

capacity. Some never got the

chance, never knew that he

or she has that capacity."