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Introduction
NBFCs have been playing a complementary role to the other financial institutions including banks in
meeting the funding needs of the economy. They help fill the gaps in the availability of financial
services that otherwise occur in the unbanked & the underserved areas. NBFCs account for 12.3%
assets of the total financial system.

An NBFC is defined in terms of Section 45I(c) of the RBI Act 1934 as a company registered under
the Companies Act 1956 engaged in granting loans/advances or in the acquisition of
shares/securities, etc. or hire purchase finance or insurance business or chit fund activities or
lending in any manner provided the principal business of such a company does not constitute any
non-financial activities such as (a) agricultural operations (b) industrial activity (c) trading in goods
(other than securities) (d) providing services (e) purchase, construction or sale of immovable
property.

The NBFC segment has witnessed considerable growth in the last few years and is now being
recognised as complementary to the banking sector due to implementation of innovative marketing
strategies, introduction of tailor-made products, customer-oriented services, attractive rates of return
on deposits and simplified procedures, etc.

NBFCs have been at the forefront of catering to the financial needs and creating livelihood sources
of the so-called unbankable masses in the rural and semi-urban areas. Through strong linkage at the
grassroots level, they have created a medium of reach and communication and are very effectively
serving this segment. Thus, NBFCs have all the key characteristics to enable the government and
regulator to achieve the mission of financial inclusion in the given time.

Types of NBFCs
NBFCs have been classified on the basis of the kind of liabilities they access, the type of activities
they pursue, and of their perceived systemic importance.

Liabilities based classification

NBFCs are classified on the basis of liabilities into two categories, viz, Category A companies,

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(NBFCs having public deposits or NBFCs-D), and Category B companies, (NBFCs not having
public deposits or NBFCs-ND).
Activity Based Classification
NBFCs are classified in terms of activities into five categories, viz., Loan Companies (LCs),
Investment Companies (ICs), Asset Finance Companies (AFCs), Infrastructure Finance Companies
(IFCs) and Systemically Important Core Investment Companies (CICs-ND-SI).
Size Based Classification
non-deposit taking NBFCs with assets of Rs. 100 crore and above were labelled as Systemically
Important Non-Deposit taking NBFCs (NBFCs-ND-SI), and prudential regulations such as capital
adequacy requirements, exposure norms along with, reporting requirements were made applicable
to them.

Market share / key players

As per the RBI, 12,159 NBFCs were registered with India as on 31st January 2014. Out of these, 244
are registered NBFCs permitted to accept Public Deposits.
As of April 2013, the NBFCs had an asset base greater than INR 6500 billion. The NBFCs have
around 12.3% assets of the total financial system.

Some of the key NBFC players are as follows:

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Overview of Loans:

Ref: CRISIL estimates (FICCI)

Funding profiles of major companies:

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Ref: India Ratings

Porters 5 forces model

Barriers to entry: Low

Licensing requirement: The licensing requirements of RBI for NBFCs are not that stringent as
compared to the banks. There are already 12159 registered NBFCs while there are only around 180
banks in India.

Bargaining power of consumers: High

Many alternatives: The consumers have got many alternatives for availing credit.

Large number of NBFCs: The consumers have a large spectrum to choose from.

Threat of substitutes: Moderate

Banks: NBFCs were actually created by the government of India as it felt the need to provide banking
facilities to the poor and underprivileged who could not get access to banks. Thus banks are a perfect
substitute for NBFCs.

Unorganized money lenders: The unorganized money lenders have a strong presence in the rural
markets. They pose a big threat to the NBFCs in the rural areas.

Bargaining power of suppliers: High

Many alternatives: The suppliers in this case are the depositors or the NBFCs funds. The suppliers
have many alternatives at their disposal to invest their money depending on their risk appetite. Eg:
High risk: stocks, low risk: banks

Intensity of rivalry: High

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Undifferentiated services: The service offerings by NBFCs are almost the same. Thus there is a low
level of service differentiation.

Marketing strategies: Due to the increased rivalry among the NBFCs, there has been use of aggressive
selling & intensive marketing strategies by the companies to gain the market share.

Key growth drivers:

Growing per capita income

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Ref: Credit Suisse

Rural wage growth is increasing, which will rural growth. Also, good monsoons last years and the
current general elections will increase spending in rural areas. This in turn may lead to growth in
vehicle and gold loans from NBFCs.

Growing consumer credit market

Consumer credit market is promoted to increase by 67% from 2013 to 2020.

Product innovation

NBFCs are building organised pre-owned CV (commercial vehicle) segment, which is largely
untouched by banks. NBFCs also finance more than 80 % of equipment leasing and hire purchase
activities in India. They currently have 70% market share in CV finance.

Another example of product innovation was creation of an Islamic banking NBFC firm in Kerala last
August.

Product customization

NBFCs structure monthly instalments while accounting for the seasonality of cash flows in
construction equipment loans.

Use for fostering financial inclusion:

Focus of NBFCs is on rural segment, Small and middle enterprises (SMEs) and Microfinance NBFCs
constitute almost 76% of the Rs. 120 billion microfinance industry in India. NBFCs have a large rural
network. The sector has been recognised as complementary of banking system by introducing
diversification in the financial sector, simplified sanction procedures, flexibility and timeliness in
meeting the credit needs.

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Impact analysis:
For NBFCs applying for banking licenses, RBI has dictated that it will be able to run a bank via a
wholly-owned Non-Operative Financial Holding Company (NOFHC). Moreover only non-financial
services companies / entities and non-operative financial holding company in the Group and
individuals belonging to Promote Group of the NBFC will be allowed to hold shares in the NOFHC.
So NBFC will not be able to fully bring about synergies in the operations. Also, a NBFC-turned-bank
will have to adhere to CRR and SLR, which limits to their loan-giving abilities.

However, the new banks and the invitation of foreign banks into the Indian banking system (by
allowing the wholly-owned subsidiary of foreign banks to acquire domestic private sector banks as
well as set up branches anywhere in the country) will increase competition for NBFCs in rural areas,
where they enjoyed unrivalled dominance.

Nachiket Mor Panel RBI report

While looking for some key differences between Banks and NBFCs, the Nachiket Mor Committee in
its report (primarily based on Financial Inclusion) batted for convergence between the two. Many of
the recommendations are similar to Usha Thorat committee (2012) like 2-category simplification of
NBFC categorization. However, unlike the Thorat report which recommended SLR for NBFCs, the
Mor report recommends that the SLR requirement to be done away with. It suggests allowing them
to raise funds from abroad as external commercial borrowings and permitting them to seize the
assets of defaulters under the Sarfaesi Act, just as banks do.

Regulations

Banks

NBFC

Recommendation

Case for convergence. Risk

Non-repaymentfor 180
Duration to qualifyfor NPA

Non-repayment for 90 days

approaches to be followed
days
types of institutions.

Case for convergence. Risk

Definition of sub-standard

NPA for a period not exceeding 12

NPA for a periodnot

asset

months

exceeding 18months

approaches to be followed
types of institutions.

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Remaining sub-standard

Case for convergence. Risk

asset for a period of 12

approaches to be followed

months

types of institutions.

Remaining sub-standard asset for a

Definition of doubtful asset
period of 12 months

Case for convergence. Risk

0.40%For direct advances to

approaches to be followed

Quantum of provisioning for

agricultural and Small and Micro

0.25%

types ofinstitutions.For agr

Standard Assets
Enterprises(SMEs) sectors at 0.25%

advances, this would imply

0.40%.

Case for convergence subje

SARFAESI eligibility

Yes

No

strong customer protection

However, two key demands of NBFCs which would have granted NBFCs more fund to lend were
rejected. Banks need to invest 9% of their own money for funds they lend and borrow the rest 91%
from the market; while NBFCs have to contribute 15%. The Mor Committee recommends a status
quo. The committee has also rejected the call to bring risk weights of the loans given by NBFCs on
a par with those by banks. A lower risk weight means lesser amount of own funds relative to the
quantum of the loan.

Conclusion
NBFCs have emerged as an integral part of the Indian financial system by catering to the credit
needs in under-served areas and unbanked customers. Though NBFCs have the rural network of
branches and established rural customer base, their raison detre may be threatened by new banks
entering the rural areas.

References :
HSBC Global Research: India NBFCs October 2013

Financial Services IBEF Report

FICCI: Financial Foresights: Role of NBFCs in promoting inclusive growth April 2013

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Fitch: India Ratings & Research Report January 2013

RBI

News reports from Times of India, Financial Express, Economic Times, The Hindu

https://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asp
http://india-financing.com/overview-of-the-indian-nbfc-sector.html

different categories of such companies like:1. Loan companies

2. Investment companies
3. Hire Purchase Finance companies
4. Equipment Leasing companies
5. Mutual Benefit Finance companies
6. Miscellaneous Non-Banking companies
7. Miscellaneous Finance companies
8. Residuary Non-Banking companies
9. Housing Finance companies
Keeping in mind, the importance and essentiality of finance companies, the Banking Laws (Miscellaneous
Provisions) Act 1963 was introduced to regulate the NBFCs. Several committees were appointed from
time to time to enable the Regulatory Authorities to frame suitable policy measures. These committees
helped to regulate and conduct an in-depth study and to make suitable recommendations for their
healthy growth within a given regulatory framework. The suggestions / recommendations made in the
context of the contemporary financial scenario by these committees established the basis for the
formulation of policy measures by the Regulatory Authorities / Reserve Bank of India. The committees
which deserve specific mention in this regard are: Bhabatosh Datta Study Group (1971), James Raj Study
Group (1975), Chakravarty Committee (1985), Vaghul Committee (1987), Narsimhan Committee (1991)
and Shah Committee (1992). The Shah Committee as a follow up to the Narsimhan Committee, was the
first to suggest a comprehensive regulatory framework for NBFCs. While endorsing in principle the Shah
Committee framework of regulation of NBFCs, the Reserve Bank of India has implemented a number oof
its recommendations and incorporated them in the Reserve Bank of India directions, which regulate and
supervise the working and operation of such companies. The Khanna Group (1996) suggested a
supervisory framework for NBFCs. In pursuance of its recommendations, the Reserve Bank of India Act
was amended in January 1997.

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It is clear that largest number of companies are engaged in share trading and investment holding. They
also undertake the work of merchant banking, share depository, registrar of share transfer and other
allied business. Some of them are very high like Kotak Mahindra and they undertake all conceivable
work of financial services including under-writing, consultancy on acquisition and merger, and arranging
loans.
The second group of companies are engaged in the business of loan finance. Their main function is to
give loans to buyers of equipment for factories, lease finance for personal durables like automobiles, , air
conditioners, refrigerators, etc. They also provide loan finance for houses. Gradually, competition is
increasing between them. Banks and development banks are also undertaking similar activities; some of
loan finance companies are also providing loans for industry and trade for short and medium term
needs. The borrowings generally go to them for assistance when they do not get assistance from
organized sector because of credit worthiness or viability of the project. NBFCs are more flexible in both
these two regards but their interest rate is higher than banks.
According to the Reserve Bank of India study 11.2% companies are engaged in hire purchase business.
The most important part of hire purchase is financing of trucks and other automobiles. Many
automobile manufacturers have their own hire purchase companies or have tie up with one or more
other NBFCs. With the increasing number of automobiles their number is increasing and some
customers are fleeced by them by levying hidden charges like processing fee and fixing monthly
installments on total amount for total period without adjusting for monthly payments. Thus interest
works out much higher than told orally. When one is not able to pay any installment, vehicle or other
item sold on hire purchase is confiscated and buyer looses the entire money paid till then because in
hire purchases ownership does not transfer till last installment has been paid.
Lease Finance is another important activity in which ownership passes to the buyers immediately after
the leasing company pays seller of the price. The financier does not prefer this route because of greater
risk involved and only 6.5% of the companies are engaged in this business.
There are 5.8% of the companies who are undertaking various types of activities and are called
diversified. They undertake more than one activity such as share trading, investment holding, loan
finance, hire purchase and lease finance. They are willing to undertake any business, which they feel, is
viable and profitable.
The rest of 18.9% are miscellaneous companies engaged in different types of financial activities but each
one of them specializes in one or a few activities which they finance including giving loans on mortgage
of any asset like gold, ornaments, houses, machinery and equipment. Some of them stock goods when
they are cheap at the time of arrival of the crops and sell them when prices rise. They trade in
difference on their own account. They are willing to fill the gap between demand for funds and their
supplies from organized financial institutions.
The NBFCs are trading largely on the money of others. The NBFCs till a decade back had no regulation
about their investment structure and even now they are free to finance any activity. Thus the Reserve
Bank of India monetary policy is not applicable on them. Therefore, the Reserve Bank of India is not able
to control them and NBFCs are getting benefit of it. NBFCs are willing to accept unaccounted money as
deposits and loans which encourages parallel economy and helps in evasion of income tax, sales tax and
other taxes. Some NBFCs are having competition with commercial banks. They are willing to finance up
to 100% of asset which is not possible for banks. When bank finance is not available NBFCs provide the
credit.
The Reserve Bank of India interest rate policy is not applicable to them except a ceiling fixed by the
Reserve Bank of India on their deposits[3].

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The Reserve Bank of India Control on NBFCs

In view of various evils of NBFCs and their disadvantages, the Reserve Bank of India started regulating
them in 1963 under the provisions of Chapter III B of the RBI Act and the directions issued therein. In
the beginning these regulations were confined solely to deposits acceptance activities and did not cover
their functional diversity and expanding intermediation.
The Reserve Bank of India felt that this regulation was not adequate to control the working of NBFCs.
Hence in 1992 it appointed the Working Group on Financial Companies under the chairmanship of Mr.
Shah which submitted its report in September 1992 and suggested better control on NBFCs so that
there may be better and more effective control of the Reserve Bank of India and their activities may be
aligned with the financial system.
In pursuance of the recommendations of the Working Group on NBFCs in 1992 (Chairman: A.C. Shah),
the Reserve Bank initiated a series of measures including redefining the deposit acceptance scheme of
registration of NBFCs based on the net owned fund of Rs.50 lakh and above. The Reserve Bank also
started regulating the asset side of the NBFCs. In 1994, NBFCs were subjected to prudential norms
relating to income recognition, asset classification, provisioning and capital adequacy. Accordingly,
registered NBFCs were required to achieve a minimum capital adequacy norm of 6 per cent in March 31,
1995. The CRAR norms for NBFCs have been progressively increased and the norm prescribed at
present is 12 per cent
REGULATION OF NBFCs IN APRIL 1993
Based on the recommendations, system of regulation was introduced in April 1993 for those NBFCs
whose Net Owned Funds were Rs. 50 lakhs and above. Prudential norms pertaining to income
recognition, asset classification were prescribed in June 1994.
In April 1995, the Reserve Bank of India constituted an Expert Group for designing a supervisory
framework. This Group was known as Khanna Committee. On the basis of the recommendations of
Khanna Committee the Reserve Bank of India Act was amended in January 1997 to vest more powers to
supervise and control the working of NBFCs.
In 1966, two new directives, viz., the Non-Banking Financial Companies (Reserve Bank) Directions, 1966
and Non-Banking Non-Financial Companies (Reserve Bank) Directions, 1966 were issued. To remove the
hardship faced by industrial undertakings in complying with the provisions of the directives on time, the
Reserve Bank made certain modifications in the Directives in 1967.
Steps taken in 1997 for betterment of NBFCs
1 Registration was made compulsory for all NBFCs with minimum net owned funds of Rs. 25 lakhs as
against Rs. 50 lakhs in 1993.
2 Maintenance of liquid assets by NBFCs as a percentage of their deposits in unencumbered approved
securities (government guaranteed bonds) was made mandatory. The limits were to be decided by the
Reserve Bank of India from time to time.
3 Creation of a reserve fund and compulsory transfer of at least 20% of the net profits to above said
fund was made compulsory.
4 The Company Law Board was authorized to direct defaulting NBFCs to repay deposits.
5 The Reserve Bank of India was vested with following powers:i. Issue directions to NBFCs regarding compliance with the prudential norms.
ii. Issue directions to NBFCs and their auditors on matters relating to balance sheet and undertake pecial
audit as also to impose penalty on every auditor.
iii. Prohibit NBFCs from accepting deposits for violation of the provisions of the RBI Act and directions
given by the Reserve Bank of India.

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iv. Reserve Bank of India was authorized to file winding up petition against NBFCs for violation of the
provisions of the RBI Act or directions issued by the Reserve Bank of India
v. Reserve Bank of India was also authorized to impose penalty directly on NBFCs for non-compliance
with the provisions of the RBI Act.
New Regulatory Framework for NBFCs
Based on above powers and experience gained about the working of NBFCs since 1993, the Reserve Bank
of India announced new set of regulatory measures in January 1998 which is the basis of control and
supervision.
NBFCs have been classified into three categories for purposes of regulations :(a) Those accepting public deposits.
(b) Those which do not accept public deposits.
(c) Core investment companies which hold at least 90% of their assets as investment in the securities of
their group / holding / subsidiary company.
The rules were more stringent for NBFCs who accept public deposits because the Reserve Bank of India
wants to safeguard the interest of deposits. Hence, NBFCs accepting public deposits are subject to the
entire regulations, those not accepting public deposits are regulated in a limited manner. Now the
regularity attention has been focused primarily on NBFCs accepting public deposits. However, the public
deposits have limited application. Borrowings by way of interoperate deposits, issue of secured
debentures / bonds, deposits from the shareholders by a private limited company and deposits from
directors by both public as well as private limited companies have been excluded from the purview of
public deposits. The Reserve Bank of India regulations on quantum, rate of interest, period of deposits,
etc. are applicable only with respect to public deposits with the exception of above.
The overall ceiling on borrowings by NBFCs has been reviewed and they have been sought to be decided
on the basis of capital adequacy requirements. The quantum of public deposits that can be raised by
NBFCs has been directly linked to the level of credit rating. An NBFCs intending to accept public
deposits must have minimum prescribed credit rating from any one of the approved credit rating
agencies. In other words, before issuing an advertisement for acceptance of deposits rating is
compulsory.
Further small NBFCs whose net owned funds are less than Rs. 25 lakhs have been prohibited from
accepting deposits from the public. In order to streamline the working of NBFCs which held public
deposits in excess of their new entitlement have been allowed a period of three years to reduce /
regularize their excess deposits.
The NBFCs are required that at least one-third of excess should be reduced every year commencing
from December 1998 and to regularize entire excess by December 31, 2000. NBFCs having investment
grade credit rating can accept fresh deposits and renew such maturing deposits, while NBFCs who do
not have minimum credit rating or are not rated can only renew maturing public deposits. It is also
expected that during the three years period, NBFCs could obtain / improve their credit rating, improve
their net owned funds, substitute public deposits by other forms of debt and arrange for alternative
sources of funds. Thus, the Reserve Bank of India has given ample opportunity for adjustment so that
working may not be affected abruptly.
NBFCs were debarred from offering an interest rate exceeding 16% per annum and a brokerage fee over
2% on public deposits; with the overall decline in interest rates, the Reserve Bank of India has reduced
these rates from time to time so that they may be in alignment with other deposit rates.
For the first time prudential norms were fixed in 1998 for mandatory compliance under the statutory
powers vested with the Reserve Bank of India. The companies which accept public deposits are required

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to comply with all the norms pertaining for bad and doubtful debts, capital adequacy, credit /
investment concentration norms, etc. To improve the liquidity of NBFCs, the percentage of liquid assets
required to be maintained by them has been enhanced to 12.5% and further to 15%.
As a move towards greater disclosure and transparency, NBFCs accepting public deposits have been
asked to furnish certain essential information regarding the financial activities with regard to their
application for deposits and advertisement for soliciting deposits. Depositors have been cautioned not to
be lured by interest rates alone and be careful to understand the financial position of the concerned
company.
Having regard to the risk profile of the assets of NBFCs, capital adequacy has been enhanced from 8%
to 10%. NBFCs other than the core investment companies not accepting public deposits have been
exempted from the regulations on interest rates, period, ceiling on quantum of borrowings. However,
prudential norms which have bearing on the true and fair status of the financial health of these
companies as reflected in their balance sheets, have been made applicable to these companies, except
those relating to capital adequacy and credit concentration norms. The responsibilities of ensuring of
these regulations have been entrusted to the statutory auditors of these companies and the Reserve
Bank of India has issued directions to the statutory auditors for these purposes.
The statutory auditors of NBFCs are required to report to the Reserve Bank of India any irregularity or
violation of the Reserve Bank of India regulations on acceptance of deposits and prudential norms.
Merchant banking companies have been exempted from the provisions of the RBI Act 1934 relating to
compulsory registration and all provisions relating to deposit acceptance and prudential norms[4].
Major Recommendations of the Task Force on NBFCs
The Task Force on Non-banking Finance Companies (NBFCs) submitted its report on October 28, 1998.
The major recommendations are as under: The rising number of defaulting NBFCs and the need for a quick redressal system call for change in
the existing legislative and regulatory framework for NBFCs.
Extension of the period for attaining minimum Net Owned Funds (NOF) beyond three years (January
2000) should be made conditional on adequate steps having been taken by the concerned NBFCs. Also,
the minimum prescribed NOF of Rs. 25 lakh be considered for upward revision.
The Reserve Bank of India should draw up a time bound programme for disposal of applications for
registration of NBFCs and keep States informed of registration granted/rejected in respect of NBFCs in
the respective States.
Higher CRAR of 15 per cent for NBFCs seeking public deposits without credit rating be prescribed by
RBI, as against existing 12 per cent for rated NBFCs.
Ceilings for exposures to real estate sector and investment in capital market, especially unquoted
shares, be prescribed by the Reserve Bank of India.
The Reserve Bank of India may stipulate 25 per cent of reserves of NBFCs to be invested in marketable
securities in addition to SLR securities already held by them.
The following ceilings may be prescribed for public deposits in respect of different categories of
NBFCs.
Nature and Extent of Supervision of NBFCs:
The nature and extent of supervision have been based on the recommendations of Khanna Committee.
Recommendations and are based on three criteria, viz., the size of NBFC; the type of activity performed
and acceptance or otherwise of public deposits. It has been further stated that the main thrust of
supervision of NBFCs will be through an offsite surveillance mechanism.
The Reserve Bank of India has worked out a comprehensive inspection arrangement and has devised

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special formats for off site reporting / monitoring. The formats of the annual returns have been revised
to seek more details relating to core assets, income of the companies. It has also been made mandatory
that the auditors of the NBFC should certify these returns.
On-site inspections of NBFCs with public deposits of Rs. 50 crore and above is sought to be carried out
annually and other NBFCs with deposits of less than Rs. 50 crore each are inspected by rotation. The
inspection is on the capital, adequacy, asset, quality, management, earnings, liquidity and systems
methodology.
Progress of NBFCs after 1998 Reforms:
After Reserve Bank of India implemented its regulations on NBFCs as discussed above there has been
clear definition of public deposits and there has been wider disclosure by NBFCs. The Reserve Bank of
India from time to time has taken more measures to safeguard the interest of depositors. It has been
insisted time and again that the balance sheet should depict true and fair picture of the company for
which company statutory auditors have been made responsible. Restrictions have been placed on
investments in real estates. In order to ensure that liquid assets are maintained against public deposits
NBFCs are required to lodge them with one of the scheduled bank or Stock Holding Corporation of
India Limited so that such securities are not withdrawn except for repayment to the deposits. Further,
the residuary NBFCs should invest at least 80% of deposit liability in specialized securities as per
investment pattern prescribed by the Reserve Bank of India in lieu of brokerage of NOF to total
deposits.
There has also been certain relaxations in the working of NBFCs. They have been permitted to set up
joint venture companies for insurance business. They have also been allowed to convert them into
commercial banks if they meet the guidelines of the Reserve Bank of India. NBFCs with net owned funds
of Rs. 2 crore or more have been permitted to undertake insurance business as an agent of insurance
companies.
As regard the quantum of public deposit , the following norms shall be adopted.
Reclassification of NBFCs
Until December 6, 2006, NBFCs were classified as equipment leasing, hire-purchase, investment
companies and loan companies. Pursuant to the announcement made in the Mid-Term Review of Annual
Policy Statement for the year 2006-07 to re-group the companies engaged in financing real/physical
assets supporting economic activity such as automobiles, general purpose industrial machinery and the
like as asset financing companies, all NBFCs were advised on December 6, 2006 that the re-classification
of the categories of NBFCs would be as asset finance companies (AFC), investment companies and loan
companies.
AFC is defined as any company which is a financial institution carrying on as its principal business of
financing the physical assets supporting productive/economic activity such as automobiles, tractors,
generator sets, earth moving and material handling equipments, moving on own power and general
purpose industrial machines. Principal business for this purpose is defined as aggregate of financing
real/physical assets supporting economic activity and income arising thereform not less than 60 per cent
of the total assets and total income, respectively.
Since the classification for the purpose of income recognition, asset classification and provisioning
norms is based on asset specification, the extant prudential norms will continue as hitherto. The
companies satisfying the above conditions have been advised to approach the Regional Office of the
Reserve Bank in the jurisdiction in which their Registered Office is located, along with the original
certificate of registration (CoR) issued by the Reserve Bank to recognise their classification as asset

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finance companies. Their request must be supported by their Statutory Auditors certificate indicating
the asset/income pattern of the company as on March 31, 2006. The change in classification would be
incorporated in the certificate of registration issued by the Reserve Bank as NBFC-Asset Finance
Company (NBFCD-AFC), if accepting deposits and NBFC-ND-AFC, if not accepting deposits.
New NBFC policy: An Evaluation:
Non-Banking finance companies are those concerns rendring financial services similar to commercial
banks and financial institutions but do not qualify to be branded as banks. Hence there name goes as
NBFCs. They accept as deposits, lend lease, operate mutual fund, and do a lot of similar functions. They
are an integral part of Indian financial system. Most NBFC are regulated by the Reserve Bank Of India .
NBFcs in India have been operating for a quite a long time. They in number they have grown in a
comparatively loose regulatory framework. Perhaps the growth have been due to absence of shackles.
Taking advantage from the loose framework , some NBFcs have also cheated by closing their ventures.
REGUALTORY FRAMEWORK:
The salient features of the new regulatory framework are as under:
For the purpose the new regulatory framework , NBFC have been divided into three broad categories
viz, those accepting public deposits, not accepting public deposits and NBFCs not accepting public
deposits and have acquired securiries in its group companies of not less than 90%of their total assets.
Prohibition from accepting deposit for NBFCs has net owed funds of less than Rs.25 lakhs. For the rest
ceiling on the quantum of public deposits have been linked to their credit rating.
NBFCs with AAA ratig can raise three their net owned fund (NOF) through deposits if they are
equipment leasing or hire purchase (HP) companies and twice their (NOF).
A 16% ceiling has been fixed for intrest om deposits.
Brokerage will be 2% for all categiries of deposits.
NBFCs that accept public deposits will have tyo file annual statutory returns and financial statement
with the RBI.
New Policy Directive- Impact on NBFCs:
The policy initiatives are in continuation initiatives, which were intesidied after the CRB scam. Before
analyzing the change it would be imntresting to look back on one important fact. Siunce one year or soa difficult period for NBFCs marked by adverse market conditions- the mainsteam NBFC industry have
alwayswelcomed prudentregulation and has even suggested necessary and development mesrure to the
RBI.
Comments Related to NBFCs:
The RBI Act 1997 and the regulations of April 1998 are comprehensive regulatory measures but it is
difficult to gauge the success of these measures because non-submission of periodic returns to Reserve
Bank of India is a common feature. To overcome this problem Reserve Bank of India has decided to
impose penalty besides considering cancellation of registration of NBFCs having deposits of Rs. 50 crore
and above. Gradually, the limit of Rs. 50 crore will be reduced as per Reserve Bank of India
announcement. Further, to tighten control, the Reserve Bank of India announced that the past period of
30 days for identification of NPAs would be done away for NBFCs. Reserve Bank of India has already
announced guidelines for identification of loss assets on an objective basis so that NPAs are properly
classified.
It seems that the Reserve Bank of India has taken all the steps but it has no machinery to verify whether
all the companies who are doing NBFC business has applied to it and whether those whose cases have
been rejected have ceased to operate or not. It is learnt that still many companies whose applications
have been rejected are carrying their own business. In order to ensure that rejected applicants do not

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carry on the business it is being proposed to involve the state government.

Further, the success depends upon the fact that cases of default should decline but there is no authentic
data on this aspect, but it is also a fact that NBFCs are working in a more disciplined manner and in
future depositors should feel more secure and the Reserve Bank of India is doing its best to control and
regulate NBFCs.
Strengthening of the Supervision of NBFCs:
In the wake of failure of some NBFCs and loss of depositors money, the supervision of NBFCs assumed
critical importance. In the backdrop of the recommendations of the Khanna Committee (1999), a
comprehensive supervisory model has been devised for effective supervision of the NBFCs depending
upon the size, type of activity and acceptance or otherwise of public deposits. For this purpose, a fourpronged mechanism comprising on-site inspection on the CAMELS pattern, off-site monitoring through
periodic control returns using state-of-the-art information technology; an effective market intelligence
network; and a system of submission of exception reports by statutory auditors of NBFCs were
instituted in order to buttress the regulatory and supervisory framework for NBFCs. The system of onsite examination is structured on the basis of CAMELS approach and the same is akin to the supervisory
model adopted for the banking system. The inspection policy of the NBFCs has recently been revised to
regulate them effectively. In order to bring the functioning of the NBFCs in line with international best
practices, the Reserve Bank initiated a consultative process with the NBFCs with regard to their plan of
action for voluntarily phasing out of their acceptance of public deposits. Recently, the Reserve Bank has
laid down a road map for Residuary Non-Banking Companies (RNBCs) with a view to ensure that the
transition process of these institutions complies with the Reserve Banks directions.