FINANCIAL SYSTEMS

A structure that is available in an economy to mobilize the capital from various surplus sectors of the economy and allocate and distribute the same to the various needy sectors. Investment (Investor)

Savings

Financial Intermediate

Consumption (Spender) Financial System Intermediaries Market Instruments (Financial Assets) Types of markets Money market - assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Debt Market -buy and sell debt securities , usually in the form of bonds. FOREX- is a global, worldwide decentralized financial market for trading currencies Capital-is a market for securities where business enterprises and can raise long-term funds. Financial Services Assisting in sourcing of funds Funding Advising Procedural assistance in deployment of funds Types of Financial services
Sr.No 1 2 3 4 Fund Based Service Provider invest or commit to invest if necessary his own fund Service provider is exposed to risk to an extent This is a participative role Includes bill discounting, purchase of commercial paper, underwriting etc Fee Based Service provider does not invest his own fund Service providers risk is minimal This is a advisory role Includes management of IPO, project financing , feasibility study etc.

Scope Liabilities
Share Capital- Management of IPO Reserves and Surplus-Advice on Bonus issue, dividend Term Loan-Loan Restructuring, recovery Debenture-issue, registry Current Liability-working capital arrangement, OD 1

Assets
Fixed Assets-Project feasibility study, risk assessment Investment- strategy, asset selection, risk mitigation Current Assets- Management consulting on inventory

Accounting Methods

Sales-bill discounting, letter of credit Less Variable cost-Credit arrangement Contribution Less Fixed Cost-Restructuring and management decision, PBIT Less Interest-Loan optimization, risk cover PBT Less Tax- advice PAT Agencies Providing FS Commercial banks fund based activities Merchant Bankers Management activities related to capital raising exercise Leasing and hire purchase of assets Mutual funds Venture capital rating agencies NBFC Stock Exchanges

HISTORY OF BANKING
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: y Early phase from 1786 to 1969 of Indian Banks y Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. y New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. y The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. 3

Phase II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalized. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: y 1949 : Enactment of Banking Regulation Act. y 1955 : Nationalisation of State Bank of India. y 1959 : Nationalisation of SBI subsidiaries. y 1961 : Insurance cover extended to deposits. y 1969 : Nationalisation of 14 major banks. y 1971 : Creation of credit guarantee corporation. y 1975 : Creation of regional rural banks. y 1980 : Nationalisation of seven banks with deposits over 200 crore. After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Nationalization of banks
The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi, the then prime minister. 14 banks which were mostly owned by businessmen and even managed by them, were natoinalized.
y y y y y y y y

Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank 4

y y y y y y

Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India

Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers - either directly or through subsidiaries -- a wide range of banking services. The second phase of nationalisation of Indian banks took place in the year 1980. Seven more banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of the banking segments in India were under Government ownership. After the nationalisation of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%. y 1955 : Nationalisation of State Bank of India. y 1959 : Nationalisation of SBI subsidiaries. y 1969 : Nationalisation of 14 major banks. y 1980 : Nationalisation of seven banks with deposits over 200 crores.

TYPES OF BANKS
Types of banks
Scheduled Banks and A. Commercial Banks 1. Foreign Banks - 38 2. Indian Scheduled Banks = 254 a) Private Sector Banks 31 (Old & New) b) Public Sector Banks 223 i. State Bank & its 7 subsidiaries = 8 ii. Nationalized Banks = 19 iii. Regional Rural Banks = 196 B. Cooperative banks - Rural & Urban Co-op Banks II. Non Scheduled Banks (Mentioned in II schedule of RBI Act 1934, Paid up capital not less than 5 lac) I.

Banking Structure of India consists of :

y y

Scheduled Commercial Banks in India Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. "Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank". "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

The following are the Scheduled Banks in India (Public Sector):

y y y y y y y y y y y

State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Saurashtra State Bank of Travancore Andhra Bank Allahabad Bank Bank of Baroda Bank of India 6

y y y y y y y y y y y y y y y

Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India UCO Bank Vijaya Bank

The following are the Scheduled Banks in India (Private Sector):

y y y y y y y y y y

ING Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Bank Ltd South Indian Bank HDFC Bank Ltd Centurion Bank Ltd Bank of Punjab Ltd IDBI Bank Ltd Jammu & Kashmir Bank Ltd.

The following are the Scheduled Foreign Banks in India:

y y y y y y y y y y y y

American Express Bank Ltd. ANZ Gridlays Bank Plc. Bank of America NT & SA Bank of Tokyo Ltd. Banquc Nationale de Paris Barclays Bank Plc Citi Bank N.C. Deutsche Bank A.G. Hongkong and Shanghai Banking Corporation Standard Chartered Bank. The Chase Manhattan Bank Ltd. Dresdner Bank AG.

OVERVIEW OF BANKING
Bank
y y y y y y y y y y y y Bank is a lawful organization, which accepts deposits that can be withdrawn on demand. It also lends money to individuals and business houses that need it. Banks give two assurances to the depositors  Safety of deposit, and  Withdrawal of deposit, whenever needed Only a firm or company are permitted to act as bank An individual is not allowed to act as a bank A firm consisting of not more than 10 partners or a company incorporated under Indian Companies Act 1956 can be a bank Money lenders are not bankers Accept deposits from public Acceptance for the purpose of lending or investments Deposit repayable to depositors on demand or otherwise Under section 5 C of the Banking Regulation Act banking company means any company that transacts the business of banking in india Sec 7(1) prohibits the word banker, banking by any company other than a bank Sec 7(2) prohibits such words by any individual

Meaning
According to Banking regulation act 1949 section 5(b) the term banking means accepting for the purpose of lending or investment of deposits of money received from public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise. According to the definition the banker is engaged in the business of accepting deposits from the public and utilizing such deposits either for the purpose of lending or for the purpose of investment.

Scope
y y y Acceptance of deposit for the purpose of lending and investment The deposit should be accepted from the public Acceptance of deposit should be in form of cash

Functions according to section 6

y y y y y y y Discounting of Bill Remittances Hiring safe deposits lockers Conducting foreign exchange transactions Conducting government transactions Issue letter of credit and guarantees Collection of cheques and bill

Functions of banks
1. Traditional function Accepting deposits Lending fund remittance Miscellaneous Modern Functions Cross border fund raising Cross border banking services 8

2.

 3.

Merchant Banking

Emerging trends in banking Universal banking Electronic banking Globalization of banking

Role of a Bank
y y y y y y y It encourages savings habit amongst people and thereby makes funds available for productive use. It acts as an intermediary between people having surplus money and those requiring money for various business activities. It facilitates business transactions through receipts and payments by cheques instead of currency. It provides loans and advances to businessmen for short term and long-term purposes. It also facilitates import export transactions. It helps in national development by providing credit to farmers, small-scale industries and self-employed people as well as to large business houses which lead to balanced economic development in the country. It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc.

RESERVE BANK OF INDIA

RBI was constituted under reserve bank of India act 1934 and started functioning with effect from 1st April 1935. RBI is a state owned institution, the governor and 4 deputy governors & 15 directors of RBI are appointed by the union government. The RBI is internal functioning is coordinated by 20 specialized departments with headquarters at Mumbai. The main objectives of RBI are contained in preamble of RBI act 1934.

Reserve Bank of India Act -1934 Banking regulation Act-1949 Rationale

` ` ` ` To generate, maintain and promote confidence and trust of the public in the financial / banking systems To promote investors interest through adequate / timely disclosure by the institutions and access to revenue information by the investor. To ensure that the financial markets are both fair and efficient To ensure that the participants measure up to the rules of the market place

Objective
` ` ` ` ` ` ` ` Promote growth and price stability Maintain monetary stability Maintain Financial Stability Stable payment system Credit allocation by the FS reflect national eco priority and social concern Regulation of the overall volume of money and credit in the economy to ensure price stability Promotion of the developed FM & FS Ensure orderly conditions in exchange markets

Function
` ` ` ` ` Issuing notes Governments Banker Bankers bank Banks supervision Development of Financial Systems  Industrial Finance- SIDBI-1964,IDBI-1989  Agricultural Credit-NABARD -1981  EXIM-1981  DICGC-1961 Exchange Control (FERA -47& FEMA-99) Monetary Policy

` `

Tools for Monetary Policy

` ` ` ` ` ` CRR((3%-15%) 6% SLR(25%-40%)25% Bank Rate -9.5% Open Market Operations Selective Credit Control Priority Sector Advances -40%

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MERGERS OF BANKS
Mergers
Meaning - When on company takes over other company Types 1) Horizontal- between 2 firms in the same line of business 2) Vertical- expanding forward or backward in the chain of distribution , towards the source of raw material or towards the ultimate consumer 3) Conglomerate combination of unrelated business a) Friendly- when the target firm agrees to be acquired b) Unfriendly When target firm is not in agreement 4) Consolidation A entirely new firm is created and the two previous entities cease to exist

Legal Frame work

y y y y y Banking regulation act 1949 Section 36(b) the RBI on request by the companies concerned and subject to the provision of section 44A of the act assist as intermediations. Section 44 lays down procedure for amalgamation .RBI sanction scheme for amalgamation Nationalized banks the Act authorize the central government after consultation with RBI SBI act 1955 empower the SBI with the consent of bank management to take over with consent from RBI and central gov RRBAct1976 in consultation with NABARD

Reason for Merger

` ` ` ` ` ` ` ` ` ` ` ` ` ` ` Achieving size Achieving economies of scale Greater geographical penetration Growth Financial capability Customer base Diversification Technological Edge Synergy Managerial Efficiency Strategies Increased bargaining power Focus on priority sector Market entry Tax advantage

Challenges
` ` ` ` ` ` ` ` ` ` ` Increased geographical location , rural and semi urban branches Managing client base and customer relation Managing systems and software Managing Human Resource Dissimilarities in structure Problem of evaluation Time factor Implementation issue

Challenges for regulator

RBI needs to devise suitable tools/norms for financial institutions Problems of large size Consolidated accounting and supervision techniques need to be adopted 11

Consolidation
` ` I Narashimham committee reforms recommended consolidation Mergers should be based on 1. Synergies 2. Location 3. Business specific concerns 4. Sound commercial sense

Aspects to consolidation
` ` ` ` Clear cut legal regulatory regime Governing consolidation Enabling policy frame work Market conditions

Concern raised coz of consolidation

` ` ` Abuse of market Large bank are often too difficult to discipline Reduction in competition may lead to disincentive to improve

Features of consolidation
Mature Markets Co is adopted to overcome excess capacity Market forces play major role Cross border mergers are rarer in market Emerging Markets Co as a means of overcoming financial distress Government authority have to play major role Foreign ownership is significant Ownership structure and concern about job losses have restricted consolidation

Principles of consolidation
` ` ` ` ` ` ` ` ` ` ` Strong and clear reasons for merger Merger should be in public interest Consolidation should lead to efficiency in banking process Market driven consolidation and government regulated Consolidation should not lead to monopoly Consolidation should not only lead to strong domestic but international markets also

Advantages of Consolidation
Reduces cost Increases efficiency Increase in number of products to banks Convenient for government and regulators for on site and off site surveillance More employee welfare schemes can be introduces

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TECHNOLOGY IN BANKING
Electronic Payment Systems
` ATM-1990  Rangarajan Committee  Benefits of ATM to Customers 1. 24* 7 accessibility 2. Less time 3. Privacy 4. Anywhere banking 5. Accessibility of cards across multiple banks 6. Other services like clearing of cheque deposit , balance enquire , cheque book requisition , details of recent transactions  Benefits of ATM to Bank 1. Cost of setting ATM is less 2. Bank employees free from routine transaction can be employed in productive manner 3. Less hassle in handling cash 4. Provide more publicity

Network of ATM
Indian Bank Association was first to set up a shared payment network systems or SWADHAN network of ATMS for its member banks in Mumbai for any where banking for its customers.

ATM Customer Interface

` ` ` ` Video Display Monitor Keyboard Touch Screen Slots 1. Card Reader 2. Cash Dispenser 3. Envelope Dispenser 4. Deposit Slots

Electronic Banking
` Anytime Banking ` Anywhere Banking ` Home Banking ` Corporate Banking ` Personal Banking ` Telebanking Update Facilities  Online  Batch

Future of ATM
` ` ` ` Increase Number of transaction per day Establish connectivity with point of sale(POS) terminals at merchant establishment E Ticketing in railways, road ways and airways Providing international payment network such as VISA & Master card

Personnel Identification Number 13

Electromagnetic Card
` Credit Card 1. 8.5 cm by 5.5 cm card 2. Name, Account number , issue date and expiry date embossed on the card 3. Card Limit 4. Allows cash withdrawals

Benefits to Cardholder
1. 2. 3. 4. 5. 6. Convenient to carry a card Inculcate sense of financial disciple Provides proof of purchase Exposure to banking Delegate spending power by adding members Extend additional facility like insurance

Types of Credit Cards

` ` ` ` Charge Card (Debit Card) Credit Card Smart Card Member Cards

Internet Banking
` ` ` Basic Level Service Simple Transactional Website Fully Transactional Website

Other Technology in Banking

` ` ` Mobile Banking E Commerce (B2B) Signature Storage & Retrieval System

Benefits to Merchant establishment

1. 2. 3. 4. 5. 6. Increase sales Less credit facility to customers Systematic accounting Advertisement on national scale Assured and immediate payment and settlement Avoid security problems in handling cash

Benefits to Bank
1. Scope and potential for better profitability from trade turnover 2. Help in better and new establishment with customers 3. Savings of expenses

Cheque Truncation
` ` ` ` ` Electronic Image of cheque Only bank involved or clearing house can TC Electronic image will substitute the physical image TC is only to be done during the course of a clearing cycle Paper image is to be kept with clearing house

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Ways ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` `

MICR Image Processing Notes and coin counting machine Microfilms

Data Communication Network & EFT Systems

Component of Data Communication Network Transmission device and interface equipment-Modem Transmission Medium Transmission Processors Mode of Transmission

Major Networks in India

INET-1991 NICNET was set up by National Information Centre. Allows access to about 50 networks in more than 30 countries INDONET 1980 BANKNET RBI Net

Emerging Trend In Communications Network for Banking

RBIs VSAT network Internet EFT Systems TELEX Communication for message transfer

SWIFT - Society for Worldwide Inter Bank Financial Telecommunications

1973 by 239 Banks Paperless message transfer system

Automated Clearing Systems

Clearing House Inter Bank Payment Systems (CHIPS)-1970 by USA Clearing House Automated Payment Systems (CHAPS)-By UK Clearing House Automated Transfer Systems (CHATS) Hong Kong

Two Level Fund Transfer

` ` ` ` Fedwire - Fedral Reserve Wire System-USA 800 banks world over are member Bankwire-Owned by associations of banks in the USA Point of Sale (POS) Systems

Developments In India
Electronic Clearing Systems In India (ECS) 1. Electronic Credit Clearance 2. Electronic Debit Clearance 3. Floppy Input Clearance National Electronic Fund Transfer (NEFT) Real Time Gross Settlement (RTGS)

` `

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NON-BANKING FINANCIAL CORPORATIONS (NBFC)

NBFC
Financial services is concerned with the design and delivery of advice and financial products. A wide variety of fund/asset-based and non-fund-based/advisory services are provided mainly by non-banking companies (NBFCs). An NBFC is a company engaged in the business of loans and advances, investments, asset finance, insurance business, venture capital, merchant banking, broking, factoring and forfeiting, credit rating and housing finance. NBFC is a financial institution that is a company  whose principal business is the receiving of deposit under any scheme/arrangement /in any other manner or lending in any manner  such other NBI/class of institutions as the RBI may specify with the prior approval of the government and by notification in the official gazette A wide variety of funds/assets based and non fund based advisory services are provided by non banking financial services. 1. Assets finance, consumer finance, investment and loan companies 2. Housing finance companies 3. Merchant Banking , Stock broking firms, credit rating and venture capital funds  Housing finance is regulated by National Housing Bank  Capital Market Operation- SEBI  Working and operation of asset finance, loan and investment category of NBFC are regulated by RBI

Registration of NBFCs
It is mandatory that every NBFC should be registered with the RBI to commence/carry on any business. It should have a minimum net owned fund of Rs 25 Rs 200 lakhs. The NBFCs registered with the RBI are (i) asset finance, (ii) loan and (iii) Investment companies. The other types of NBFCs are regulated by other regulators. They could be further classified into those accepting deposits and those not accepting deposits. The registered NBFCs are required to invest in unencumbered approved securities worth at least 5 per cent of their outstanding deposits. Every NBFC must create a reserve fund by transferring at least 20 per cent of its net profits before declaring any dividend. The RBI can regulate/prohibit solicitation of deposits from public. It can give directions to NBFCs relating to (a) Prudential norms for income recognition, accounting standards, provisioning on capital adequacy and (b) Deployment of funds. It can also issue directions for providing information relating to deposits/for conduct of business. For contraventions/ defaults by an NBFC, the RBI can impose penalty. It can also cancel the registration of an NBFC. RBI ACT FRAMEWORK The RBI regulates and supervises the NBFCs under Chapter III-B and chapter II C of the RBI Act.

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The regulatory and supervisory objective is to a) Ensures the healthy growth of the NBFCs, b) Ensures that they function as part of the financial system within the policy framework in such a manner that their existence and functioning do not lead to any systematic irregularity and c) Ensures that the quality of surveillance and supervision is sustained by keeping pace with the developments that take place in this sector of the financial system. RBI NBFCs DIRECTIONS The RBI has issued three directions to the NBFCs: (1) Acceptance of Public Deposits Directions, (2) Prudential Norms Directions for NBFCs-D and NBFCs-ND-SI, and (3) Auditors Reports Directions. In terms of the RB1 Act, 1934, registration of NBFCs with the RBI is mandatory, irrespective of whether they hold public deposits or not. The amended Act (1997) provides an entry point norm of Rs. 25 lakhs as the minimum net owned fund (NOF), which has been revised upwards to Rs.2 crore for new NBFCs seeking grant of CoR on or after April 21, 1999. Financial companies like insurance companies, housing finance companies, stock broking companies, chit fund companies, companies notified as nidhis under Section 620A of the Companies Act, 1956 and companies engaged in merchant banking activities (subject to certain conditions), however, have been exempted from the requirement of registration under the RBI Act, as they are regulated by other agencies.

Deposit
Includes any receipt of money by way of deposit or loan or in any other form . Excluding  Amount received from banks  Amount received from Development financial corporations  Amount received in ordinary course of business  Loan from Mutual Funds

Supervision
Focus of the RBI is on prudential supervision so as to ensure that NBFCs function on sound and healthy lines and avoid excessive risk taking. On-site inspection; Off-site monitoring supported by state-of the art technology; Market intelligence Exception reports of statutory auditors of NBFCs. The thrust of supervision is based on the asset size of the NBFC whether it accepts/ holds deposits from the public. CAMELS (Capital, Assets, Management, Earnings, Liquidity, and Systems and Procedures) approach Market intelligence system The companies not holding public deposits arc supervised in a limited manner with companies with asset size of Rs.100 crore and above being subjected to annual inspection and other non-public deposit companies by rotation once in every 5 years.

Policy Development
Regulatory measures adopted during the year aim at Aligning the interest rates in this sector with the rates prevalent in the rest of the economy, Tightening prudential norms, Standardizing operating procedures and aligning the RBIs regulations with the requirements of the amended Companies Act. 17

Alignment of the RBI regulations with companies Act 20000

All NBFCs were advised to report to the Company Law Board the defaults, if any, in repayment of matured deposits or payment of interest to small depositors within 60 days of such default. In addition to NBFCs with asset size of Rs.50 crore and more, those with paid up capital of not less than Rs.5 crore have to constitute Audit Committees. Such committees would have the same powers, functions and duties as laid down in Companies Act, 1956.

Liquid Asset Securities of NBFCs

All NBFCs should necessarily hold their investments in government securities either in Constituents Subsidiary General Ledger Account (CSGL) with a scheduled commercial bank or Stock Holding Corporation in a dematerialized of India Ltd. (SHCIL) or Account with depositories [National Securities Depository Ltd. (NSDL) / Central Depository Services (India) Ltd. (CDSL)] through a depository participant registered with SEBI.

Statutory Auditors
NBFCs have to reiterate in their letter of appointment to statutory auditors their statutory responsibility to report directly to the RBI the violations, if any, of the provisions of the RBI Act or Directions issued there under, noticed by them in the course of their audit.

Difference between Bank & NBFC

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.) It is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

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