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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

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.

NBFCs provide financial services like hire-purchase, leasing, loans,


investments, chit-fund companies etc. NBFCs can be classified into deposit
accepting companies and non-deposit accepting companies. NBFCs are small in
size and are owned privately. The NBFCs have grown rapidly since 1990. They
offer attractive rate of return. They are fund based as well as service oriented
companies. Their main companies are banks and financial institutions.
According to RBI Act 1934, it is compulsory to register the NBFCs with the
Reserve Bank of India.

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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Non-Banking Financial Companies constitute an important segment of the


financial system. NBFCs are the intermediaries engaged in the business of
accepting deposits and delivering credit. They play very crucial role in
channelizing the scare financial resources to capital formation.

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.

Non Banking Finance Companies (NBFCs) are a constituent of the institutional


structure of the organized financial system in India. The Financial System of
any country consists of financial Markets, financial intermediation and financial
instruments or financial products. All these Items facilitate transfer of funds
and are not always mutually exclusive. Inter-relationships Between these are
parts of the system e.g. Financial Institutions operate in financial markets and
are, therefore, a part of such markets.

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.

The term “Finance” is often understood as being equivalent to “money”.


However, final exactly is not money; it is the source of providing funds for a
particular activity. The word system, in the term financial system, implies a set
of complex and closely connected or inter-linked Institutions, agents, practices,
markets, transactions, claims, and liabilities in the Economy. The financial
system is concerned about money, credit and finance. The three terms are
intimately related yet are somewhat different from each other:

 Money refers to the current medium of exchange or means of payment.


 Credit or loans is a sum of money to be returned, normally with interest;
it refers to a debt
 Finance is monetary resources comprising debt and ownership funds of
the state, company or person.

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2.1.MEANING

Non-Banking Financial Companies (NBFCs) play a vital role in the context of

Indian Economy. They are indispensable part in the Indian financial system

because they supplement the activities of banks in terms of deposit mobilization

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

recognized the need for a well-established and healthy non-banking financial

sector.

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

Companies Act, 1956 and is engaged in the business of loans and

advances, acquisition of shares/stock/bonds/debentures/securities issued by

Government or local authority or other securities of like marketable nature,

leasing, hire-purchase, insurance business, chit business but does not include

any institution whose principal business is that of agriculture activity,

industrial activity, sale/purchase/construction of immovable property.

Non-banking institution which is a company and which has its principal

business of receiving deposits under any scheme of arrangement or any

other manner, or lending in any manner is also a non- banking financial

company.

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2.2.DEFINITIONS OF NBFC.

Non-Banking Financial Company has been defined as:

(i) A non-banking institution, which is a company and which has its principal

business the receiving of deposits under any scheme or lending in any

manner.

(ii) Such other non-banking institutions, as the bank may with the previous

approval of the central government and by notification in the official

gazette, specify.

NBFCS provide a range of services such as hire purchase finance, equipment

lease finance, loans, and investments. NBFCS have raised large amount of

resources through deposits from public, shareholders, directors, and other

companies and borrowing by issue of non-convertible debentures, and so on.

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

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(NBFIs) or Investment Institutions:

 UNIT TRUST OF INDIA.

 LIFE INSURANCE CORPORATION (LIC).

 GENERAL INSURANCE CORPORATION (GIC).

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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-

banking institutions receiving deposits and financial institutions. It was observed

that the existing legislative and regulatory framework required further

refinement and improvement because of the rising number of defaulting NBFCs

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

NBFCs, the need to develop a framework of prudential legislations and a

supervisory system was felt especially

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 committees and its recommendations are given hereunder:

1. James Raj Committee (1974)

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

Money Circulation Schemes (Banning) Act, 1978 was enacted

2. Dr.A.C.Shah Committee (1992):

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

committee made wide ranging recommendations covering, inter-alia entry point

norms, compulsory registration of large sized NBFCs, prescription of prudential

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

better regulation of NBFCs.

3. Khan Committee (1995)

This Group was set up with the objective of designing a comprehensive and

effective supervisory framework for the non-banking companies segment of the

financial system. The important recommendations of this committee are as

follows:

i. Introduction of a supervisory rating system for the registered NBFCs. The

ratings assigned to NBFCs would primarily be the tool for triggering on-

site inspections at various intervals.

ii. Supervisory attention and focus of the Reserve Bank to be directed in a

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comprehensive manner only to those NBFCs having net owned funds of

Rs.100 laths and above.

iii. Supervision over unregistered NBFCs to be exercised through the off-site

surveillance mechanism and their on-site inspection to be conducted

selectively as deemed necessary depending on circumstances.

iv. Need to devise a suitable system for co-coordinating the on-site

inspection of the NBFCs by the Reserve Bank in tandem with other

regulatory authorities so that they were subjected to one-shot examination

by different regulatory authorities.

v. Some of the non-banking non-financial companies like

industrial/manufacturing units were also undertaking financial activities

including acceptance of deposits, investment operations, leasing etc to a

great extent. The committee stressed the need for identifying an

appropriate authority to regulate the activities of these companies,

including plantation and animal husbandry companies not falling under

the regulatory control of Either Department of Company Affairs or the

Reserve Bank, as far as their mobilization of public deposit was

concerned.

vi. Introduction of a system whereby the names of the NBFCs which had not

complied with the regulatory framework / directions of the Bank or had

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failed to submit the prescribed returns consecutively for two years could

be published in regional newspapers.

4. Narasimha Committee (1991)

This committee was formed to examine all aspects relating to the structure,

organization & functioning of the financial system.

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:

a. To acquire any such shares , stocks, debenture, debenture stock, bonds,


obligation or securities by original subscription, exchange or otherwise and to
subscribe for the same either conditionally or otherwise, to guarantee the
subscription thereof issued or guaranteed by any government, state, public
body, or authority, firm, body corporate or any other entity or persons in India
or elsewhere.

b. To purchase or acquire, hold, trade and further to dispose of any right,


stake or controlling interest in the shares, stocks, debentures, debenture stock,
bonds, obligation or securities of companies or partnership firms either singly or
jointly with any other person(s), body corporate or partnership firm carrying out
or proposing to carry out any activity in India or in any other part of the world.

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.

d. To facilitate and encourage the creation, issue or conversion of


debentures, debenture stock, bonds, obligation, shares, stocks, and securities,
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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.

2. To give any guarantee in relation to the payment of any debentures,


debenture stock, bonds, obligation or securities.

3. To subscribe for, conditionally or unconditionally, to underwrite issue


on commission or otherwise take, hold, deal in, and convert stocks, shares and
securities, of all kinds, and to enter into partnership, or into any arrangement for
sharing profits, union of interest, reciprocal consession or co-operation with any
person, partnership, or organize companies, syndicates, or partnerships of all
kinds, for the purpose of acquiring and undertaking any property and liabilities
of this company, or of any other company or of advancing, directly or
indirectly, the object thereof, or for any other purpose which this company may
think expedient.

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).

6. To transact or carry on all kinds of agency business, and in particular


in relation to the investment of money, the sale of property and the collection
and receipt of money.

7. To Purchase or otherwise acquire, and to sell, exchange, surrender,


lease, mortgage, charge, convert, turn to account, dispose of , and deal with
property and rights of all kinds, and in particular, mortgages, debentures,
produce, concessions, options, contracts, patents, licenses, stocks, shares, bonds,
policies, book debts, business concerns, and undertakings and claims,
privileges, and chooses in action of all kinds.

8. To carry on activities of leasing and /or hire-purchase.

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CHAPTER 4

IMPORTANCE OF NBFC

Why are Non-Banking Financial Companies important?


India’s financial services sector is huge. It is not just comprised of commercial
banks, but also non-banking financial companies (NBFCs). These firms offer a
wide array of financial services like loans, chit-funds, and are different from
banks. NBFCs are often small players that largely go unnoticed. However, they
are still important to the economy, especially in a developing country like India
where 70% of the population lives in rural areas.

In a speech, P Vijaya Bhaskar, Executive Director of the Reserve Bank of


India, explained NBFC companies are game-changers that are very
important to the economy. Here’s how:
 Size of sector:
The NBFC sector has grown considerably in the last few years despite the
slowdown in the economy. As of March 2013, it accounted for 12.5% of the
country’s Gross Domestic Product (GDP) – a measure of the size of the
economy. This is up from 8.4% in March 2006. However, this only counts
NBFCs with assets more than Rs 100 crore. “If the assets of all the NBFCs
below Rs 100 crore are reckoned, the share of NBFCs’ assets to GDP would go
further,” Bhaskar said in his speech.

 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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in 2010-11, the NBFC sector clocked a growth of 25.7%. This shows, it is


contributing more to the economy every year.

 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%.

 Promoting inclusive growth:


NBFCs cater to a wide variety of customers – both in urban and rural areas.
They finance projects of small-scale companies, which is important for the
growth in rural areas. They also provide small-ticket loans for affordable
housing projects. All these help promote inclusive growth in the country.

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CHAPTER 5
RESEARCH METHODOLOGY19

6.1 RESEARCH DESIGN


Since the research is for industry analysis and it is structured for NBFC‘S. The
research uses secondary data for analysis and interpretation.

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

6.3 SCOPE OF THE STUDY


The study was limited to the Financial Service market of India which
included NBFC‘s mainly from the . The study was completed within the time
frame of 60 days(2 months)starting from 1st April, 2010 and ending on 1st
June, 2010. The target group of the study were the
NBFC‘s

6.4 DATA COLLECTION


There are two methods of data collection that can be considered when collecting
data fore search purpose. These data collection types include the following:
1.Primary data
2.Secondary data Both the secondary and primary data collection methods were
used in the study.

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6.4.1 PRIMARY DATA


The primary data required for this study was collected by visiting the financial
services and analyzing the information provided by them.

6.4.2 SECONDARY DATA


The secondary data for the research was collected from journals, research
articles, books and internet websites, annual reports etc whose details and
references has been given in Chapter-
2 and in ―References‖. The source of the secondary data was British
Library, NBFC‘s And Internet.
6.5 FIELD WORK PLAN
The study was conducted in New Delhi (NCR and Bangalore visiting different
institutions and analyzing the different NBFC‘s work.

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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:

Asset Finance Company(AFC)


The main business of these companies is to finance the assets such as machines,
automobiles, generators, material equipment’s, industrial machines etc.

Investment Company (IC)


The main business of these companies is to deal in securities.

Loan Companies (LC)


The main business of such companies is to make loans and advances (not for
assets but for other purposes such as working capital finance etc. )

Infrastructure Finance Company (IFC)


A company which has net owned funds of at least Rs. 300 Crore and has
deployed 75% of its total assets in Infrastructure loans is called IFC provided it
has credit rating of A or above and has a CRAR of 15%.

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Systemically Important Core Investment Company (CIC-ND-SI)


A systematically important NBFC (assets Rs. 100 crore and above) which has
deployed at least 90% of its assets in the form of investment in shares or debt
instruments or loans in group companies is called CIC-ND-SI. Out of the 90%,
60% should be invested in equity shares or those instruments which can be
compulsorily converted into equity shares. Such companies do accept public
funds.

Infrastructure Debt Fund (IDF-NBFC)


A debt fund means an investment pool in which core holdings are fixed income
investments. The Infrastructure Debt Funds are meant to infuse funds into the
infrastructure sector. The importance of these funds lies in the fact that the
infrastructure funding is not only different but also difficult in comparison to
other types of funding because of its huge requirement, long gestation period
and long term requirements.

In India, an IDF can be set up either as a trust or as a company. If the IDF is


set up as a trust, it would be a mutual fund, regulated by SEBI. Such funds
would be called IDF-MF. The mutual fund would issue rupee-denominated
units of five years’ maturity to raise funds for the infrastructure projects.

If the IDF is set up as a company, it would be an NBFC; it will be regulated


by the RBI. The IDF guidelines of the RBI came in September 2011. According
to these guidelines, such companies would be called IDF-NBFC.

An IDF-NBFC is a non-deposit taking NBFC that has Net Owned Fund of Rs


300 crores or more and which invests only in Public Private Partnerships (PPP)
and post commencement operations date (COD) infrastructure projects which

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have completed at least one year of satisfactory commercial operation and


becomes a party to a Tripartite Agreement.

Non-Banking Financial Company – Micro Finance Institution (NBFC-


MFI)
NBFC-MFI is a non-deposit taking NBFC which has at least 85% of its assets in
the form of microfinance. Such microfinance should be in the form of loan
given to those who have annual income of Rs. 60,000 in rural areas and Rs.
120,000 in urban areas. Such loans should not exceed Rs. 50000 and its tenure
should not be less than 24 months. Further, the loan has to be given without
collateral. Loan repayment is done on weekly, fortnightly or monthly
instalments at the choice of the borrower.

Non-Banking Financial Company – Factors (NBFC-Factors)


Factoring business refers to the acquisition of receivables by way of assignment
of such receivables or financing, there against either by way of loans or
advances or by creation of security interest over such receivables but does not
include normal lending by a bank against the security of receivables etc.
An NBFC-Factoring company should have a minimum Net Owned Fund (NOF)
of Rs. 5 Crore and its financial assets in the factoring business should constitute
at least 75 percent of its total assets and its income derived from factoring
business should not be less than 75 percent of its gross income.

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CHAPTER 7

FRAUDS IN NBFC

Incidence of frauds in NBFCs is a matter of concern. While the primary


responsibility for preventing frauds lies with NBFCs themselves, a reporting
system for frauds is prescribed in the following paragraphs, which may be
adopted by NBFCs.

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.

NBFCs should specifically nominate an official of the rank of General Manager


or equivalent who will be responsible for submitting all the returns referred to in
this circular.

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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Cell/Regional Offices of Department of Non-Banking Supervision as the case


may be.

CLASSIFICATION OF FRAUDS

In order to have uniformity in reporting, frauds have been classified as under


based mainly on the provisions of the Indian Penal Code:

 Misappropriation and criminal breach of trust.

 Fraudulent encashment through forged instruments, manipulation of


books of account or through fictitious accounts and conversion of
property.

 Unauthorised credit facilities extended for reward or for illegal


gratification.

 Negligence and cash shortages, Cheating and forgery.

 Irregularities in foreign exchange transactions.


Any other type of fraud not coming under the specific heads as above.

Cases of 'negligence and cash shortages' and ‘irregularities in foreign exchange


transactions’ referred to in item (d) and (f) above are to be reported as fraud if
the intention to cheat/defraud is suspected/ proved.

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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amount, may be reported as fraud. NBFCs having overseas branches/offices


should report all frauds perpetrated at such branches/offices also to the Reserve
Bank as per the format and procedure detailed under Paragraph 3 below.

REPORTING OF FRAUDS TO RESERVE BANK OF INDIA

Frauds involving Rs. 1 lakh and above

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.

Fraud reports should also be submitted in cases where central investigating


agencies have initiated criminal proceedings sue moto and/or where the Reserve
Bank has directed that they be reported as frauds.

Wherever information is available, NBFCs may also report frauds perpetrated in


their subsidiaries and affiliates/joint ventures. Such frauds should, however, not
be included in the report on outstanding frauds and the quarterly progress
reports referred to in paragraph 4 below.

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.

Frauds committed by unscrupulous borrowers

It is observed that a large number of frauds are committed by unscrupulous


borrowers including companies, partnership firms/proprietary concerns and/or
their directors/partners by various methods including the following:

(i) Fraudulent discount of instruments.

(ii) Fraudulent removal of pledged stocks/disposing of hypothecated stocks


without the NBFC’s knowledge/inflating the value of stocks in the stock
statement and drawing excess finance.

(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.

In respect of frauds in borrower accounts involving an amount of Rs. 5 lakh


and above, additional information as prescribed under Part B of FMR – 1 may
also be furnished.

Frauds involving Rs. 25 lakh and above

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In respect of frauds involving Rs. 25 lakh and above, in addition to the


requirements given at paragraphs 3.1 and 3.2 and above, NBFCs may report the
fraud by means of a D.O. letter addressed to the Chief General Manager-in-
charge of the Department of Banking Supervision, Reserve Bank of India,
Frauds Monitoring Cell, Central Office and a copy endorsed to the Chief
General Manager-in-charge of the Department of Non-Banking Supervision,
Reserve Bank of India, Central Office within a week of such frauds coming to
the notice of the NBFC. The letter may contain brief particulars of the fraud
such as amount involved, nature of fraud, modus operandi in brief, name of the
branch/office, names of parties involved (if they are proprietorship/ partnership
concerns or private limited companies, the names of proprietors, partners and
directors), names of officials involved, and whether the complaint has been
lodged with the Police. A copy of the D.O. letter should also be endorsed to the
Regional Office of Reserve Bank, Department of Non-Banking Supervision
under whose jurisdiction the Registered Office of the NBFC is functioning.

Cases of attempted fraud

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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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

QUARTERLY RETURNS

Report on Frauds Outstanding

NBFCs should submit a copy of the Quarterly Report on Frauds Outstanding in


the format given in FMR – 2 to the Regional Office of the Reserve Bank of
India, Department of Non-Banking Supervision under whose jurisdiction the
Registered Office of the NBFC falls irrespective of amount within 15 days of
the end of the quarter to which it relates.

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.

Progress Report on Frauds

NBFCs should furnish case-wise quarterly progress reports on frauds involving


Rs. 1 lakh and above in the format given in FMR – 3 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
within 15 days of the end of the quarter to which it relates.

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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

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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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

REPORTS TO THE BOARD

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.

Quarterly Review of Frauds

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.

These should be accompanied by supplementary material analyzing statistical


information and details of each fraud so that the Board would have adequate
material to contribute effectively in regard to the punitive or preventive aspects
of frauds.

All the frauds involving an amount of Rs 25 lakh and above should be


monitored and reviewed by the Audit Committee of the Board (ACB) or if ACB
is not there, other Committee of the Board of NBFCs. The periodicity of the
meetings of the Committee may be decided according to the number of cases
involved. However, the Committee should meet and review as and when a fraud
involving an amount of Rs 25 lakh and above comes to light.

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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

Annual Review of Frauds

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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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

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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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

GUIDELINES FOR REPORTING FRAUDS TO POLICE

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:

(a) In dealing with cases of fraud/embezzlement, NBFCs should not merely be


actuated by the necessity of recovering expeditiously the amount involved, but
should also be motivated by public interest and the need for ensuring that the
guilty persons do not go unpunished.

(b) Therefore, as a general rule, the following cases should invariably be


referred to the State Police:

(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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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

CHAPTER 8

ROLE OF NON- BANKING FINANCIAL COMPANIES.

(1) Promoters Utilization of Savings:

Non- Banking Financial Companies play an important role in promoting the

utilization of savings among public. NBFC’s are able to reach certain deposit

segments such as unorganized sector and small borrowers were commercial

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

keep aside, but which is not used. It is surplus money.

(2) Provides easy, timely and unusual credit:

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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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

(3) Financial Supermarket:

NBFC’s play an important role of a financial supermarket. NBFC’s create a

financial supermarket for customers by offering a variety of services. Now,

NBFC’s are providing a variety of services such as mutual funds, counseling,

merchant banking, etc. apart from their traditional services. Most of the NBFC’s

reduce their risks by expanding their range of products and activities.

(4) Investing funds in productive purposes:

NBFC’s invest the small savings in productive purposes. Productive purposes

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

equipment to industrialists, the industrialists can carry on their production with

less capital and the leasing company can also earn good amount of profit.

(5) Provide Housing Finance:

NBFC’s, mainly the Housing Finance companies provide housing finance on

easy term and conditions. They play an important role in fulfilling the basic

human need of housing finance. Housing Finance is generally needed by middle

class and lower middle class people. Hence, NBFC’s are blessing for them.

(6) Provide Investment Advice:

NBFC’s, mainly investment companies provide advice relating to wise

investment of funds as well as how to spread the risk by investing in different


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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

securities. They protect the small investors by investing their funds in different

securities. They provide valuable services to investors by choosing the right

kind of securities which will help them in gaining maximum rate of returns.

Hence, NBFC’s plays an important role by providing sound and wise

investment advice.

(7) Increase the Standard of living:

NBFC’s play an important role in increasing the standard of living in India.

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

like Television, Refrigerators, Air Conditioners, Kitchen equipments, etc.

NBFC’s increase the Standard of living by providing consumer goods on easy

installment basis. NBFC’s also facilitate the improvement in transport facilities

through hire- purchase finance, etc. Improved and increased transport facilities

help in movement of goods from one place to another and availability of goods

increase the standard of living of the society.

(8) Accept Deposits in Various Forms:

NBFC’s accept deposits forms convenient to public. Generally, they receive

deposits from public by way of depositor a loaner in any form. In turn the

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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

NBFC’s issue debentures, units’ certificates, savings certificates, units, etc. to

the public.

(9) Promote Economic Growth:

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

investors. They work on the principle of providing a good rate of return on

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

enterprises by investing their funds in efficient and financially sound business

enterprises only. One major benefit of NBFC’s speculative business means

investing in risky activities.. NBFC’s play a very positive and active role in the

development of our country.

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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

CHAPTER 9
ADVANTAGES & DISADVANTAGES

The main advantages of NBFC are as follows:


(i) Both risk as well as loan capital are available. Public financial institutions
provide underwriting facilities also.

(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.

(iii) As these institutions carry out a thorough investigation before granting


assistance to a concern, relationship with them helps to increase the credit-
worthiness of a 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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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

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.

(iii) Sometimes, these institutions place restrictions on the autonomy of


management. They lay down a convertibility clause in loan agreements. In some
cases, they insist on the appointment of their nominees to the Board of Directors
of the borrowing company.

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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

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

of the credit requirement of the manufacturing is provided by NBFCs. 65 per

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

purchase finance, equipment lease finance, loans, investments, and so on.

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

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ROLE OF NBFC IN INDIAN FINANCIAL MARKET TYFM

successfully emerged as ‘Financial Institutions’ in short span of time and are in

the process of converting themselves into ‘Financial Super Market’. The

NBFCs are taking initiatives to establish a self-regulatory organization (SRO).

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 NBFC IN INDIAN FINANCIAL MARKET TYFM

CHAPTER 12

BIBLIOGRAPHY

 www.NBFC.com
 www.RBI.org.in

 www. Wikipedia.com
 www.investing.com
 www.forexfactory.com

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