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NBFC & MFI in India

From Wikipedia, the free encyclopedia

A Non Banking Financial Company (NBFC) is [1] a company registered under the Companies Act,
1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds
hire-purchase, insurance business, or chit business: but does not include any institution whose
principal business is that includes agriculture or industrial activity; or the sale, purchase or
construction of immovable property.[2]

1 Difference between NBFCS & Banks


3 MFIs go for NBFC licences

4 Exemptions granted to NBFCs engaged in microfinance activities

5 MFIs & SHG-Bank linkage programme

6 RBI relaxes norms for NBFCs

7 MFIs of India

8 Criticisms

9 References

Difference between NBFCS & Banks[edit]

NBFCs perform functions similar to that of banks; however there are a few differences in that an
NBFC cannot accept demand deposits; an NBFC is not a part of the payment and settlement system
and as such, an NBFC cannot issue cheques drawn on itself; and deposit insurance facility of the
Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike

Microfinance institutions, also known as MFIs,[3] offer financial services to underprivileged and
impoverished communities.

MFIs go for NBFC licences[edit]

An Increasing number of microfinance institutions (MFIs) are seeking non-banking finance company
(NBFC) status from RBI to get wide access to funding, including bank finance. [4]

Exemptions granted to NBFCs engaged in microfinance

The Task Force on Supportive Policy and Regulatory Framework for Microfinance set up
by NABARD in 1999 provided various recommendations. Accordingly, it was decided to exempt
NBFCs which are engaged in micro financing activities, licensed under Section 25 of the Companies
Act, 1956, and which do not accept public deposits, from the purview of Sections 45-IA (registration),
45-IB (maintenance of liquid assets) and 45-IC (transfer of profits to the Reserve Fund) of the RBI
Act, 1934.[5] 010

MFIs & SHG-Bank linkage programme[edit]

In a joint fact-finding study on microfinance conducted by the Reserve Bank of India and a few major
banks, the following observations were made:

Some of the microfinance institutions (MFIs) financed by banks or acting as their

intermediaries or partners appear to be focusing on relatively better banked areas, including
areas covered by the SHG-Bank linkage programme. Competing MFIs were operating in the
same area, and trying to reach out to the same set of poor, resulting in multiple lending and
overburdening of rural households.

Many MFIs supported by banks were not engaging themselves in capacity building and
empowerment of the groups to the desired extent. The MFIs were disbursing loans to the newly
formed groups within 1015 days of their formation, in contrast to the practice

obtaining in the SHG Bank linkage programme, which takes about six to seven months for group
formation and nurturing. As a result, cohesiveness and a sense of purpose were not being built up in
the groups formed by these MFIs.

Banks, as principal financiers of MFIs, do not appear to be engaging them with regard to
their systems, practices and lending policies with a view to ensuring better transparency and
adherence to best practices. In many cases, no review of MFI operations were undertaken after
sanctioning the credit facility.[6]

RBI relaxes norms for NBFCs[edit]

NBFCs registered with the Reserve Bank of India may take part in the insurance agency business
on a fee basis and without risk participation or the need to seek the bank's approval.
In a notification issued, the RBI said such NBFCs should obtain permission from the Insurance
Regulatory and Development Authority and comply with IRDA regulations for acting as a "composite
corporate agent" with insurance companies.[7][8]

MFIs of India[edit]
Forbes magazine named seven microfinance institutes in India in the list of the world's top 50
microfinance institutions.
Bandhan, as well as two other Indian MFIsMicrocredit Foundation of India (ranked 13th) and
Saadhana Microfin Society (15th) have been placed above Bangladesh-based Grameen
Bank (which along with its founder Mohammed Yunus, was awarded the Nobel Prize). Besides
Bandhan, the Microcredit Foundation of India and Saadhana Microfin Society, other Indian entries

include Grameen Koota (19th), Sharada's Women's Association for Weaker Section (23rd), SKS
Microfinance Private Ltd (44th) and Asmitha Microfin Ltd (29th).[9][10]
Bandhan Registers entity "BANDHAN FINANCIAL HOLDINGS LIMITED" to carry out banking &
financial services related operations [11]

Recently, microfinance has come under fire in the state of Andhra Pradesh due to allegations of
MFIs using coercive recollection practices and charging usurious interest rates. [12] These charges
resulted in the state government's passing of the Andhra Pradesh Microfinance Ordinance on
October 15, 2010. The Ordinance requires MFIs to register with the state government and gives the
state government the power, suo moto, to shut down MFI activity.[13] A number of NBFCs have been
affected by the ordinance, including sector heavyweight SKS Microfinance. [14]

What is a Chit Fund?

Chit Fund is a saving scheme practiced in India. It originated 1000s of years ago. It was
started as informal association of traders and households with in communities. It
enables poor people to convert small savings into lump sums.

According to the definition given by Chit Funds Act 1982, Chit means a transaction
whether called chit, chit fund, chitty, kuri or by any other name by or under which a
person enters into an agreement with a specified number of persons that every one of
them shall subscribe a certain sum of money (or a certain quantity of grain instead) by
way of periodical installments over a definite period and that each such subscriber shall,
in his turn, as determined by lot or by auction or by tender or in such other manner as
may be specified in the chit agreement, be entitled to the prize amount.
Explanation:- A transaction is not a chit within the meaning of this clause, if in such
transaction,(i) some alone, but not all, of the subscribers get the prize amount without any liability
to pay future subscriptions; or
(ii) all the subscribers get the chit amount by turns with a liability to pay future

Acts Governing the Chit Funds in India are:

Union Government - Chit Funds Act 1982 (Except the State of Jammu and Kashmir)
Kerala: Kerala Chitties Act 1975
Tamil Nadu: Tamil Nadu Chit Funds Act, 1961
Karnataka: The Chit Funds (Karnataka) Rules, 1983

Andhra Pradesh: The Andhra Pradesh Chit Funds Act, 1971

New Delhi: The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007
Maharashtra: Maharashtra Chit Fund Act 1975

Why people invest in Chit Funds?

Easy to join as there is no formalities needed
High Promised Return
Option of small deposit
High Liquidity
Door to door collection by agents

What are different kinds of Chit Funds in India? Is Chit fund

safe investment option?
There are 3 kinds of Chit funds in India

Chit funds run by State governments like Kerala State Financial Enterprises and
Mysore Sales International Ltd and PSU run Chit funds
There are registered Chit funds like Shriram chits etc which are run by big
business houses and are registered
Unregistered Chit funds, which are run on the basis of friendship and close
proximity of the members.
Chitfunds run by PSUs are the safest. The second safest is the one run by registered
ones. The least secured is the unregistered ones.
What should be done when some one you know approaches with high return Chit fund?
What are the checklist one should have while investing in Chitfunds?

Check if the Chitfund is registered or not. If registered, get the registration

Check if the certificate of Registration is genuine or not?
Find out if the new chit started by the chitfund is approved or not?
If you join the chit, you should ask yourself if one is able to continue to the full
term ie period of the chit is very important
Find out who are the promoters of the Chitfund?
Find out if there is any compliant against the company/chitfund. If you have
access to internet, just do a Google search on the company

Facts and Figures of Chit Fund Business in India

India has around 15,000 chit fund Groups/Companies

In Kerala the State is running its own Chit Fund company named Kerala State
Financial Enterprise which has operations through out the state.
Out of the 15,000 chit fund companies/groups, only less than one percent run it
as professional business unit. Rest all work in unorganized setup.
Chit Fund money is used by the investor in India is mainly used for marriage,
property purchase, Vechicles, Assets purchase, Consumer Non durable goods etc.
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