Non Banking Financial Companies

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Dilip Gajipara
Ankit Solanki
Vishal Gogari
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Ô The non-banking financial sector in India has recorded

marked growth in the recent years, in terms on number of
NBFCs, their deposits and so on.
Ô After considering the growth of NBFCs, the banking laws
of 1963 was introduced to regulate them.
Ô Able to carve niche in meeting credit need of wholesale and
retail customers.

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It means
Ô A financial institutions that is company
Ô A non²banking institution that is a company whose
principal business is the receiving of deposits under any
scheme or arrangement or lending in any manner
Ô Other non banking institutions with prior approval of
GOI.
Ô It excludes FI which carry on agricultural operations as
their principal business.
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It is only non²banking institution that is any hire²
purchase finance, investment, loan or mutual benefit
financial company and an equipment leasing company but
excludes and insurance company/stock exchange/stock
broking company/ merchant banking company.

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Ô A NBFC cannot accept demand deposits (demand
deposits are funds deposited at a depository institution
that are payable on demand - immediately or within a very
short period - like your current or savings accounts.)
Ô It is not a part of the payment and settlement system and
as such cannot issue cheques to its customers; and
Ô deposit insurance facility of DICGC is not available for
NBFC depositors unlike in case of banks.

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Depending on the nature and type of service provided.
Ô Asset Finance, Consumer Finance, Investment, and loan
company, and factoring and forfaiting organization x
Ô Aousing finance companies
x
 
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Ô erchant banking organizations, stock broking firm,
depositories, credit rating agencies, and venture capital
funds
x

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Ô The RBI regulates different types of NBFCs under the
provision of chapter III-B and chapter III-C of the RBI act.
Ô It was amended in 1997.

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 the term deposit is defined in a broad sense to
include any receipt of money by way of deposit or loan or
any other form. Aowever, certain receipts are excluded:
‡ Amount received from banks, development finance corp.,
other financial institutions, individual/firm/association
related to money lending, and ordinary course of business,
security deposit, dealership deposit, earnest money,
advance against order for goods/property/services, loan
from mutual funds.
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  These mean any non banking
institution/financial company.
â Aire purchase, loans, advances, insurance and stock
 broking etc.





Ô 'ith effect from Jan 1997, to commence a new company or

to carry on existing company the business of NBFC must
obtain certificate of registration from RBI.

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Ô NOF means
‡ Paid up capital
‡ Free reserves ² accumulated losses, deferred revenue
expenditure and other intangible assets
‡ Less investments in shares
‡ Less the book value of debentures/bonds/outstanding
loans and advances including hire-purchase and lease
finance.
Ô inimum NOF must be rs. 25 lakh or such other
amount not exceeding Rs 200 lakh.
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Ô They have to invest in unencumbered approved Indian
securities 5% or more their outstanding deposits at the
close of business on the last working day of second
preceding quarter.
Ô Approved securities ² it means securities of any state
government or central government and bonds
unconditionally guaranteed by them as regards the
payment of interest as well as repayment of principal.

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Ô Included in unencumbered approved securities are

approved securities lodged by NBFCs with other
institutions for an advance/any other arrangement.
Ô The basis of valuation of such securities would be the cost
or current market price.

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Ô ´very NBFC must create a reserve fund to which at least

20% of its net profits must be transferred before the
declaration of any dividend.

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Ô RBI can general regulate or prohibit the issue by any NBI of

any prospectus or advertisement soliciting deposits of
money form the public and also specify conditions subject
to which they can be issued.

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1. An equipment leasing company (´LC)
2. A hire purchase company (APC)
3. An investment company (IC)
4. A loan company(LC)
5. A mutual benefit financial companies (BFC)I.e. Nidhi
companies

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Ô A BFC is a financial institution notified by the
government under section 620-A of the companies act.
Ô BFCs or Nidhis were exempt from provision of RBI·s
NBFCs directions.

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Ô A company or Financial Insititute carrying all or any of
following types of business.
Ô collection of money in one lump sum/installments by way
of
‡ Contributions
‡ Sale of units/certificates/other instruments
‡ In any manner
‡ As membership/admission fee/
‡ Service charges to with respect to utual benefit, any
savings, thrift etc.

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Ô All non banking financial institutions other than NBFC,
BFC and NBCs are known as RNBCs.

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Ô It include FD, Recurring deposits, deposits received from

relatives and friends, shareholders by public limited
company and money raised by issue of unsecured
debentures/bonds.
Ô It will not include money raised by NBFCs by way of issue
of secured debentures/bonds, borrowings from banks/
financial institutions deposit form directors, foreign
citizens, private limited companies form their shareholders.

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Ô inimum NOF Rs. 25 lakh
Ô Compulsory registration with RBI
Ô aintenance of liquid assets
Ô Creation of reserve fund into with 20% of Net profit should
be transferred

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Ô NBFCS that have minimum NOF of 25 lakh can accept
public deposits but they must have minimum investment
grade for their FD from one of approved rating agencies at
least once a year.
Ô A copy of rating should be sent to RBI along with the
return.
Ô Credit rating agency such as CRISIL, ICRA, CAR´.

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Ô NOF ² Rs. 25 Lack
Ô Capital adequacy ratio ² 15% (As per last balance sheet)
Ô Acceptance of deposits ² 1.5 times of NOF or 10 cr which
ever is lower.
Ô If they have minimum grade ² 4 times of NOF

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Ô NOF ² Rs. 25 lakh or more
Ô in Investment grade
Ô 15% adequacy ratio as per last balance sheet.
Ô If AAA ratings ² ad. Ratio is below 15%- they are
prohibited from accepting/renewing deposits in excess of
amount outstanding as on Dec 18 1998 or 1.5 NOF ² which
ever is low.

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Ô If grading is AA ² but with less than 15% ad ratio than its

allowed to accept public deposit upto its NOF till it attains
15%
Ô If grading is A ² and ad ratio is less than 15% the ceiling on
deposit is one half of NOF.

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Ô It is the rate of interest on deposits.
Ô It is paid or compounded at rests but not shorter than
monthly rests.
Ô Currently ceiling is 12.5%.

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Ô Brokerage payable by NBFCs on deposit of one year to five
years has at 2% uniformly.
Ô The permissible brokerage commissions, incentives, or any
other benefit on deposits with all NBFC is 2% of the
deposit.
Ô The expenses, by way of reimbursement on the basis of
related vouchers/bill produced, up to 0.5% of the deposits
are also permitted.

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