CHAPTER 1
INTRODUCTION
We studied about banks, apart from banks the Indian Financial System has a
large number of privately owned, decentralized and small sized financial
institutions known as Non-banking financial companies. In recent times, the
non-financial companies (NBFCs) have contributed to the Indian economic
growth by providing deposit facilities and specialized credit to certain segments
of the society such as unorganized sector and small borrowers. In the Indian
Financial System, the NBFCs play a very important role in converting services
and provide credit to the unorganized sector and small borrowers.
The NBFCs in advanced countries have grown significantly and are now
coming up in a very large way in developing countries like Brazil, India, and
Malaysia etc. The non-banking companies when compared with commercial
and co-operative banks are a heterogeneous (varied) group of finance
companies. NBFCs are heterogeneous group of finance companies means all
NBFCs provide different types of financial services.
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NBFCs supplement the role of the banking sector in meeting the increasing
financial need of the corporate sector, delivering credit to the unorganized
sector and to small local borrowers. NBFCs have more flexible structure than
banks. As compared to banks, they can take quick decisions, assume greater
risks and tailor-make their services and charge according to the needs of the
clients. Their flexible structure helps in broadening the market by providing the
saver and investor a bundle of services on a competitive basis.
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 differ widely in their ownership: Some are
subsidiaries of large Manufacturers (e.g., T.V. Motors T.V. Finances and
Services Ltd). Many others are owned by banks such as ICICI Banks, ICICI
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Securities Ltd, SBI Capital Market Ltd, Muthoot Bankers Muthoot Financial
Services Ltd a key player in Kerala financial services. Other financial
institutions are IFCIs IFCI Financial Services Ltd or IFCI Custodial Services
Ltd (Devdas, 2005).
Non-banking Financial Institutions carry out financing activities but their
resources are not directly obtained from the savers as debt. Instead, these
Institutions mobilize the public savings for rendering other financial services
including investment. All such Institutions are financial intermediaries and
when they lend, they are known as Non-Banking Financial Intermediaries
(NBFIs) or Investment Institutions.
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2.1.MEANING
Indian Economy. They are indispensable part in the Indian financial system
and lending. They play a very important role by providing finance to activities
which are not served by the organized banking sector. So, most the committees,
appointed to investigate into the activities, have recognized their role and have
sector.
leasing, hire-purchase, insurance business, chit business but does not include
company.
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2.2.DEFINITIONS OF NBFC.
(i) A non-banking institution, which is a company and which has its principal
manner.
(ii) Such other non-banking institutions, as the bank may with the previous
gazette, specify.
lease finance, loans, and investments. NBFCS have raised large amount of
resources are not directly obtained from the savers as debt. Instead, these
Institutions mobilize the public savings for rendering other financial services
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CHAPTER 2
HISTORICAL BACKGROUND.
The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by
the Reserve Bank Amendment Act, 1963 to include provisions relating to non-
and the need for an efficient and quick system for Redressal of grievances of
individual depositors. Given the need for continued existence and growth of
to encourage the growth of healthy NBFCs and weed out the inefficient ones.
With a view to review the existing framework and address these shortcomings,
various committees were formed and reports were submitted by them. Some of
The James Raj Committee was constituted by the Reserve Bank of India in 1974.
After studying the various money circulation schemes which were floated in the
country during that time and taking into consideration the impact of such
schemes on the economy, the Committee after extensive research and analysis
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had suggested for a ban on Prize chit and other schemes which were causing a
great loss to the economy. Based on these suggestions, the Prize Chits and
The Working Group on Financial Companies constituted in April 1992 i.e. the
Shah Committee set out the agenda for reforms in the NBFC sector. This
norms for NBFCs on the lines of banks, stipulation of credit rating for
acceptance of public deposits and more statutory powers to Reserve Bank for
This Group was set up with the objective of designing a comprehensive and
follows:
ratings assigned to NBFCs would primarily be the tool for triggering on-
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concerned.
vi. Introduction of a system whereby the names of the NBFCs which had not
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failed to submit the prescribed returns consecutively for two years could
This committee was formed to examine all aspects relating to the structure,
These were the committee’s which founded non- banking financial companies.
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CHAPTER 3
OBJECTIVES OF NBFC
1. To carry on the business or businesses of a holding and investment
company, and to buy, underwrite and to invest in and acquire and hold shares,
stocks, debentures, debenture stock, bonds, obligation or securities of
companies or partnership firms or body corporates or any other entities whether
in India or elsewhere either singly or jointly with any other person(s), body
corporate or partnership firm or any other entity carrying out or proposing to
carry out any activity whether in India or elsewhere in any manner including but
not limited to the following:
c. To invest and deal with the moneys of the Company not immediately
required in such manner as may from time to time be determined and to hold or
otherwise deal with any investment made.
and to act as trustees in connection with any such securities, and to take part in
the conversion of business concerns and undertakings into companies.
4. To lend and advance money and assets of all kinds or give credit on
any terms or mode and with or without security to any individual, firm, body
corporate or any other entity ( including without prejudice to the generality of
the foregoing any holding company, subsidiary or fellow subsidiary of , or any
other company whether or not associated in any way with, the company ), to
enter into guarantees, contracts of indemnity and suretyship of all kinds, to
receive money on deposits or loan upon any terms, and to secure or guarantee in
any manner and upon any terms the payment of any sum of money or the
performance of any obligation by any person, firm or company (including
without prejudice to the generality of the foregoing any holding company,
subsidiary or fellow subsidiary of , or any other company associated in any way
with, the company )
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5. To borrow and raise money in any manner for the purpose of any
business of the company or of any company in which the company is interested
and to secure the repayment of any money borrowed, raised or owing by
mortgage, charge, standard security, lien or other security upon the whole or
any part of the Company’s property or assets (whether present or future).
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CHAPTER 4
IMPORTANCE OF NBFC
Growth:
In terms of year-over-year growth rate, the NBFC sector beat the banking sector
in most years between 2006 and 2013. On an average, it grew 22% every year.
Even when the country’s GDP growth slowed to 6.3% in 2011-12 from 10.5%
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Profitability:
NBFCs are more profitable than the banking sector because of lower costs. This
helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth
– the increase in the amount of money being lent to customers – is higher than
that of the banking sector. Credit grew an average 24.3% per year for NBFCs as
against 21.4% for banks. This shows that more customers are opting for
NBFCs.
Infrastructure Lending:
NBFCs contribute largely to the economy by lending to infrastructure projects,
which are very important to a developing country like India. But they require
large amount of funds, and earn profits only over a longer time-frame. As a
result, these are riskier projects. This deters a lot of banks from lending to
infrastructure projects. In the last few years, NBFCs have contributed more to
infrastructure lending than banks. NBFCs lent over one third or 35.8% of their
total assets to infrastructure sector as of March 2013. In contrast, banks lent
only 7.6%.
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CHAPTER 5
RESEARCH METHODOLOGY19
6.2 OBJECTIVE
The confined objectives of the present study are:
To analyze the market of NBFC‘s in India
To study the financials of NBFC‘s
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CHAPTER 6
TYPES OF NBFC
All NBFCs are either deposit taking or Non-deposit taking. If they are non-
deposit taking, ND is suffixed to their name (NBFC-ND). The NBFCs which
have asset size of Rs.100 Crore or more are known as Systematically Important
NBFC. They have been classified so because they can have bearing on financial
stability of the country. The Non-deposit taking NBFCs are denoted as NBFC-
NDSI. Under these two broad categories, the different NBFCs are as follows:
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19
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CHAPTER 7
FRAUDS IN NBFC
It is possible that frauds are, at times, detected in NBFCs long after their
perpetration. NBFCs should, therefore, ensure that a reporting system is in place
so that frauds are reported without any delay. NBFCs should fix staff
accountability in respect of delays in reporting of fraud cases to the Reserve
Bank.
Delay in reporting of frauds and the consequent delay in alerting other NBFCs
about the modus operandi and issue of caution advices against unscrupulous
borrowers could result in similar frauds being perpetrated elsewhere. NBFCs
may, therefore, strictly adhere to the timeframe fixed in this circular for
reporting fraud cases to the Reserve Bank failing which NBFCs would be liable
for penal action as prescribed under the provisions of Chapter V of the RBI Act,
1934.
It may be noted that NBFCs are not required to submit ‘Nil’ reports to Frauds
Monitoring Cell/Regional Offices of Department of Non-Banking Supervision.
At the same time enough precautions may be taken by deposit-taking NBFCs to
ensure that the cases reported by them are duly received by Frauds Monitoring
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CLASSIFICATION OF FRAUDS
Cases of cash shortage up to Rs. 1,000/- reported on the same day by persons
handling the cash and where there is no suspicion of fraud, need not be reported
as fraud. However, cases of cash shortage involving more than Rs. 1,000/- and
those detected by the management/ inspecting officer, irrespective of the
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Fraud reports should be submitted in all cases of fraud of Rs. 1 lakh and above
perpetrated through misrepresentation, breach of trust, manipulation of books of
account, fraudulent encashment of FDRs unauthorized handling of securities
charged to the NBFC, misfeasance, embezzlement, misappropriation of funds,
conversion of property, cheating, shortages, irregularities, etc.
The fraud reports in the prescribed format should be sent to the Central Office
(CO) of the Reserve Bank of India, Department of Banking Supervision, Frauds
Monitoring Cell where the amount involved in fraud is Rs 25 lakhs and above
and to Regional Office of the Reserve Bank of India, Department of Non-
Banking Supervision under whose jurisdiction the Registered Office of the
NBFC falls where the fraud amount involved in fraud is less than Rs 25 lakh , in
the format given in FMR – 1, within three weeks from the date of detection.
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A copy of FMR-1 where the amount involved in the Fraud is Rs 25 lakhs and
above should also be submitted to the Regional Office of the Department of
Non-Banking Supervision of Reserve Bank of India under whose jurisdiction
the Registered Office of the NBFC falls.
(iii) Diversion of funds outside the borrowing units, lack of interest or criminal
neglect on the part of borrowers, their partners, etc. and also due to managerial
failure leading to the unit becoming sick and due to laxity in effective
supervision over the operations in borrower accounts on the part of the NBFC
functionaries rendering the advance difficult of recovery.
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Cases of attempted fraud, where the likely loss would have been Rs. 25 lakh or
more, had the fraud taken place, should be reported to the Central Office of the
Reserve Bank, Department of Banking Supervision, Frauds Monitoring Cell and
a copy endorsed to Central Office of the Reserve Bank, Department of Non-
Banking Supervision indicating the modus operandi and how the fraud was
detected. Such cases should not be included in the other returns to be submitted
to the Reserve Bank.
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QUARTERLY RETURNS
Part – A of the report covers details of frauds outstanding as at the end of the
quarter. Parts B and C of the report give category-wise and perpetrator-wise
details of frauds reported during the quarter respectively. The total number and
amount of fraud cases reported during the quarter as shown in Parts B and C
should tally with the totals of columns 4 and 5 in Part – A of the report.
NBFCs should furnish a certificate, as part of the above report, to the effect that
all individual fraud cases of Rs. 1 lakh and above reported to the Reserve Bank
in FMR – 1 during the quarter have also been put up to the NBFC’s Board and
have been incorporated in Part – A (columns 4 and 5) and Parts B and C
of FMR – 2.
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In the case of frauds where there are no developments during a quarter, a list of
such cases with a brief description including name of branch and date of
reporting may be furnished as per FMR – 3.
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Reporting of Frauds
NBFCs should ensure that all frauds of Rs. 1 lakh and above are reported to
their Boards promptly on their detection.
Such reports should, among other things, take note of the failure on the part of
the concerned officials, and consider initiation of appropriate action against the
officials responsible for the fraud.
Information relating to frauds for the quarters ending March, June and
September may be placed before the Board of Directors during the month
following the quarter to which it pertains.
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NBFCs should conduct an annual review of the frauds and place a note before
the Board of Directors for information. The reviews for the year-ended
December may be put up to the Board before the end of March the following
year. Such reviews need not be sent to RBI. These may be preserved for
verification by the Reserve Bank’s inspecting officers.
The main aspects which may be taken into account while making such a review
may include the following:
(a) Whether the systems in the NBFC are adequate to detect frauds, once they
have taken place, within the shortest possible time.
(b) Whether frauds are examined from staff angle.
(c) Whether deterrent punishment is meted out, wherever warranted, to the
persons found responsible.
(d) Whether frauds have taken place because of laxity in following the systems
and procedures and, if so, whether effective action has been taken to ensure that
the systems and procedures are scrupulously followed by the staff concerned.
(e) Whether frauds are reported to local Police, as the case may be, for
investigation.
The annual reviews should also, among other things, include the following
details:
(a) Total number of frauds detected during the year and the amount involved as
compared to the previous two years.
(b) Analysis of frauds according to different categories detailed in Paragraph 2.1
and also the different business areas indicated in the Quarterly Report on Frauds
Outstanding (vide FMR – 2).
(c) Modus operandi of major frauds reported during the year along with their
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present position.
(d) Detailed analyses of frauds of Rs. 1 lakh and above.
(e) Estimated loss to the NBFC during the year on account of frauds, amount
recovered and provisions made.
(f) Number of cases (with amounts) where staff are involved and the action
taken against staff.
(g) Time taken to detect frauds (number of cases detected within three months,
six months and one year of their taking place).
(h) Position with regard to frauds reported to Police.
(i) Number of frauds where final action has been taken by the NBFC and cases
disposed of.
(j) Preventive/punitive steps taken by the NBFC during the year to
reduce/minimize the incidence of frauds.
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NBFCs should follow the following guidelines for reporting of frauds such as
unauthorized credit facilities extended by the NBFC for illegal gratification,
negligence and cash shortages, cheating, forgery, etc. to the State Police
authorities:
(i) Cases of fraud involving an amount of Rs. 1 lakh and above, committed by
outsiders on their own and/or with the connivance of NBFC staff/officers.
(ii) Cases of fraud committed by NBFC employees, when it involves NBFC
funds exceeding Rs. 10,000/
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CHAPTER 8
utilization of savings among public. NBFC’s are able to reach certain deposit
bank cannot reach. These companies encourage savings and promote careful
spending of money without much wastage. They offer attractive schemes to suit
needs of various sections of the society. They also attract idle money by
offering attractive rates of interest. Idle money means the money which public
NBFC’s provide easy and timely credit to those who need it. The formalities
and procedures in case of NBFC’s are also very less. NBFC’s also provides
unusual credit means the credit which is not usually provided by banks such as
credit for marriage expenses, religious functions, etc. The NBFC’s are open to
all. Every one whether rich or poor can use them according to their needs.
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merchant banking, etc. apart from their traditional services. Most of the NBFC’s
mean they invest the savings of people in businesses which have the ability to
earn good amount of returns. For example – In case of leasing companies lease
less capital and the leasing company can also earn good amount of profit.
easy term and conditions. They play an important role in fulfilling the basic
class and lower middle class people. Hence, NBFC’s are blessing for them.
securities. They protect the small investors by investing their funds in different
kind of securities which will help them in gaining maximum rate of returns.
investment advice.
People with lesser means are not able to take the benefit of various goods which
were once considered as luxury but now necessity, such as consumer durables
through hire- purchase finance, etc. Improved and increased transport facilities
help in movement of goods from one place to another and availability of goods
deposits from public by way of depositor a loaner in any form. In turn the
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the public.
NBFC’s play a very important role in the economic growth of the country. They
increase the rate of growth of the financial market and provide a wide variety of
saving, while reducing the risk to the maximum possible extent. Hence, they
help in the survival of business in the economy by keeping the capital market
active and busy. They also encourage the growth of well- organized business
investing in risky activities.. NBFC’s play a very positive and active role in the
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CHAPTER 9
ADVANTAGES & DISADVANTAGES
(ii) New companies which may find it difficult to raise finance from the public
can get it from these institutions. Assistance is available when recourse to
normal sources is impracticable or unprofitable. Modernization and expansion
plans can be financed without much strain on the financial structure of the
company.
(iv) Loans and guarantees in foreign currency and deferred payment facilities
are available for the import of required machinery and equipment.
(v) The rate of interest and repayment procedures are convenient and
economical. Facilities for repayment in easy installments are made available to
the deserving concerns.
(vi) Along with finance, a company can obtain expert advice and guidance for
the successful planning and administration of projects.
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Disadvantages of NBFC :
(i) The concern requiring finance from public financial institutions has to
submit itself to a thorough investigation that involves a number of formalities
and documents.
(ii) Many deserving concerns may fail to get assistance for want of security and
other conditions laid down by these institutions.
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CHAPTER 10
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
cent of the private construction activities was also financed by NBFCs. Now
they are also financing second hand vehicles. NBFCs can play a significant role
in channelizing the remittance from abroad to states such as Gujarat and Kerala.
NBFCs in India have become prominent in a wide range of activities like hire
times, NBFCs could survive owing to their aggressive character and customized
services. NBFCs are doing more fee-based business than fund based. They are
of insurance. Many of the NBFCs have ventured into the domain of mutual
funds and insurance. NBFCs undertake both life and general insurance business
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Equipment Leasing Association of India (ELA). The Reserve Bank wants these
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CHAPTER 12
BIBLIOGRAPHY
www.NBFC.com
www.RBI.org.in
www. Wikipedia.com
www.investing.com
www.forexfactory.com
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