PROJECT REPORT

ON

NON BANKING FINANCIAL

COMPANIES

BY:
ANKIT JAIN
REG. NO. 221109844/03/2011

1
 INDEX
S.NO. CONTENTS PAGE NO.
1 INTRODUCTION 5-6

2 HISTORICAL BACKGROUND 7-8

3 NON BANKING FINANCIAL COMPANY- MEANING 9

4 DEFINATION OF NBFC 10

5 FACTORS CONTRIBUTING TO THE GROWTH OF 11

NBFC

6 CLASSIFICATION OF NBFC`S 12-18

7 ROLE OF NON BANKING FINANCE COMPANIES 19-20

8 FUNCTIONS OF NON BANKING COMPANIES 21

9 COMMERCIAL BANKS VERSUS NBFC 22

10 RBI GUIDELINES FOR ALM SYSTEM IN NBFC`S 23-24

11 ALM INFORMATION SYSTEM 25

12 LIQUIDITY RISK MANAGEMENT 26

13 FINANCIAL COMPANIES REGULATION BILL, 2009 27-36

AND SOME CLARIFICATIONS

14 NORMS FOR NBFC 37-43

15 SOME ADVERTISEMENT AND OTHERS 44-46

16 LIST OF NON BANKING FINANCIAL COMPANIES 47-48

17 CONCLUSION 49

18 BIBLIOGRAPHY 50

2
 PREFACE

As a part of Company secretary E-MSOP training program and in order to gain the practical knowledge
in the field of NBFC, I have made a project report on Non Banking Financial Companies. The Basic
Objective behind this project is to get the knowledge on functioning of Non Banking Financial
Companies.

In this project report I have included various types of NBFC`s, their background etc.

During this project report I had enhanced my knowledge of NBFC`s

Justification can`t be done to whatever I had learnt in last so many weeks with few pages but I have still
tried my best to cover as much as possible in this report.

(ANKIT JAIN)

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 ACKNOWLEDGEMENT

“There is no such thing as a self made man, we all are made up thousands of others”

I am indebted to my CS Institute for providing the students such a knowledgeable, inspirational,

motivational session and to enlighten us on various different topics, which are necessary to be
known before entering into the competitive corporate world, which will really work in our future.

Last but not the least I would like to extend my gratitude towards my parents for their unceasing
help and timely guidance they helped my while I worked on this project.

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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.

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.

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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 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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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 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.

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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

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 failed to submit the
prescribed returns consecutively for two years could be published in regional
newspapers.

4. Narasimhan 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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Functions of Non- Banking Financial Companies:
(1) Receiving benefits:

The primary function of nbfcs is receive deposits from the public in various ways such as
issue of debentures, savings certificates, subscription, unit certification, etc. thus, the
deposits of nbfcs are made up of money received from public by way of deposit or loan or
investment or any other form.

(2) Lending money:

Another important function of nbfcs is lending money to public. Non- banking financial
companies provide financial assistance through.
(a) Hire purchase finance:
Hire purchase finance is given by nbfcs to help small important operators,
professionals, and middle income group people to buy the equipment on the basis
on Hire purchase. After the last installment of Hire purchase paid by the buyer, the

ownership of the equipment passes to the buyer.

(b) Leasing Finance:

In leasing finance, the borrower of the capital equipment is allowed to use it, as a
hire, against the payment of a monthly rent. The borrower need not purchase the
capital equipment but he buys the right to use it.
(c) Housing Finance:

NBFC’s provide housing finance to the public, they finance for construction of
houses, development of plots, land, etc.

(d) Other types of finance provided by NBFCs include:

Consumption finance, finance for religious ceremonies, marriages, social activities,
paying off old debts, etc. NBFCs provide easy and timely finance and generally
those customers which are not able to get finance by banks approach these
companies.
(e) Investment of surplus money:
NBFCs invest their surplus money in various profitable areas.

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 Commercial Bank versus (v/s) Non-banking Financial
Companies
While commercial banks and non-banking financial companies are both financial
intermediaries (middleman) receiving deposits from public and lending them. Commercial
bank is called as “Big brother” while the “NBFC” is called as the “Small brother. But there

are some important differences between both of them, they are as follows:

No. Commercial Banks. Non Bank Financial companies.

1 Issue of cheques:
In case of NBFC’s there is no
In case of commercial banks, a
facility to issue cheques against bank
cheque can be issued against bank
deposits.
deposits.

2 Rate of interest:
NBFC’s offer higher rate of interest on
Commercial bank offer lesser rate of
deposits and charge higher rate of interest
interest on deposits and charge less rate
on loans as compared to Commercial
of interest on loans as compared to
banks.
NBFC’s.

3 Facilities provided by them:Commercial

NBFC’s are not given such facilities.
banks can enjoy the benefit of certain
facilities like deposit insurance cover
facilities, refinancing facilities, etc.

4 Law which governs them: NBFC’s are regulated by different

Commercial banks are regulated by regulation such as SEBI, Companies Act,
Banking Regulation Act 1949 and RBI National Housing Bank, Unit
Fund Act and RBI.

5 Types of assets: NBFC’s specialize in one types of asset.

commercial banks hold a variety of assets For e.g.: Hire purchase companies specialize
in the form of loans, cash credit, bill of in consumer loans while Housing Finance
exchange, overdraft etc. Companies specialize in housing
Finance only.
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RBI Guidelines for Asset-Liability Management (ALM)
system in NBFCs.
This note lays down broad guidelines in respect of interest rate and liquidity risks
management systems in NBFCs which form part of the Asset Liability Management (ALM)
function. This is applicable to all NBFCs and Residuary non-banking companies meeting

the criteria of asset base of Rs.100 crores, whether accepting deposits or not, or holding
public deposits of Rs.20 crores or more. Sl.No. Description / Compliance requirement
Comments.

As we are aware, the guidelines for introduction of ALM system by banks and all India
financial intuitions have already been issued by Reserve Bank of India and the system has
become operational. Since the operations of financial companies also give rise to Asset
Liability mismatches and interest rate risk exposures, it has been decided to introduce an
ALM system for the NON- Banking Financial Companies (NBFCs) as well, as part of their
overall system for effective risk management in their various portfolios. A copy of the
guidelines for Asset Liability Management (ALM) system in NBFCs is enclosed.

Is there an Asset Liability Committee (ALCO) consisting of the company’s senior

management to decide the business strategy of the NBFC.

1. In the normal course, NBFC'S are exposed to credit and market risks in view of the
asset-liability transportation. With liberalization in Indian financial markets over the
last few years and growing integration of domestic with external markets and entry
of MNC's for meeting the credit needs of not only the corporate but also the retail

segments, the risks associated with NBFC's operations have become complex and
large, requiring strategic management. NBFC’s are now operating in a fairly
deregulated environment and are required to determine on their own, interest rates
on deposits, subject to the ceiling of maximum rate of interest on deposits they can
offer on deposits prescribed by the Bank; and advances on a dynamic basis. The
interest rates on investments of NBFC's in Government and other securities are also
now market related. Intense pressure on the management of NBFC's to maintain a
good balance among spreads, profitability and long-term viability. Imprudent
liquidity management can put NBFC's earnings and reputation at great risk.

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Current Status:

Structural Linkages between Banks and NBFCs:

Banks and NBFCs operating in the country are owned and established by entities in the
private sector (both domestic and foreign), and the public sector.

Some of the NBFCs are subsidiaries/ associates/ joint ventures of banks – including foreign
banks, which may or may not have a physical operational presence in the country. There has
been increasing interest in the recent past in setting up NBFCs in general and by banks, in
particular.

Investment by a bank in a financial services company should not exceed 10 per cent of the
bank’s paid-up share capital and reserves and the investments in all such companies,
financial institutions, stock and other exchanges put together should not exceed 20 per cent
of the bank’s paid-up share capital and reserves.

Banks in India are required to obtain the prior approval of the concerned regulatory
department of the Reserve Bank before being granted Certificate of Registration for
establishing an NBFC and for making a strategic investment in an NBFC in India.
However, foreign entities, including the head offices of foreign banks having branches in
India may, under the automatic route for FDI, commence the business of NBFI after
obtaining a Certificate of Registration from the Reserve Bank.

NBFCs can undertake activities that are not permitted to be undertaken by banks or which
the banks are permitted to undertake in a restricted manner, for example, financing of
acquisitions and mergers, capital market activities, etc. The differences in the level of
regulation of the banks and NBFCs, which are undertaking some similar activities, gives
rise to considerable scope for regulatory arbitrage. Hence, routing of transactions through
NBFCs would tantamount to undermining banking regulation.

This is partially addressed in the case of NBFCs that are a part of banking group on account
of prudential norms applicable for banking groups.

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The important regulations relating to acceptance of deposits
by NBFCs are as follows:
The NBFCs are allowed to accept/renew public deposits for a minimum period of
12 months and maximum period of 60 months. They cannot accept deposits repayable on
demand.

NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time
to time. The present ceiling is 11 per cent per annum. The interest may be paid or
compounded at rests not shorter than monthly rests.

NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

NBFCs (except certain AFCs) should have minimum investment grade credit rating.

The deposits with NBFCs are not insured.

The repayment of deposits by NBFCs is not guaranteed by RBI.

There are certain mandatory disclosures about the company in the Application Form issued
by the company soliciting deposits.

Non-banking financial companies (NBFCs) have seen considerable business model shift
over last decade because of regulatory environment and market dynamics.

In the early 2000s, the NBFC sector in our country was facing following problems:

(a) High cost of funds.

(b) Slow industrial growth.

(c) Stiff competition with NBFCs as well as with banking sector.

(d) Small balance sheet size resulting in high cost of fund and low asset profile.

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1) On AM ET advertisement:
Reserve Bank of India's (RBI) latest guideline allowing non-banking finance companies
(NBFC) to issue semi-closed system pre-paid payment instruments will boost the growth of
m-commerce in India. Industry sources estimate that, in the next 3 years, India could have
25 mn m-commerce users up from the current 5 mn. The industry currently stands at a

market size of $10bn.

"The new guideline will increase the reach of the services to the people at the bottom of
pyramid. Now, people not having any bank account could pay their utility bill by electronic
transfer. We expect a five fold increase in number of people using m-commerce services,"
said Anil Gajwani, Senior Vice President - Technology, Comviva Technologies.

After the new guideline, entry of a few NBFC MNCs into the segment could not be denied.
However, the most viable business plan would be for telecom operators, as the guidelines
will allow them to operate as a pre-paid payment instrument as well.

Considering the reach of the telcos, in urban, rural and semi-urban areas, their entry will
increase the penetration of the services among the masses.

Further, these telecom operators already have a large network of agents, who are selling
pre-paid recharge coupon to the end customer. As per industry estimate every service
provider has around 50,000 such agents. Telcos could use these existing agents for m-
commerce as well.

"This will certainly bring more people into the eco-system. Even people not having any

bank account would be able to do some basic financial transaction," said Probir Roy, Co-
founder and MD of Pay mate. Pay mate has currently half a million users in the country.
The company expects to grow manifold, in terms of the users, by the end of current FY.

However, the new guidelines still have some bottlenecks, which the industry people wanted
to be removed. RBI restricts the maximum value of such payment instruments that can be
issued by the institutions/companies to Rs 5,000. Further, these pre-paid payment
instruments up to Rs 5,000 can be issued by accepting any 'officially valid documents'
defined under Rule 2(d) of Prevention of Money Laundering Act, as proof of identity.

Such instruments shall not permit cash withdrawal. The utility bills/essential services shall
44
include only electricity bills, water bills, telephone/mobile phone bills, and insurance
premium, cooking gas payments, ISP for Internet/broadband connections, cable/DTH
subscriptions and citizen services by government or government bodies.

2) Invest in only top 15 NBFCs to play safe.

NIVEDITA MOOKERJI

Investors once again faced disappointment with Kuber Finance defaulting on payments.
Although there have been several defaults in the past couple of years, the Kuber fiasco
brought back memories of the CRB scam in 1997. After the CRB letdown, one thought
investors were going to stay away from non-banking finance companies (NBFCs) for a long
time to come. But the temptation to earn high returns was hard to resist, and investors burnt
their fingers again.

But why don't investors learn from others' experiences? What is it that draws them to
NBFCs? Sheer Singh, banking and consumer analyst, Consult Opportune (India's first
consumer banking advisory service), explains why investors are still opting for NBFCs.

Says Singh, ``the lure of earning returns, which are significantly higher than what banks
offer, is one of the reasons.'' Seen against the backdrop of dismal stock market performance
over the past few years, it becomes quite clear why people still invest in NBFCs, he says.
Lack of sufficient investment alternatives is also why investors are drawn to NBFCs, says
Singh. Giving a consumer point of view, Singh says that through NBFC investments, people
seek returns to hedge against inflation. Plus, it is seen as a way to earn income to finance the
growing consumerist urge. And more than anything else, high returns promised by some
NBFCs seem to fulfill investors' desire to make a fast buck.

In such a scenario, sound guidelines may help investors in opting for the reliable NBFCs.
Sheer Singh offers guidelines which have been formulated by Consult Opportune. The
things to look for while investing in NBFCs, according to Consult Opportune, are:

a) Deposits of NBFCs must have an adequate rating by one of the credit rating
agencies in India.

b) Preferably invest in deposits of only the top 10-15 NBFCs in India.

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 List of Non-Banking Financial Companies:

A. R. T. LEASING PRIVATE LIMITED. ADOR FINANCE LTD.

144, M.C.ROAD, CHENGANNUR. ALAPUZHA ADOR HOUSE, 6 K DUBASH MARG

DISTRICT MUMBAI - 400 023

KERALA

AL BARR FINANCE HOUSE LTD AD-MANUM FINANCE LTD

(FORMERLY KNOWN AS 5, YESHWANT COLONY,

ALBARAKA FINANCE HOUSE INDORE 452 003 (MP)

LIMITED),
INDIA HOUSE NO. 2,

KEMPS CORNER,
MUMBAI – 400 036.

ADAYAR FINANCE & LEASING LTD., ALPIC FINANCE LTD.,

208, BHARATHI SALAI, NEW EXCELSIOR BLDG.,

ROYAPETTAH, 6TH FLOOR,

CHENNAI
600–014 WALLACE STREET, FORT, MUMBAI
- 400 001

ALTA LEASING & FINANCE LTD. ANMOL FINANCIAL SERVICES LTD

ALTA BHAVAN, A -66, IST FLOOR,

532, SENAPATI BAPAT MARG GURU NANAK PURA , VIKAS MARG,

DADAR, DELHI – 110092

MUMBAI - 400 028

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ANNA FINANCE LIMITED 16 ABIRAMI FINANCIAL SERVICES
B/9, DEV NAGAR, (INDIA) LTD
D.B. GUPTA ROAD, KAROL 157, HABIBULLAH ROAD, T. NAGAR,
BAGH, CHENNAI - 600 017

AMARPREET FINANCE PVT. LTD., ANNA FINANCE LIMITED

182, NEW JAWAHAR NAGAR, 16 B/9, DEV NAGAR,
JALANDHR. D.B. GUPTA ROAD,

KAROL BAGH,

NEW DELHI -110005

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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 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. The Reserve Bank has
emphasis on formation of SRO Particularly for the benefit of smaller NBFCs.

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Bibliography

BOOKS:-

1) Statutory guidance’s for non- banking financial companies. – Taxman.

WEBSITES:-

▪ www.NBFC.com

▪ www.RBI.com

▪ www. How Stuff Works.com

▪ www. Wikipedia

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