INDEX

Page
Serial No Particulars
No

Chapter 1 INTRODUCTION OF FINANCIAL INSTITUTION

Chapter 2 TYPE OF FINANCIAL INSTITUTION

Chapter 3 BANKING INSTITUTION

Chapter 4 NON-BANKING INSTITUTION

CONTRIBUTION OF NON-BANKING AND BANKING

Chapter 5 SECTOR IN GROWTH OF GDP

LITERATURE REVIEW OF NON-BANKING FINANCIAL

Chapter 6
INSTITUTION

Chapter 7 CONCLUSION

Chapter 8 BIBLIOGRAPHY
 Chapter 1: Introduction of financial institution

1.1 Introduction:
A financial institution is an intermediary between consumers and the capital or the debt markets
providing banking and investment services. financial institution is responsible for the supply of
money to the market through the transfer of funds from investors to the companies in the form of
loans, deposits, and investments. Large financial institutions such as JP Morgan Chase, HSBC,
Goldman Sachs or Morgan Stanley can even control the flow of money in an economy.
Financial institutions are companies in the financial sector that provide a broad range of business and
services including banking, insurance, and investment management. Governments of the country
consider it important to oversee and to regulate financial institutions as they play an integral part in
the economy of the country.

Example:

Bank ABC is a shareholder-owned institution that offers banking and investment services to a wide
range of customers. The bank acts as an intermediary between retail and institutional investors, who
supply the funds through deposits and retail and institutional investors, who are looking for financing.
The bank pays a 2% interest on the deposits it accepts from households and businesses from the
interest earned from lending services. In addition, the bank offers fund management and health and
life insurance services through its subsidiaries.

Furthermore, Bank ABC operates in the wholesale market, seeking to lend large conglomerates and
corporations as well as government agencies. In this context, the bank has a highly-equipped advisory
team, which offers corporate finance, forex, capital markets and investment management services.

The bank is regulated for the protection of consumers. Hence, its funds undergo strict scrutiny by the
Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve System. These two Federal
agencies are responsible for guaranteeing that the bank will be able to repay the borrowed funds.
1.2 Objectives of Financial Institution:

Financial institutions, such as banks, credit unions, stockbrokers, finance and insurance companies,
often have a business plan with a set list of goals and objectives. These objectives are a set of
standards or goals that the institution as a whole and each employee will work toward on a daily
basis. Objectives can be external and benefit the customers and clients, but also can have external
benefits and create a brand for the financial institution.

Quicker Customer Service:

Financial institutions may have customers coming in to get services or use self-service options to
speed up the service process. Since customers and clients are an important asset for financial
institutions, an objective is to provide the best customer service to keep clients satisfied and happy.
Banking institutions, for instance, may want to improve the customer service procedures within the
bank when people come in to pay bills or withdraw money. Credit unions could have the same
objective, as members are given reasonable credit rates and the unions need the members to stay
active and afloat.

Help People Invest:

Some financial institutions, such as banks and stockbrokers, offer people help in investing to increase
income and worth. If the client has little to no experience in financial investments, the stockbroker or
banking manager should provide the knowledge and expertise to help the client invest wisely. An
objective can include teaching and helping clients understand the world of investing and teach them
tools to keep track of their own investments.

Savings Plans:

Many financial institutions manage people‘s personal money. Since fees, investments, insurance and
other services may cost the customer money, a financial institution may have an objective to provide
services and savings plans that will save the customer money. This can include combining banking
and insurance services for one financial institution rather than having several service providers. It
also can mean changing insurance plans, for instance.
Insurance Premiums and Plans:

Insurance companies and larger banking branches may offer clients insurance plans and premiums to
protect clients. This can include credit card insurance, loan limit insurance, car insurance, travel and
home insurance, and insurance against burglary and home invasion. Since the needs of each client
differ, the financial institution may have an objective to provide insurance plans that are tailored for
each client. This is not only to keep current clients satisfied but also in hopes of attracting new
customers.

Savings Plans:

Many financial institutions manage people‘s personal money. Since fees, investments, insurance and
other services may cost the customer money, a financial institution may have an objective to provide
services and savings plans that will save the customer money. This can include combining banking
and insurance services for one financial institution rather than having several service providers. It
also can mean changing insurance plans, for instance.

Insurance Premiums and Plans:

Insurance companies and larger banking branches may offer clients insurance plans and premiums to
protect clients. This can include credit card insurance, loan limit insurance, car insurance, travel and
home insurance, and insurance against burglary and home invasion. Since the needs of each client
differ, the financial institution may have an objective to provide insurance plans that are tailored for
each client. This is not only to keep current clients satisfied but also in hopes of attracting new
customers.

Universal banking is a term related to banks providing both investment services and savings and loan
options to their customers. Many of the banks in Europe function on the basis of the the universal
banking model. The main objectives of such a model are an increased participation in investment
strategies, securing clients through saving and loan schemes, development of private sectors and
cutting costs for financial services.
Participation in Investments:

Universal banking focuses on performance of private firms by directly investing into such entities. By
participating on the investment market, such banks can directly exercise decision-making power in
the governance of corporations. This objective of universal banking aims to secure the financial
interests of companies that have received direct investment and to protect the future development of
such institutions. For example, Swiss economist Georg Rich indicates that by aiming to directly
participate on the investment market, universal banks in Switzerland want to ensure that the
companies that have received investment funds would deal with them properly and will not undertake
unreasonable financial decisions.

Savings and Loans:

By delivering multiple financial services, universal banking aims to deliver immediate benefits for
their clients. This makes such entities quite attractive for people who want to take care of their all
financial needs at one place -- they can both apply for an investment scheme and require credit for
business development. By providing their clients with saving and loan options, universal banks aim to
diversify their range of services and have larger influence on the financial markets. German
economist Ralf Elsas from Frankfurt University emphasizes on the fact that by aiming to promote
saving and loan programs, universal banks can benefit from different types of clients and obtain more
working capital to invest in the future.

Development of Private Sector:

Among the main objectives of universal banking is the development of the private sector. As such,
banking institutions are highly unlikely to cooperate with governmental funds because of their urgent
need to invest money, universal banks target the private sector as a main source of clients. But to
have such clients, universal banks need to develop the sector and ensure its stable run and economic
growth. This has been revealed by economist Gary Gorton who states that universal banks in
Germany are the main contributors for the rapidly expanding private sector in the country.
Cutting the Costs:

Since many of the European continental banks are adopting the universal banking approach, it is
essential for them to be more competitive on the global market where American and Asian banks
offer better prices for providing financial services. The idea of the universal banks is to reduce the
costs of their financial services by enlargement -- being able to expand their areas of expertise would
empower European banks to engage in more serious price reduction strategies. The European Central
Bank has already partially achieved this objective by providing low interest loans to European Union
economies.

1.3 Advantages & Limitations:

The economic growth of any nation depends on the expansion of the business division. The healthy
developed economic organism helps the business to accomplish development by making funds
obtainable to them. Financial institutions give industrial, technical support and managerial services to
organizations. They provide both owned capital and loan capital for long and medium-term
requirements and supplement the usual financial agencies like commercial banks.

Advantages of Financial Institutions:

The Advantages of raising funds through financial institutions are as follows:

Here, finance is accessible even during periods of depression, when no other foundation of finance is
accessible in the market. New companies which may find it hard to elevate finance from the public
can get it from these institutions.

(i) As these institutions carry out a systematic investigation before conceding support to an
apprehension, relationship with them helps to increase the credit-worthiness of a company.

(ii) Besides providing funds, many of these institutions endow with financial, administrative and
industrial guidance and consultancy to business firms. Assistance is obtainable when recourse to
usual sources is impossible or unbeneficial.

(iii) Financial institutions provide long-term finance, which is not provided by commercial banks;
(iv) The rate of interest and repayment measures is convenient and economical. Facilities for
repayment in simple installments are made obtainable to the deserving concerns.

(v) For long-term business funds requirements, financial institutions are preferable as they provide
long-term finance, which is not provided by commercial banks. Modernization and development
plans can be financed without much strain on the financial organization of the company.

(vi) Besides providing funds, many of these institutions provide financial, managerial and technical
advice and consultancy to business firms;

(vii) Obtaining a loan from financial institutions increases the goodwill of the borrowing company in
the capital market. Consequently, such a company can raise funds easily from other sources as well;

(viii) As repayment of loan can be made in easy installments, it does not prove to be much of a
burden on the business;

(ix) Loans and guarantees in foreign currency and deferred payment facilities are obtainable for the
import of required technology and equipment.

(x) Along with finance, a company can obtain specialist guidance and direction for the successful
planning and management of projects.

(xi) The funds are made available even during periods of depression when other sources of finance
are not available.

Disadvantages of Financial Institutions:

The major Disadvantages of raising funds from financial institutions are as given below:

Restriction on dividend payment imposed on the powers of the borrowing company by the financial
institutions. The concern requiring finance from public financial institutions has to submit itself to a
thorough investigation that involves a number of formalities and documents.

(i) As these institutions come under government criteria, they follow rigid rules for granting loans.
Too many formalities make the procedure time-consuming. Many deserving concerns may fail to get
assistance for want of security and other conditions lay down by these institutions.

(ii) Financial institutions may have their nominees on the Board of Directors of the borrowing
company thereby restricting the powers of the company.

(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.
(iv) Financial institutions follow rigid criteria for grant of loans. Too many formalities make the
procedure time consuming and expensive;

(v) Certain restrictions such as restriction on dividend payment are imposed on the powers of the
borrowing company by the financial institutions;

(vi) Financial institutions may have their nominees on the Board of Directors of the borrowing
company thereby restricting the powers of the company.

(vii) Many deserving concerns may fail to get assistance for want of security and other conditions laid
down by these institutions.
 Chapter 2: Types of financial institution

2.1 Types of Financial Institutions:

There are many different types of financial institutions exist in the financial market for the fund
flows. These are divided primarily on the basis of the type of transactions performed by them i.e.,
some of them are involved in the depositary type of the transaction while others are involved in the
non-depositary type of the transactions. So, the type of financial institutions is as follows:
2.1.1 – Depository Institutions:
Types of Depository Institutions are –

A depository financial institution is one that specializes in depository lending, and the services
offered by these institutions are a bit different from that of other financial service providers. The
depository financial institutions are also known as deposit-taking financial organizations.

The primary functions of these institutions are to accept deposits and to use the money collected for
lending purposes. Services of Depository Financial Institutions: The lending activities of depository
financial institutions basically include channelizing funds for mortgage loans, commercial loans and
real estate loans.
The depository financial institutions work in association with the credit unions and many other
cooperative organizations.

With their customized service and extensive network branches, the depository financial institutions
are experiencing a growing customer base.

As per the 2019 data, over 15000 depository financial institutions are functional in the territory of the
United States. The United States depository financial institutions operate through 150,000 branch
offices placed in different states.

The depository financial institutions have set a benchmark in the field of commercial banking in the
US. The funds collected by the deposit-taking financial organizations of the US are used to meet the
credit requirements of others.

The system of unit banking is an integral part of the deposit-taking financial service, it prevents the
growth of monopoly in the commercial banking sector of the United States.

The depository financial institutions make use of the deposits kept in checking accounts. The deposits
constitute the liability of the depository financial institutions. The credits offered by them come under
the asset side. The use of hedging based on maturity ensures operational security of the depository
financial institution. The hedging mechanism is mostly applied on the commercial lending‘s for short
time period. The depository financial institutions also apply the technique of hedging for liabilities
accrued from students, households, farmers and other clients who are devoid of financial capital.
Depository institutions are the financial institutions that are allowed to accept monetary deposits from
the consumers legally. These include commercial banks, savings banks, credit unions, and the savings
and loan association. The different types of depository institutions are explained as below:

Commercial Banks:

Commercial banks accept the deposits from the public and offer security to their customers. Due to
commercial banks, it is no longer required to keep huge large currency on hand. Using commercial
bank facilities, transactions can be done through checks or credit/debit cards.

Saving Banks:
Saving banks perform the function of accepting the savings from the individuals and lending to the
other consumers.

Credit Unions:

Credit unions are the associations which are created, owned, and also operated by the participants

who are voluntarily associated for the purpose of saving their money and then lending it members of

their union only. As such, these institutions are the not-for-profit organizations enjoying tax-exempt

status.

Saving and Loan Association:

These institutions collect the funds of many of the small savers and then lend them to home buyers or

other types of borrowers. They specialize in proving the help to the people in getting residential

mortgages.

2.1.2 Non-Depository Institutions:

No depository institutions are the financial institutions that serve as the intermediary between the
savers and the borrowers but they do not accept the time deposits. Such institutions perform their
activities of lending to the public either by the way of selling securities or through the insurance
policies. No depository institutions include insurance companies, finance companies, pension funds,
and mutual funds. Federal Deposits Insurance Corporation (FDIC) in India ensures the regular
deposit accounts in order to reassure the individuals and businesses with respect to the safety of their
finances with the financial institutions.

Insurance Companies:
Insurance companies are the contractual saving institutions which collect periodic premium from an
insured party and in return agree to compensate against the risk of loss of life and properties. They
pool the small premiums of the insured to pay the larger claims to those who have losses. The
premium payments are regular while the losses are irregular, both in timing and amount.

Pension/Provident Funds:
Pension funds are financial institutions which accept saving to provide pension and other kinds of
retirement benefits to the employees of government units and other corporations. Pension funds are
basically funded by corporation and government units for their employees, which make a periodic
deposit to the pension fund and the fund provides benefits to associated employees on the retirement.
The pension funds basically invest in stocks, bonds and other type of long-term securities including
real estate.

Finance Companies:
Finance companies are the financial institutions that engage in satisfying individual credit needs and
perform merchant banking functions. In other words, finance companies are non-bank financial
institutions that tend to meet various kinds of consumer credit needs. They involve in leasing, project
financing, housing and other kind of real estate financing.

Mutual Funds:
Mutual funds are open-end investment companies. They are the associations or trusts of public
members and invest in financial instruments or assets of the business sector or corporate sector for the
mutual benefit of its members. Mutual funds are basically a large public portfolio that accepts funds
from members and then use these funds to buy common stocks, preferred stocks, bonds and other
short-term debt instruments issued by government and corporation.

2.2 Role of Financial Institutions:

The primary functions of financial institutions of this nature are as follows:

  Accepting Deposits

 Providing Commercial Loans

 Providing Real Estate Loans

 Providing Mortgage Loans

 Issuing Share Certificates

Finance companies provide loans, business inventory financing and indirect consumer loans. These
companies get their funds by issuing bonds and other obligations. These companies operate in a
number of countries. On the other hand, there are insurance companies that provide coverage for a
variety of risk factors and they also provide several investment options. Insurance companies provide
loans for a number of purposes and create investment products.

The functions of financial institutions, such as stock exchanges, commodity markets, futures,
currency, and options exchanges are very important for the economy. These institutions are involved
in creating and providing ownership for financial claims. These institutions are also responsible for
maintaining liquidity in the market and managing price change risks. As part of their various services,
these institutions provide investment opportunities and help businesses to generate funds for various
purposes.

The functions of financial institutions like investment banks are also vital and related to the
investment sector. These companies are involved in a number of financial activities, such as
underwriting securities, selling securities to investors, providing brokerage services, and fundraising
advice.

2.2.1 Deposit taking Institute:

A deposit is the act of placing cash (or cash equivalents) with some entity, most commonly with a
financial institution such as a bank. The deposit is a credit for the party (individual or organization)
who placed it, and it may be taken back (withdrawn) in accordance with the terms agreed at time of
deposit, transferred to some other party, or used for a purchase at a later date.

Deposit-taking institutions are of great importance to the Canadian economy, not only because of the
major role they play in managing the deposits of millions of Canadians but because they also offer
credit to companies big and small. No successful bank would keep all of its deposits in the safe.
Rather, the idea is to put the deposits to work by turning them into loans for consumers and
businesses – and using them to invest in stocks, bonds and private equity ventures. A deposit-taking
institution is one of three main legs in the financial system, encompassing those which accept
deposits and make loans. These include banks, trust companies, credit unions and mortgage loan
companies. The other two major segments of the financial system are of the non-deposit taking
variety – insurance companies and investment institutions.
The banks do have stringent capital requirements that can support the institution in the event of a
crisis. Tier 1 requirements are the most well-known and they contain cash reserves, common and
preferred stock. Those requirements rose steadily after the Basel III set of international banking
regulations came into effect. The minimum level for Tier 1 requirements prior to Basel III in 2010 –
the Tier 1 Capital Ratio – was only four per cent. The level rose to six per cent in 2015 and to 8.5 per
cent in 2019. Canadian banks all comfortably exceed those minimums.

2.2.2 Finance and insurance Institution:

A financial institution is an organization that provides services that people need to manage their
money. Financial institutions include different types of banks and credit unions. Insurance
companies are a type of ―non-bank‖ financial institution that sell policies that provide protection from
various kinds of risks. Banks use the monies that their customers deposit to make a larger base of
loans and thereby create money. Since their depositors demand only a portion of their deposits every
day, banks keep only a portion of these deposits in reserve and lend out the rest of their deposits to
others. Another difference between banks and insurance companies is in the nature of their systemic
ties. Banks operate as part of a wider banking system and have access to a centralized payment and
clearing organization that ties them together. This means that it is possible for systemic contagion to
spread from one bank to another because of this sort of interconnection. U.S. banks also have access
to a central bank system, through the Federal Reserve, and its facilities and support. Banks and
insurance companies are subject to different regulatory authorities. National banks and their
subsidiaries are regulated by the Office of the Comptroller of the Currency or the OCC. In the case of
state-chartered banks, they are regulated by the Federal Reserve Board for banks that are members of
the Federal Reserve System. As for other state-chartered banks, they fall under the purview of the
Federal Deposit Insurance Corporation, which insures them. Various state banking regulators also
supervise the state banks.
. Insurance companies invest and manage the monies they receive from their customers for their own
benefit. Their enterprise does not create money in the financial system. For an insurance company,
however, its liabilities are based on certain insured events happening. Their customers can get a
payout if the event they are insured against, such as their house burning down, does happen. They
don‘t have a claim on the insurance company otherwise. Insurance companies are also subject to
interest rate risk. Since they invest their premium monies in various investments, such as bonds and
real estate, they could see a decline in the value of their investments when interest rates go up. And
during times of low-interest rates, they face the risk of not getting a sufficient return from their
investments to pay their policyholders when claims come due. Insurance companies, however, are not
subject to a federal regulatory authority. Instead, they fall under the purview of various state guaranty
associations in the 50 states. In case an insurance company fails, the state guaranty company collects
money from other insurance companies in the state to pay the failed company‘s policyholders.

2.2.3 Investment Institution:

Institutional investors are organizations that pool together funds on behalf of others and invest those
funds in a variety of different financial instruments and asset classes. They include investment funds
like mutual funds and ETFs, insurance funds, and pension plans as well as investment banks and
hedge funds.

2.2.4 Pension providing Institutions:

A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds
set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the
earnings on the investments generate income to the worker upon retirement.

In addition to an employer's required contributions, some pension plans have a voluntary investment
component. A pension plan may allow a worker to contribute part of his current income from wages
into an investment plan to help fund retirement. The employer may also match a portion of the
worker‘s annual contributions, up to a specific percentage or dollar amount. In the simplest sense,
retirement planning is the planning one does to be prepared for life after paid work ends, not just
financially but in all aspects of life. The non-financial aspects include lifestyle choices such as how to
spend time in retirement, where to live, when to completely quit working, etc. A holistic approach to
retirement planning considers all these areas. The emphasis one puts on retirement planning changes
throughout different life stages. Early in a person's working life, retirement planning is about setting
aside enough money for retirement. During the middle of your career, it might also include setting
specific income or asset targets and taking the steps to achieve them. Once you reach retirement age,
you go from accumulating assets to what planners call the distribution phase. You‘re no longer
paying in; instead, your decades of saving are paying out. Remember that retirement planning starts
long before you retire -- the sooner, the better. Your ―magic number,‖ the amount you need to retire
comfortably, is highly personalized, but there are numerous rules of thumb that can give you an idea
of how much to save.

2.2.5 Risk management Institutions:

The banks and other Financial services companies are seriously entangled with crumbling asset
quality, erosion in bank profitability and depleting status of bank capital. Stock prices of many banks
are substantially lower to Book values indicating shareholders are shouldering substantial amount of
risk of banks‘ portfolio and operations. The imperative to address this crisis is strengthening of risk
management systems of banks. For each institution, the actual solution to this problem is entailing
different philosophies towards risk policies, methodologies, processes and technologies. Visualizing
the risk, combating the adverse effects on profitability through proactive planning and ensuring the
implementation of the risk management process has currently assumes pivotal significance.

The new risk based regulatory framework of Basel is emphasising on strengthening of regulatory
mechanisms such as tighter definition of regulatory capital, higher risk-weighted requirements, a new
minimum leverage ratio and a capital conservation buffer. The market risk framework has been
largely overhauled, with improvements that include increased granularity and the introduction of the
―expected shortfall‖ concept in the Standardised Approach, comprehensive risk capture and a more
granular model approval process in the Internal Models Approach. Basel framework includes the
Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), standards aimed at
ensuring banks‘ resilience to liquidity stress. The new architecture of ‗Risk Management‘ has two
important tenets: risk quantification and establishing control systems. The Basel Accords (Basel-II
and III) demands utmost importance for risk management systems in Banks and Financial Institutions
and directs these institutions to adopt risk capital allocation based on quantification of risk. In this
context, this programme is intended to cover all generic risks, i.e. Liquidity Risk, Credit Risk, Market
Risk, Operational Risk and other specific risks of ICAAP. The complex function of risk management
demands application of sophisticated models for measuring and managing risks, and this programme
aims at improving the competence of managers in selection and application of modern techniques of
risk management.
 Chapter 3: Banking financial institution

3.1 Banking Institution:

A banking institution (also referred to as a universal or commercial bank) can range from a large
financial institution with a highly visible brand name and an international presence to a small
organization with a local presence.

A banking institution‘s financing activities generally involve various types of lending, such as
corporate finance, housing, project finance, retail, short-term finance, small-medium enterprises,
trade, and others. Alternatively, the focus of a banking institution may be only on specific
transactions with clients that meet certain requirements and within certain industry sectors. Banking
institutions may also provide financial products with a focus on environmental business
opportunities.

3.1.1 Corporate Finance:

Corporate transactions typically consist of loans to, or investments in, commercial operations of
different sizes and operating in a variety of industry sectors. Loans (debt) can be used by the
commercial operation to finance a specific aspect of the operation, such as the purchase of
equipment, or for renovation/expansion of the operation. Equity investments in a commercial
operation provide operating capital for an operation in exchange for shares (equity) in the
company/project.

The environmental and social risks associated with a corporate transaction will vary greatly and can
be significant as a function of the operation‘s industry sector, size, location, and company
commitment and capacity to managing environmental and social risks. Environmental and social
risks will be more significant for medium and high-risk industry sectors and large-scale operations
such as mining, oil and gas, and heavy manufacturing, which may result in loss of life, health
impacts, and water contamination, among others, if not managed properly. For low-risk industry
sectors such as retail operations and other services, the environmental and social risks will usually be
low and mainly related to labor standards and life and fire safety, which can readily be addressed.
Regardless of the industry sector, there may also be environmental and social risks, especially related
to labor and working conditions, in the supply chain of raw materials and goods.

Environmental and social issues may threaten the financial and operational viability of a commercial
operation. For a commercial operation, the source of repayment of a loan or payment of dividends on
an investment is from the operation itself, backed by its entire balance sheet, rather than a specific
asset. A corporate transaction exposes a financial institution to the entire commercial operation of the
investee company, which presents a liability, reputational, and credit risk. When a loan is backed by a
specific asset as collateral, the liability risk for the financial institution may be increased if there are
associated environmental and social issues.

3.1.2 Housing:

This type of financing generally involves providing mortgage loans directly to consumers for the
specific purpose of financing the purchase of a home. In this type of transaction, the financial
institution becomes the legal owner of the property during the repayment duration of the mortgage.

Environmental and social risks associated with housing finance may include inappropriate
development location, poor building design (including ability to withstand natural disasters) and
inadequate construction as well as unresolved land tenure issues. Some of these risks can result in
damage or loss of the property or in some cases injury and safety concerns for residents.

Environmental and social risks that may result in property damage and legal issues affect the
financial standing of borrowers and their ability to repay the mortgage loan. For financial institutions
focusing on housing finance, this represents a credit risk. There are also legal and reputational risks
for the financial institution arising from ownership of properties in cases of land contamination or
other environmental and social liabilities.
3.1.3 Project Finance:

Project finance transactions typically involve the direct financing of infrastructure and industrial
projects.

The financing is usually secured by the project assets such that the financial institution providing the
funds will assume control of the project if the sponsor has difficulties complying with the terms of the
transaction.

Project finance is generally used for large, complex and sizable operations, such as roads, oil and gas
explorations, dams, and power plants. Due to their complexity, size, and location, these projects often
have challenging environmental and social issues, which may include involuntary resettlement, loss
of biodiversity, impacts on indigenous and/or local communities, and worker safety, pollution,
contamination, and others. Because these projects generally face high scrutiny from regulators, civil
society, and financiers, the project‘s sponsoring companies allocate more resources to managing
environmental and social risks.

If not managed properly, the environmental and social risks can result in disrupting or halting project
operations and lead to legal complications and reputational impacts that threaten the overall success
of the project. Because anticipated project cash flows typically generate the necessary resources to
repay the loan, any disruption to the project itself, regardless of the financial standing of the
sponsoring companies involved, poses a direct financial risk to the financial institution.

3.1.4 Retail:

Retail transactions include financial services such as deposits (checking and savings accounts) and
credit cards as well as personal loans such as mortgage and vehicle finance.

Environmental and social issues associated with retail transactions that target individuals are
generally non-existent, although there may be concerns associated with mortgage finance and
potentially certain investment options that may involve controversial or high-risk projects/companies.
There is usually no credit, liability or reputational risks due to environmental and social issues for
financial institutions involved in retail banking. However, in some cases, there may be concerns with
corporate accounts that are linked to companies or individuals whose activities are viewed as
harmful, such as arms manufacturing, money laundering, and terrorism, which may represent a legal
and reputational risk to the financial institution.

3.1.5 Short-Term Finance:

Short-term finance involves providing loans with a term of a few months or less, but no longer than a
year. Short-term finance, such as trade finance, often involves collateral such as accounts payable or
inventories. A company will pledge or sell its receivables to the creditor in exchange for immediate
cash (also called factoring). While certain corporate loans and types of project finance usually target a
specific purpose such as construction or purchase of equipment, short-term loans such as working
capital loans, are usually for general purposes and support the general business operations of a
company.

The environmental and social issues related to a short-term finance transaction range from minimal to
complex and vary according to size, industry, location, and company commitment to managing
environmental and social risks. Because a working capital loan provides general support to a
company as opposed to being targeted for equipment purchase or expansion, the financial institution
is exposed to the borrower‘s overall risk including potential environmental and social issues.

Reputational risk is the main concern for short-term finance, especially if borrowers have pending
environmental and social issues that are highly visible and scrutinized by the public. Due to the short-
term nature of the transaction and the use of collateral, the credit risk to a financial institution is
limited. However, given that assets are used as collateral there may be liability risks, for example in
the case of land contamination. Due to the short tenure of short-term finance, a financial institution
will have limited leverage in managing environmental and social risks.

3.1.6 Small and Medium Enterprises:

Although less complex than for large corporate and project investments, the environmental and social
issues associated with small and medium enterprises can be significant and are primarily related to
worker health and safety and pollution. Investments in small and medium enterprises focus on a
particular set of clients, usually defined by annual sales but also by loan amount. Small and medium
enterprises have specific funding needs in terms of their business growth. The monetary cut-off for
classifying a company as a small and medium enterprise generally varies greatly by country, by
market, and by financial institution.

Although less complex than for large corporate and project investments, the environmental and social
issues associated with small and medium enterprises can be quite significant and are primarily related
to worker health and safety and pollution. These environmental and social issues may not be closely
monitored and the risks will vary depending on company size and its capacity to manage
environmental and social risks, as well as by industry sector, and location. Financial institutions that
lend or invest in small and medium enterprises generally try to develop long-term relationships,
which may further expose lenders/investors to environmental and social issues associated with the
enterprise, posing financial and liability risks. Due to the visibility of small and medium enterprises
in a community, reputational risk is also a factor.

3.1.7 Trade:

Trade financing involves providing financial products to enable importers and exporters to trade
across national borders and is generally done through banks, credit agencies, insurers, forfeiters or
other institutions. The environmental and social risks of trade finance are associated with the
production of those goods being traded and vary by industry sector and location. Companies selling
to foreign markets are required to comply with local and international social and environmental
regulations and in many cases also face public scrutiny. Importing and exporting companies are
therefore exposed to some level of reputational risk.

Given the short-term nature of trade finance, a financial institution will have limited leverage
to manage environmental and social risks once it has approved a transaction. However, a financial
institution can have simple transaction screening procedures to avoid supporting the trade of products
and substances that are subject to bans and international phase-outs.

3.2 Public sector:

(PSBs) are a major type of bank in India, where a majority stake (i.e. more than 50%) is held by a
government. The shares of these banks are listed on stock exchanges. There are a total of 12 Public
Sector Banks alongside 1 state-owned Payments Bank in India. (PSBs) are a major type of bank in
India, where a majority stake (i.e. more than 50%) is held by a government. The shares of these banks
are listed on stock exchanges. There are a total of 12 Public Sector Banks alongside 1 state-owned
Payments Bank in India.

3.2.1 State bank of India:

The State Bank of India (SBI) is an Indian multinational, public sector banking and financial
services statutory body. It is a government corporation statutory body headquartered in Mumbai,
Maharashtra. SBI is ranked as 236th in the Fortune Global 500 list of the world's biggest corporations
of 2019.[5] It is the largest bank in India with a 23% market share in assets, besides a share of one-
fourth of the total loan and deposits market.[6]

The bank descends from the Bank of Calcutta, founded in 1806, via the Imperial Bank of India,
making it the oldest commercial bank in the Indian subcontinent. The Bank of Madras merged into
the other two "presidency banks" in British India, the Bank of Calcutta and the Bank of Bombay, to
form the Imperial Bank of India, which in turn became the State Bank of India in
1955.[7] The Government of India took control of the Imperial Bank of India in 1955, with Reserve
Bank of India (India's central bank) taking a 60% stake, renaming it the State Bank of India.

3.2.2 Nationalized bank:

Any Bank where the Government of a Country has a stake of 51% or higher is called a Nationalized
Bank. This means that the Government calls many of the shots and policies for the bank and also has
a big role or say in appointments of directors, and even in decisions on loans. In India several banks
have between 80 - 95% shareholding by the Government of India and all are Nationalized Banks. The
reason they are all called Nationalized Banks are because the Government forcibly bought their
majority shareholdings in the year 1969 and Nationalized them from their private status.
Nationalization refers to the transfer of public sector assets to be operated or owned by the state or
central government. In India, the banks which were previously functioning under private sector were
transferred to the public sector by the act of nationalization and thus the nationalized banks came into
existence.

3.3 Private Sector:

The private sector banks in India are banks where the majority of the shares or equity are not held by
the government but by private share holders.

In 1969 all major banks were nationalised by the Indian government. However, since a change in
government policy in the 1990s, old and new private sector banks have re-emerged. The private
sector banks are split into two groups by financial regulators in India, old and new. The old private
sector banks existed prior to nationalisation in 1968 and kept their independence because they were
either too small or specialist to be included in nationalisation. The new private sector banks are those
that have gained their banking license since the change of policy in the 1990s.

The private sector banks were incorporated as per the revised guidelines issued by the RBI regarding
the entry of private sector banks in 1993.

private sector banks as follows:

3.3.1 Indian Private bank:

The private sector banks in India are banks where the majority of the shares or equity are not held by
the government but by private share holders.

In 1969 all major banks were nationalised by the Indian government. However, since a change in
government policy in the 1990s, old and new private sector banks have re-emerged. The private
sector banks are split into two groups by financial regulators in India, old and new. The old private
sector banks existed prior to nationalisation in 1968 and kept their independence because they were
either too small or specialist to be included in nationalisation. The new private sector banks are those
that have gained their banking license since the change of policy in the 1990s.
HDFC Bank:

HDFC Bank Ltd. is an Indian banking and financial services company headquartered
in Mumbai, Maharashtra. It has a base of 111,208 permanent employees as of 30 September
2019. HDFC Bank is India‘s largest private sector lender by assets. It is the largest bank in India by
market capitalisation as of February 2016. It was ranked 60th in 2019 Brand Top 100 Most Valuable
Global Brands. HDFC Bank was incorporated in 1994, with its registered office
in Mumbai, Maharashtra, India. Its first corporate office and a full service branch at Sandoz
House, Worli were inaugurated by the then Union Finance Minister, Manmohan Singh.

As of June 30, 2019, the Bank's distribution network was at 5,130 branches across 2,764 cities. The
bank also installed 4.30 Lakhs POS terminals and issued 235.7 Lakhs debit cards and
85.4 Lakhs credit cards in FY 2017.

ICICI Bank:
ICICI Bank Limited is an Indian multinational banking and financial services company headquartered
in Mumbai, Maharashtra with its registered office in Vadodara, Gujarat. As of 2018, ICICI Bank is
the second largest bank in India in terms of assets and market capitalisation. It offers a wide range of
banking products and financial services for corporate and retail customers through a variety of
delivery channels and specialised subsidiaries in the areas of investment banking, life, non-life
insurance, venture capital and asset management. The bank has a network of 4882 branches and
15101 ATMs across India and has a presence in 17 countries including India. ICICI Bank is one of
the Big Four banks of India. The bank has subsidiaries in the United Kingdom and Canada; branches
in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar, Oman, Dubai International
Finance Centre, China and South Africa; and representative offices in United Arab Emirates,
Bangladesh, Malaysia and Indonesia. The company's UK subsidiary has also established branches in
Belgium and Germany. ICICI Bank was established by the Industrial Credit and Investment
Corporation of India (ICICI), an Indian financial institution, as a wholly owned subsidiary in 1994.
The parent company was formed in 1955 as a joint-venture of the World Bank, India's public-sector
banks and public-sector insurance companies to provide project financing to Indian industry. The
bank was founded as the Industrial Credit and Investment Corporation of India Bank, before it
changed its name to the abbreviated ICICI Bank. The parent company was later merged with the
bank.

In the 1990s, ICICI transformed its business from a development financial institution offering only
project finance to a diversified financial services group, offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999,
ICICI become the first Indian company and the first bank or a financial institution from non-Japan
Asia to be listed on the NYSE.

3.3.2 Foreign Private:

A foreign branch bank is a type of foreign bank that is obligated to follow the regulations of both the
home and host countries. Because the foreign branch banks' loan limits are based on the parent bank's
capital, foreign banks can provide more loans than subsidiary banks. This is because the foreign
branch bank, while possibly small in one market, is technically part of a larger bank — hence, it
enjoys the capital base of the larger parent entity.

HSBC Bank:
HSBC Holdings plc is a British[6] multinational investment bank and financial services holding
company. It was the 7th largest bank in the world by 2018, and the largest in Europe, with total assets
of US$2.558 trillion (as of December 2018). HSBC traces its origin to a hong in Hong Kong, and its
present form was established in London by the Hongkong and Shanghai Banking Corporation to act
as a new group holding company in 1991.[7][8] The origins of the bank lie mainly in Hong Kong and
to a lesser extent in Shanghai, where branches were first opened in 1865.[1] The HSBC name is
derived from the initials of the Hongkong and Shanghai Banking Corporation. The company was first
formally incorporated in 1866.

HSBC has around 3,900 offices in 65 countries and territories across Africa, Asia, Oceania, Europe,
North America, and South America, and around 38 million customers. As of 2014, it was the world's
sixth-largest public company, according to a composite measure by Forbes magazine.

HSBC is organised within four business groups: Commercial Banking, Global Banking and Markets
(investment banking), Retail Banking and Wealth Management, and Global Private Banking.
HSBC has a dual primary listing on the Hong Kong Stock Exchange and London Stock
Exchange and is a constituent of the Hang Seng Index and the FTSE 100 Index. As of 6 July 2012, it
had a market capitalisation of £102.7 billion, the second-largest company listed on the London Stock
Exchange, after Royal Dutch Shell. It has secondary listings on the New York Stock
Exchange, Euronext Paris, and the Bermuda Stock Exchange.

Standard Chartered Bank:

Standard Chartered PLC is a British multinational banking and financial services company
headquartered in London, England. It operates a network of more than 1,200 branches and outlets
(including subsidiaries, associates and joint ventures) across more than 70 countries and employs
around 87,000 people. It is a universal bank with operations in consumer, corporate and institutional
banking, and treasury services. Despite its UK base, it does not conduct retail banking in the UK, and
around 90% of its profits come from Asia, Africa and the Middle East.

Standard Chartered has a primary listing on the London Stock Exchange and is a constituent of
the FTSE 100 Index. It had a market capitalisation of approximately £24.4 billion as of 4 April 2017,
the 28th-largest of any company with a primary listing on the London Stock Exchange.[2] It has
secondary listings on the Hong Kong Stock Exchange and the National Stock Exchange of India. Its
largest shareholder is the Government of Singapore-owned Temasek Holdings.[3][4][5]

José Viñals is the Group Chairman of Standard Chartered.[6] Bill Winters is the current Group Chief
Executive.[7]

3.3.3 Cooperative bank:

Cooperative banking is retail and commercial banking organized on a cooperative basis.

Cooperative banking institutions take deposits and lend money in most parts of the world. Co-
Operative Banks are small financial institutions that offer the lending facility to the small businesses
in both urban and non-urban regions. These are monitored and regulated by the Reserve Bank of
India (RBI) and come under the Banking Regulations Act, 1949 as well as the banking laws act,
1965. The Co-Operative Banks have a huge significance for the small businesses as these have
around 67% penetration in villages and account for 46% of the net funding for the rural businesses
through support for processing, housing, warehousing, transport, dairy, etc.
There are 4 types of co-operative banks in India:

1. Central Co-Operative Banks:

These banks are organized and operated at the district level and can be of two types:

 Co-operative Banking Union

 Mixed control Co-operative Bank

In the first, the members of the bank are the co-operative societies only. However, in the second, the
members can be co-operative societies as well as individuals. The central co-operative banks lend
money mainly to the affiliated primary societies with typical loan tenure lending between 1 to 3
years.

2. State Co-Operative Banks:

These banks are organized and operated at the district level and rest at the top of the hierarchy in the
co-operative credit structure.

With the help of State Co-operative Banks (SCBs), the RBI funds the co-operative institutions. These
banks also get loans at an interest rate of 1% to 2% lower than the standard bank rate.

3. Primary Co-Operative Banks:

These offer credit services in the urban and semi-urban regions. Thus, they are not considered as
agricultural credit societies. Primary Co-Operative Banks receive concessional refinance service from
RBI and IDBI from time to time for them to offer housing loans and other types of loans that can be
used by small businesses.

4. Land Development Banks:

The land development banks are divided into three tiers which are primary, state, and central. These
offer credit services to the farmers for developmental purposes. They used to be regulated by the RBI
as well as the state governments. However, this responsibility was recently transferred to the National
Bank for Agricultural and Rural Development (NABARD).
3.3.4 Regional rural bank:

Regional Rural Banks (RRBs) are Indian Scheduled Commercial Banks (Government Banks)
operating at regional level in different States of India. They have been created with a view of serving
primarily the rural areas of India with basic banking and financial services. However, RRBs may
have branches set up for urban operations and their area of operation may include urban areas too.
The Regional Rural Banks were owned by the Central Government, the State Government and the
Sponsor Bank Any commercial bank can sponsor the regional rural banks) who held shares in the
ratios as follows Central Government – 50%, State Government – 15% and Sponsor Banks – 35%.
The area of operation of RRBs is limited to the area as notified by Government of India covering one
or more districts in the State. RRBs also perform a variety of different functions. RRBs perform
various functions in following heads: Providing banking facilities to rural and semi-urban areas.
Carrying out government operations like disbursement of wages of MGNREGA workers, distribution
of pensions etc. Providing Para-Banking facilities like locker facilities, debit and credit cards,mobile
banking,internet banking,UPI etc.
 Chapter 4: Non-Banking financial institution

4.1 Introduction:

An essential feature of the evolution of financial system has been the emergence of non-banking
financial institutions, outside the traditional banking system including finance companies, leasing
companies, merchant banks and trust and investment companies. The deep and broad-based financial
system has invariably enhanced access to finance at a reasonable cost, and reduced volatility thereby
reducing risk by improving transparency, inducing competition and diversifying products and
services and also efficient delivery of them. Diversification of the financial sector has been one of the
principal features of economic growth in both advanced and emerging economies. It has been well
established that improvements in financial architecture quite often precede and contribute to
economic performance in most countries (World Bank, 2003). Tremendous progress of financial
system, especially during the 1980s and 1990s, was mainly due to the rigorous efforts of the non-
banking financial institutions (NBFIs) world over. Therefore, Non-banking financial companies
(NBFCs) have been the subject of special focus during the eighties and nineties including in India. In
particular, the rapid growth of NBFCs, especially in the nineties, has led to a gradual blurring of
dividing lines between banks and NBFCs, with the exception of certain exclusive privileges for the
commercial banks. Over a period, both banks and non-bank financial institutions have become key
elements of broad-based and sound financial system in India. The growing importance of NBFCs was
recognised by series of committees and working groups since early 1970s including Banking
Commission till the second Narasimha Committee (1998). Further, the Reserve Bank of India in its
Discussion Paper on Harmonisation of the Role and Operations of DFIs and Banks(1999) and the
Report of the Working Group on Money Supply (1998) (Chairman: Dr. Y.V. Reddy) had also
discussed their importance.

In the recent global crisis, however, the role of non-bank financial intermediaries (NBFIs)1 had been
widely reproached. NBFIs, in general, were known for taking higher risks than the banking system.
The nexus between the banking system and the NBFIs during the global crisis (2007-2009) put the
entire financial system in distress. Traditionally, the debate regarding the banks expansion into non-
banking activities veered around certain activities, viz., insurance, investment banking, etc. However,
the recent global crisis has extended the debate to the inter-connectedness of the banking system with
the NBFIs, as excessive inter-institutional exposure put the entire financial system into vulnerability.

In this backdrop, the objective of this study is to examine ‗the issue of Bank-NBFC financial inter-
connectedness and their policy implications‘. The rest of this study is structured as follows:
importance of the role of the NBFIs, the structure of this sector and growth of NBFCs over a period
in India, are presented in Section II. In Section III, besides tracing the evolution of regulatory and
supervisory framework in India, in brief, the regulatory norms relating to raising of resources by
NBFCs and banks‘ exposure to NBFCs is presented. In Section IV, attempt is made to address ‗the
core issue of ‗banks-NBFCs inter-connectedness‘ by analysing banks exposures to NBFCs of both
deposit taking and non-deposit taking systemically important institutions‘. Besides, a snapshot of
select countries‘ experiences of banks‘ exposures to NBFCs/ NBFIs is also presented in the same
section. Conclusion and policy implications are presented in the section V.
 classification of NBFcs by activity:

Type of NBFC Activity

Asset Finance Company (AFC) Financing of physical assets including automobiles,

tractors and generators.

Loan Company Provision of loan finance.

Investment Company Acquisition of securities for purpose of selling.

NBFC-Infrastructure Finance Company (NBFC-IFC) Provision of infrastructure loans.

NBFC-Systemically Important Core Investment Company (CIC-ND-SI) Makes investments and loans to
group companies.

Infrastructure Debt Fund-NBFC (IDF-NBFC) Facilitation of flow of long-term debt into infrastructure
projects.

NBFC-Micro Finance Institution (NBFC-MFI) Credit to economically dis-advantaged groups.

NBFC-Factor Acquisition of receivables of an assignor or extending

loans against the security interest of the receivables at a discount.

NBFC-Non-Operative Financial Holding Company (NOFHC) Facilitation of promoters/ promoter groups

in setting up new banks.

Mortgage Guarantee Company (MGC) Undertaking of mortgage guarantee business.

NBFC-Account Aggregator (NBFC-AA) Collecting and providing information about a customer‘s

financial assets in a consolidated, organised and

retrievable manner to the customer or others as specified

by the customer.

NBFC–Peer to Peer Lending Platform (NBFC-P2P) Providing an online platform to bring lenders and
borrowers together to
help mobilise funds.
4.1.1 Financial Parameters of the NBFc sector:

2016-17 2017-18 2018-19

Items NBFC NBF NBFCs NBFC NBF NBFCs NBFC NBF NBF
s Cs- -D s Cs- -D s Cs- Cs-
D
ND- ND- ND-
SI SI SI
1 2 3 4 5 6 7 8 9 10
A. Income 2,310 1,909 402 2,515 2,034 480 1,395 1,111 284
(7.8) (6.9) (12.6) (8.9) (6.5) (19.4) (16.7) (7.8) (73.
2)
B. Expenditure 1,822 1,498 325 1,958 1,584 374 1069 863 206
(11.9) (11.5) (14.0) (7.5) (5.7) (15.1) (16.2) (9.8) (53.
7)
C. Net Profit 314 263 50 386 316 70 230 179 51
(-14.4) (-17.3) (2.0) (22.9) (20.2) (40.0) (16.2) (4.1) (96.
2)
D. Total Assets 19,797 17,017 2,781 22,760 19,300 3,460 26,019 22,220 3,79
9
(14.9) (14.7) (15.9) (15.0) (13.4) (24.4) (17.2) (16.0) (25.
2)
E. Financial Ratios
(as per cent of Total
Assets)
(i) Income 11.7 11.3 14.5 11.0 10.5 13.9 5.4 5.0 7.5
(ii) Expenditure 9.2 8.9 11.7 8.6 8.2 10.8 4.1 3.9 5.4
(iii) Net Profit 1.6 1.6 1.8 1.7 1.6 2.0 0.9 0.8 1.3
F. Cost to Income Ratio 78.9 68.3 80.9 77.9 72.7 77.8 72.1 68.7 83.3
(Per cent)
Notes: 1. Data are provisional.
2. Figures in parentheses indicate y-o-y growth in per cent.
source: Supervisory Returns, RBI.
4.2 Importance of the Role of NBFIs:

By now it is well established, with the experience, that the robust growth and effective functioning of
a financial system is vital for economic development. There is universal agreement that a well
functioning financial system is necessary for a thriving modern economy (Kroszner, 2010). In all
advanced economies, for example, sophisticated financial systems efficiently deliver a broad range of
financial services and act as a critical pillar in contributing to macroeconomic stability and sustained
economic growth and prosperity (World Bank, 2003). Moreover, the well developed financial
markets facilitate mobilization of savings, by offering savers and investors wider choice of
instruments. Further, with NBFCs coming up on the financial system, investors could place their
funds at more attractive returns in comparison to the bank deposits. This is the single most important
reason to explain as to why the NBFCs are popular among lower and middle class population
including India. This development paradigm is increasingly recognized around the world, especially
in the aftermath of repeated emerging market crises in countries with bank-dominated financial
systems. According to a report from the World Bank (2018), developed financial markets also have
enhanced access to finance for more firms and individuals at reasonable cost, reduced volatility and
distortions, by operating in an environment that is transparent, competitive, and characterized by the
presence of a diverse array of products and services, including instruments for effective risk
management. All these were made possible because of widening the financial system with effective
participation of NBFIs.

Referring to NBFIs, Greenspan (1999) had stated: ―…enhance the resilience of the financial system
to economic shocks by providing it with an effective ‗spare tyre‘ in times of need…‖ Moreover,
while short term loans required by the industry and agriculture are provided by the banking system,
the other types of services required by industry as well as other segments of economy are provided by
NBFCs and other similar financial institutions, such as factoring, venture finance, and so on. A
common feature in all the advanced economies is their financial systems are well developed to
deliver a wide range of financial services and sophisticated products at competitive price that are
demanded by the sophisticated clientele. This was possible because of institutions such as NBFIs that
were found to be more aggressive and innovative. More importantly, it resulted in improving the
efficiency by inciting competition between NBFIs and banking system and ultimately stated to have
contributed to macroeconomic stability and sustained economic growth.

Indeed it is evident in India that with the development of NBFCs segment within the overall financial
system, it challenged the other segments, viz., banks to innovate, to improve quality and efficiency,
and deliver at flexible timings and at competitive prices. In fact, in a number of un-treaded paths,
NBFCs were the ones to enter first to try the market and develop before banks entered the field. In
India, for instance, the loans against gold jewelleries were introduced by the NBFCs much before the
nationalised banks entered this market. Similarly, lending to small traders and small transport
operators, used-commercial vehicle financing, in particular, were initiated by the NBFCs. Practically,
many specialised financial services, such as the factoring, lease finance, venture capital finance,
financing road transport, etc., were pioneered by the NBFCs. NBFCs have also played a leading role
in the business of securities-based lending such as Loan against Shares (LAS), Margin Funding,
Initial Public Offering (IPO) Financing, Promoter Funding, etc. These customized credit products
have added liquidity and encouraged retail participation in public issues in particular and equity
markets in general, resulting in better price discovery according to a report by the Task Force
appointed by FICCI. Even housing finance was taken to newer heights by the NBFCs. In the recent
years, NBFCs also played important role in wider reach of microfinance. Moreover, development of
such alternative financing vehicles adds to the liquidity and diversity of the financial system, thereby
increasing its effectiveness as an engine for economic growth and enhancing the financial system‘s
capacity to absorb shocks (Carmichael et al, 2002).

In view of the above, both banks and non-bank financial intermediaries are key prerequisites of sound
and stable financial system and development of both sectors offer important synergies. It is
interesting to note that the growth in the non−bank financial services industry in many countries has
been more rapid than the deposit / lending activities of commercial banks. As a result, banking
institutions have sought to diversify away from the traditional commercial banking business
i.e., accepting deposits and providing loans to non-traditional banking activities, viz., investment
banking, IPO financing and other capital market related activities besides the lease finance etc.
NBFIs thus, in general ‗…tend to offer enhanced equity and risk-based products...‘ (RBI, 2019).
With the rise of middle class in India which has reached a certain stage of discernible economic
development, there is a growing demand for property ownership, small-scale investment, and saving
for retirement and a growing need for housing finance, contractual savings, insurance services,
pension plans management and asset management. These varied requirements cannot be met by the
banking system alone as commercial banks in India are not functioning as a full-fledged ‗universal
banking‘. This is being met by opening non-banking financial subsidiaries by practically all the major
banks in India3. These subsidiaries are in the form of merchant banks, mutual funds, insurance
companies, primary dealers and other NBFCs. Thus, NBFIs play a crucial role in broadening access
to financial services, enhancing competition and diversification of the financial sector (RBI, 2019).

It is therefore, necessary to view NBFIs segment of financial system as a catalyst for economic
growth and to provide proactive regulatory policy support for their contribution towards economic
development.

4.3 Structure of NBFIs in India:

Indian financial system is predominantly institution oriented unlike many developed economies such
as the US where the financial system is predominated by capital market. The institutions include both
banks and non-bank financial institutions4, though banking system takes dominant position as it is
the main conveyor of core financial services. Over the years, the non-bank financial entities came
into existence with multiplicity as well as importance in mobilizing the public savings and
channelizing the same to industry and other economic activities since the country‘s independence.

The NBFCs form the major sub-sector of NBFIs in India and is widely recognized for its
heterogeneous character. Presently, for the purpose of regulatory convenience, the NBFCs are
broadly being classified into two categories based on whether they accept public deposits, viz., (i)
NBFC-Deposit taking (NBFC-D) and (ii) NBFCs-Non-Deposit taking (NBFC-ND). Besides, there
are only two residuary non-banking finance companies (RNBCs)7 which are also deposit taking
companies of different character. Among the NBFCs-ND, companies with asset size of Rs. 100 crore
and more have been categorized as systemically important (NBFC-ND-SI). Further, since 2013, both
of deposit taking and non-deposit taking NBFCs were reclassified based on whether they were
involved in the creation of productive assets. Under this new classification, the companies creating
productive assets were divided into three major categories, i.e., asset finance companies (AFCs), loan
companies (LCs) and investment companies (ICs) (Exhibit 1).

In the recent years, infrastructure finance gained greater importance, and considering this; a fourth
category of NBFC involved in ‗infrastructural finance‘ was introduced in February 2010. These
companies are called as ‗infrastructure finance companies‘ (Annex I). In a nutshell, all deposit taking
companies are classified under three categories, viz., AFCs, ICs, and LCs. The non-deposit taking
systemically important NBFCs (NBFCs-ND-SI) are also classified along the similar line as AFCs,
ICs, and LCs. Besides, new set of companies, viz., infrastructure finance company (IFC) called as
core investment companies (CIC) are also included recently.
4.4 Size of NBFCs Sector and their Growth:

In line with the global trend, NBFCs in India too emerged primarily to fill in the gaps in the supply of
financial services which were not generally provided by the banking sector, and also to complement
the banking sector in meeting the financing requirements of the evolving economy. Over the years
NBFCs have grown sizably both in terms of their numbers as well as the volume of business
transactions the growth of NBFCs has been rapid, especially in the owing to the high degree of their
orientation towards customers and simplification of loan sanction requirements. Further, the activities
of NBFCs in India have undergone qualitative changes over the years through functional
specialisation. NBFCs are perceived to have inherent ability and flexibility to take quicker decisions,
assume greater risks, and customise their services and charges according to the needs of the clients.
These features, as compared to the banks, have tremendously contributed to the proliferation of
NBFCs in the eighties and nineties. Their flexible structures allowed them to unbundle services
provided by banks and market the components on a competitive basis. Banks on the other hand, had
all along been known for their rigid structure, especially the public sector banks. This compelled
them carry out such services by establishing ‗banking subsidiaries‘ in the form of NBFCs. The
willingness of NBFCs to engage in varied forms of financial intermediation, hitherto unavailable to
the banking system, has provided the valuable flexibility in financing new areas of business. Though
the NBFCs are different species and smaller in size as a segment when compared with the banking
system, their relevance to the overall economic development and to certain specified areas cannot be
undermined.

Over a period as the regulatory requirements were made progressively stringent, the total number of
NBFCs registered with the Reserve Bank stood at 17.3 trillion by end-March 2019. The number of
NBFCs-D declined considerably with conversion into non-deposit taking companies, besides closure
and mergers of weaker companies. Incidentally, the regulatory regime also seems to be in favors of
reducing the number of deposit taking NBFCs and consequent migration of depositors towards the
banking system which is better regulated and supervised in line with the global standards.
 Chart : Structure of NBFIs under Reserve Bank Regulation
(At end-September 2019)

AIFIs are apex institutions established during the development planning era to provide long-term
financing/refinancing to specific sectors such as (i) agriculture and rural development; (ii) trade; (iii)
small industries; and (iv) housing. NBFCs are dominated by joint stock companies, catering to niche
areas ranging from personal loans to infrastructure financing. PDs play an important role as market
makers for government securities. The Reserve Bank regulated NBFI sector grew by 15.8 per cent in
2018-19; by the end of March 2019, it was 19.8 per cent of the scheduled commercial banks (SCBs)
taken together in terms of balance sheet size. Within the NBFI sector, AIFIs constituted 23 per cent
of total assets, while NBFCs represented 75 per cent and standalone PDs accounted for 2 per cent.

Against this background, this chapter presents an analysis of the financial performance of NBFIs
in 2018-19 and during April-September 2019. The rest of the chapter is organised into four sections.
Section 2 provides an overview of the NBFC sector–non-deposit taking systemically important
NBFCs (NBFCs- ND-SI) and deposit-taking NBFCs (NBFCs-D). The activities of housing finance
companies (HFCs), which are under the regulatory purview of the National Housing Bank (NHB), are
also covered in this section. Section 3 discusses the performance of AIFIs, followed by an evaluation
of the role of primary dealers in Section 4. Section 5 concludes with an overall assessment and policy
perspectives.

Households play a vital role in the functioning of an economy as factors of production, as consumers,
and as a source of financing for investment through saving. Accordingly, financial conditions of
households assume crucial importance in the context of overall financial stability. The Financial
Stability Report of the Reserve Bank of India (RBI) conducts a bi-annual systemic risk survey, for
which financial saving of households is a crucial variable under the macroeconomic risks category.

Data on annual household saving are published by the Central Statistics Office (CSO) in its end-
January release titled ‗First Revised Estimates (FRE) of National Income, Consumption Expenditure,
Saving and Capital Formation‘, and revised in the subsequent annual releases. Information on
financial assets and liabilities of the household sector are also available in the Flow of Funds (FoF)
Accounts of the Indian Economy1 published annually by the RBI on a ‗from-whom-to-whom‘ basis
consistent with the United Nations System of National Accounts (SNA) 2008. In terms of the FoF,
households are traditionally a financial surplus sector and based on the FoF compilations, the RBI has
been publishing preliminary estimates of annual household financial saving in its Annual Report, five
months ahead of the CSO release. Higher frequency information on this critical variable is desirable
to support a closer assessment of macroeconomic conditions, especially in identifying the sectoral
linkages, spillovers, and in tracing the transmission of potential shocks across sectors.

This is the first release of quarterly data on household financial assets and liabilities, as a precursor to
our endeavour to move towards quarterly compilation of FoF accounts. This article presents a
mapping of financial assets and liabilities of the household sector on a quarterly basis following the
FoF approach for the period Q1:2016-17 to Q2:2018-19. The rest of the article is divided into two
sections. Section II discusses preliminary estimates of quarterly financial assets and liabilities of the
household sector at the aggregate level. Section III presents instrument wise developments. Section
IV concludes. The methodology and data sources, as well as a tabular presentation of instrument-wise
estimates of household financial assets and liabilities are given in the table
 Table 1: Households Financial Assets and Liabilities
(Amount in ₹billion)
2016-17 2017-18 2018-19
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Net
Financial
4,689.1 1,685.0 2,507.8 2,568.4 5,037.3 4,593.4 -2,812.4 6,061.3 2,289.0 3,403.9
Assets
(A-B)
14.5 5.0 7.2 7.0 14.0 12.4 -7.3 14.8 5.8 8.3
A. Gross
Financial 5,109.9 2,337.8 4,374.3 3,555.0 6,026.2 5,948.1 -4,245.7 8,912.7 2,874.9 5,578.5
Assets
15.8 7.0 12.6 9.6 16.7 16.0 -11.0 21.8 7.3 13.6
B.
Financial 420.7 652.9 1,866.5 986.6 988.9 1,354.7 -1,433.3 2,851.4 585.9 2,174.5
Liabilities
1.3 1.9 5.4 2.7 2.7 3.6 -3.7 7.0 1.5 5.3
Memo item:
GDP 32,416.9 33,540.9 34,749.3 36,933.2 35,984.9 37,153.5 38,502.7 40,896.1 39,297.3 40,882.9
Note : Figures in italics are as per cent to GDP.

The household sector holds its financial assets mainly in the form of currency, deposits, investments
in debt securities, equities, mutual fund units, insurance and pension funds, and small savings.
Liabilities are mostly in the form of loans and borrowings from banks, housing finance companies
(HFCs) and nonbanking financial corporations (NBFCs). Indian households are generally net savers
and suppliers of financial resources for the rest of the economy. However, net financial assets2 of the
households turned negative (-7.3 per cent of gross domestic product (GDP)) in the third quarter of
2016-17, reflecting the transitory effects of demonetisation3. With subsequent remonetisation, the
household sector‘s net financial assets turned around and in the fourth quarter they amounted to 14.8
per cent of GDP. In 2018-19, net financial assets of households are estimated at 8.3 per cent of GDP
in Q2, up from 5.8 per cent of GDP in Q1.

Table 1: Household Sector’s Savings in Financial Assets

(As percentage of quarterly GDP)
2016-17 2017-18 2018-19
Item
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Gross Financial Assets 15.8 7.0 12.6 9.6 16.7 16.0 -11.0 21.8 7.3 13.6
 Of which:
1. Total Deposits (a)+(b) 8.2 3.1 4.4 3.4 8.1 8.6 5.4 3.6 -3.4 5.9
(a) Bank Deposits 7.9 2.8 4.2 3.4 7.8 8.4 5.2 3.6 -3.6 5.8
i. Commercial Bank deposits 7.4 2.7 3.7 3.0 6.9 8.2 4.8 3.3 -3.3 5.7
ii. Cooperative Banks 0.5 0.1 0.5 0.4 0.9 0.2 0.4 0.3 -0.3 0.2
(b) Non-Bank Deposits 0.3 0.3 0.2 0.0 0.3 0.2 0.2 0.0 0.2 0.0
2. Life Insurance Funds 2.3 1.2 2.8 1.6 3.0 2.8 1.4 4.2 2.0 2.4
3. Provident and Pension Funds (including
2.0 2.0 1.9 1.9 2.3 2.3 2.2 2.1 2.4 2.3
PPF)
4. Currency 1.3 0.1 1.8 2.5 1.7 -0.1 -21.5 11.1 4.6 1.0
-
5. Investments, of which 1.5 0.1 1.3 1.2 2.1 1.0 0.4 1.2 1.4
0.2
- -
i. Mutual Funds 1.2 1.1 1.1 1.7 0.9 0.3 1.1 1.2
0.1 0.3
6. Small Savings (excluding PPF) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5
Source: Staff calculations.

Table 2: Household Sector’s Liabilities

(As percentage of quarterly GDP)
2015-16 2016-17 2017-18
Item
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Gross Financial Liabilities 1.3 1.9 5.4 2.7 2.7 3.6 -3.7 7.0 1.5 5.3
Loans (Borrowings) from
A. Financial Corporations (i+ii) 1.3 1.9 5.4 2.7 2.7 3.6 -3.7 7.0 1.5 5.3
(i) Banking Sector 1.5 1.3 3.1 1.9 1.9 2.9 -4.8 6.3 0.5 4.1
Of Which
Commercial banks 1.3 1.3 3.0 2.0 1.4 2.9 -4.6 6.2 0.5 4.1
(ii) Other Financial Institutions -0.3 0.6 2.3 0.7 0.9 0.7 1.0 0.6 1.0 1.2
-
(a) Financial Corporations -0.5 0.1 1.6 0.5 0.1 0.5 0.1 0.2 0.3
0.1
(b) Housing Finance Companies 0.2 0.4 0.6 0.8 0.3
0.6 0.6 0.5 0.7 0.8
(c) Insurance Companies 0.1 0.1 0.1 0.1 0.1
0.1 0.0 0.0 0.1 0.1
B. Non-Financial Corporations (Private Corporate
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Business)*
C. General Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Note: outstanding data for provident funds of employees of general government sector are not
available. Therefore, outstanding figures pertain to EPFO and retirement funds of some public sector
undertakings.

There were 9,659 non-banking financial companies (NBFCs) registered with the Reserve Bank as on
March 31, 2019, of which 88 were deposit- accepting (NBFCs-D) and 263 systemically important
non-deposit accepting NBFCs (NBFCs-ND-SI).37 All NBFC-D and NBFCs-ND-SI are subject to
prudential regulations such as capital adequacy requirements and provisioning norms along with
reporting requirements. Recent developments

Even as their importance in credit intermediation is growing, recent developments in the domestic
financial markets have brought the focus on the NBFC sector (including housing finance companies
or HFCs) especially with regard to their exposures, quality of assets and asset-liability mismatches
(ALM). The liquidity stress in NBFCs reflected in the third quarter of the last financial year
(September - December 2018) was due to an increase in funding costs as also difficulties in market
access in some cases. Despite the dip in confidence, better performing NBFCs with strong
fundamentals were able to manage their liquidity even though their funding costs moved with market
sentiments and risk perceptions as shown in graph

Growth rates in assets and liabilities of NBFCs

NBFCs depend largely on public funds which account for 70 per cent of the total liabilities of the
sector. Bank borrowings, debentures and commercial papers are the major sources of funding for
NBFCs. Bank borrowings have shown an increasing trend as the share of bank borrowings to total
borrowings have increased from 21.2 percent in March 2017 to 23.6 percent in March 2018 and
further to 29.2 percent in March 2019. During the same period, dependence on debentures declined.
from 50.2 percent in March 2017 to 41.5 percent in March 2019. This indicates that banks are
compensating for the reduced market access for NBFCs in the wake of stress in the sector. The top 10
NBFCs accounted for more than 50 per cent of total bank exposure to the sector while the top 30
NBFCs (including government owned NBFCs) accounted for more than 80 per cent of the total
exposure.

In the CP market, the absolute issuance of CPs by NBFCs have declined sharply relative to its level
pre - IL&FS default During the stress period, CP spread of all entities had increased, particularly that
of NBFCs, highlighting a reduced risk-appetite for them. Subsequently, the CP spread for NBFCs has
reduced and its gap vis-à-vis other issuers has narrowed Thus, in a way the IL&FS stress episode
brought the NBFC sector under greater market discipline as the better performing companies
continued to raise funds while those with ALM and/or asset quality concerns were subjected to higher
borrowing costs.

4.5 Evolution of Regulatory and Supervisory:

4.5.1 Framework of NBFCs in India:

The report of the Shah working group on NBFCs (1992) mentioned that NBFCs have been in
operation in informal setup since long time in India. Over a period, there had been a lot of complaints
from the investors relating to NBFCs dubious functioning and the loss to depositors. This threw up
new challenges for policymakers and regulators to integrate them within the overall prudential
regulatory framework of the financial system. Accordingly, it was felt in the early 1960s that RBI
should be vested with the adequate powers to regulate the NBFCs. The RBI Act was amended by the
Banking Laws (Miscellaneous Provisions) Act, 1963 to include Chapter IIIB containing provisions
relating to Non-Banking Institutions receiving deposits and financial institutions to regulate the
NBFIs (RBI,1992). Initially, the legislative intent was aimed at moderating the deposit mobilization
of NBFCs and thereby to provide indirect protection to depositors by linking the quantum of deposit
acceptance to Net Owned Fund (NoF)9. Thus, the directions were restricted to the liability-side of the
balance sheet and mainly to deposit acceptance activities. It did not extend to the asset-side of the
balance sheets of NBFCs. Subsequently, several experts/working groups, viz., Banking Commission
(1972), Bhabatosh Datta Sub-Group (1971) and James Raj Committee (1975) which examined the
functioning of NBFCs were unanimous about the inadequacy of the legislative framework and
reiterated the need for enhancing the extant framework. The Chakravarty Committee (1985)
recommended for the introduction of a system of licensing (based on the level of business) for
NBFCs in order to protect the interests of depositors. Thereafter, the Narasimham Committee (1991)
outlined a regulatory framework for streamlining the functioning of the NBFCs. Accordingly, the
Committee recommended for the introduction of capital adequacy, debt-equity ratio, credit-
concentration ratio, adherence to sound accounting practices, uniform disclosure requirements and
assets valuation. Further, it also stressed that the supervision of these institutions should come within
the purview of an agency to be set up for this purpose under the aegis of Reserve Bank of India.

Thus, the process of evolution of the regulatory framework for NBFCs has, to a great extent, been the
outcome of the recommendations of various committees/ working groups. Following the
recommendations of the Working Group on Financial Companies constituted in April 1992
(Chairman: A C Shah), a system of registration was introduced in April 1993 for NBFCs with Net
Owned Funds (NOF) of Rs.50 lakh and above.

Along with recommendations of the Shah Working Group and the observations made by the Joint
Parliamentary Committee in 1992, the Reserve Bank constituted an Expert Group in April 1995 for
designing a supervisory framework for the NBFCs (Khanna Committee) to suggest the off-site
surveillance and the on-site examination system based on their asset size and the nature of business
conducted by them. Accordingly, an Ordinance was promulgated by the Government in January 1997
and subsequently, it was replaced by an Act in March 1997 by effecting comprehensive changes in
the provisions contained in Chapter III-B and Chapter V of the Act by vesting more powers with the
RBI. The amended Act provided, inter alia, for:
(i) Compulsory Registration of NBFCs and a minimum NOF of Rs.25 lakh as entry point norm;
(ii) Maintenance of liquid assets by NBFCs as a percentage of their deposits in unencumbered
approved securities (Government securities/guaranteed bonds);
(iii) Creation of a reserve fund and compulsory transfer of at least 20 per cent of the net profits to
aforesaid fund;
(iv) Authorising Company Law Board (CLB) to direct a defaulting NBFC to repay deposits; and
(v) Vesting the Reserve Bank with the powers to:

(a) issue directions to NBFCs regarding compliance with the prudential norms;
(b) issue directions to NBFCs and their Auditors on matters relating to balance sheet and undertake
special audit as also to impose penalty on erring auditors;
(c) prohibit NBFCs from accepting deposits for violation of the provisions of the RBI Act and direct
NBFCs not to alienate their assets;
(d) file winding up petition against NBFCs for violations of the provision of the Act/ directions;
(e) impose penalty directly on NBFCs for non-compliance with the provisions of the Act.

Thus, with the amended Act came in to existence since January 1, 1998, the whole gamut of
regulatory focus got redefined primarily to focus on NBFCs accepting public deposits. Accordingly,
prudential norms pertaining to income recognition, asset classification and provisioning were
prescribed in January 1998 and for the first time, assets of NBFCs were put under comprehensive
regulatory regime (RBI, 1999).

The regulatory framework for NBFCs is based on three criteria, viz., (a) the acceptance or otherwise
of public deposits; (b) the size of NBFCs, and (c) the type of activity performed. To ensure the
adherence of the NBFCs to the regulatory guidelines, a four pronged supervisory model which
included: (i) on-site inspection based on the CAMELS methodology; (ii) off-site monitoring
supported by state-of-the-art technology; (iii) market intelligence; and (iv) exception reports of
statutory auditors was put in place by the Reserve Bank (RBI, 2005). The basic tenet of regulation
and supervision of NBFCs sector is that, while ensuring the interests of depositors, the functioning of
NBFCs should be in consonance with the monetary policy framework so that it does not lead to
systemic aberrations. The extant key regulatory and supervisory norms are presented in the Annex II.
Over a period, considering the rapid growth in the number of NBFC-ND segment in terms of their
size and numbers within the financial system, even these NBFCs not accepting public deposits with
assets size of Rs. 100 crore and above (defined as systemically important) were also brought within
the fold of RBI‘s regulatory framework since 2006. Though initially it was intended to regulate in a
limited manner, since recent years, there is a visible progress in the convergence of regulatory norms
between both the deposit taking and non-deposit taking NBFCs of systemically important category. It
is worth being pointed out that as on March 2010, out of 12630 registered NBFCs with the Reserve
Bank, only 311 companies are deposit taking companies as per the returns filed with the regulatory
authority. The extant regulations are applicable only to larger NBFCs (with assets size of Rs. 100
crore and above) among the non-deposit taking NBFCs which are systemically important. This
means, from the remaining around 12000 companies, those companies whose assets are between Rs.
50 crore and Rs. 100 crore are only required to submit an auditor‘s certificate to the regulator.
Interestingly this is meant to monitor their progress towards the threshold limit of Rs. 100 crore.
There is no mechanism to ensure if these NBFCs are indeed not accepting public deposits unless
some complaints are received from the public. Therefore, banks‘ exposures to these institutions are
also not clear. In view of this, it is necessary that even among the non-deposit taking companies there
should be some mechanism to monitor their activities and their progress.

4.5.2 Regulatory Focus relating to Raising of Resources by NBFCs:

Consequent upon the amendments to the Reserve Bank of India Act in 1997, the Reserve Bank has
narrowed down its focus by confining its regulatory focus only in relation to public deposits from the
originally defined broader concept of ‗regulated deposits‘. Hence, it needs to be underlined that the
concept of ‗public deposits10‘ mobilised by NBFCs as on March 31, 1998 and after, is different from
the earlier concept of regulated deposits. NBFCs are not permitted to accept deposits payable on
demand, as these companies are not part of payment system. The accepted global practice is that only
banks by virtue of being part of payment system and well regulated and supervised should be the
main institutions that are permitted to seek such deposits. Therefore NBFCs are discouraged to raise
public deposits; however, because of legacy of the past, still a number of NBFCs are being allowed to
raise public deposit11. At the same time, the public deposit taking activities of NBFCs would need to
be regulated in the same manner as banks. This is the underlying principle of the regulatory regime
presently being put in place in respect of NBFCs in India.

Only those NBFCs that are registered with and specifically authorized by the Reserve Bank are
entitled to accept public deposits. The quantum of deposits accepted by a company is linked to its net
owned funds (NoF) and credit ratings by the approved rating agencies. Borrowings by way of inter-
corporate deposits, issue of secured debentures/ bonds, deposits from shareholders by a private
limited company and deposits from directors by both public as well as private limited companies
have been excluded from the purview of public deposits.

On October 10, 2000, the Reserve Bank exempted money received by NBFCs by issue of commercial
paper (CP) from the purview of public deposits. These apart, NBFCs are also permitted to borrow
from the banking system directly by way of loans and advances. And till recently many of the
categories of such loans and advances by commercial banks to NBFCs were permitted to be treated as
priority sector advances. Further, NBFCs borrow indirectly, by banks subscribing to debentures and
CPs issued by these companies. It needs to be underscored that presently, there are no regulatory
limits prescribed for NBFCs to borrow from the banking system. However, at the banks‘ level, there
are exposure norms with respect to NBFCs prescribed by the banking regulator.

4.5.3 Prudential Limit on Banks’ Exposures to NBFCs:

The banking sector regulator (RBI) has put in place prudential norms with respect to the exposure of
banks to NBFCs (both lending and investment, including off-balance sheet exposures). Exposure of a
bank to a single NBFC / NBFC-AFC should not exceed 10 per cent /15 per cent, respectively, of the
bank's capital funds as per its last audited balance sheet. Banks may, however, be permitted to exceed
their exposures on a single NBFC / NBFC-AFC(asset finance company) up to 15 per cent / 20 per
cent, respectively, of their capital funds provided the exposure in excess of 10 per cent / 15 per cent,
respectively, is meant for funds on-lent by the NBFC / NBFC-AFC to the infrastructure sector.
Further, exposure of a bank to the NBFCs-IFCs (Infrastructure Finance Companies) should not
exceed 15 per cent of its capital funds as per its last audited balance sheet, with a provision to
increase it to 20 per cent if the same is on account of funds on-lent by the IFCs to the infrastructure
sector. Further, the regulator has advised the banks to consider fixing ‗internal limits‘ for their
aggregate exposure to all NBFCs put together. Infusion of capital funds after the published balance
sheet date may also be taken into account for the purpose of computing exposure ceiling. Even
registered residuary NBFCs are permitted to raise resources by way of borrowings from the banking
system limited to ‗one time equivalent of net owned fund (NoF)‘.

Even if the NBFCs are not raising resources directly by way of public deposits, from the regulator‘s
perspective, there is a strong rationale to regulate and supervise them in the contemporary globalised
financial system. The rationale emanates principally from their systemic inter-connectedness. For, the
losses, if any, in whatever the form for any set of institutions would affect the system as a whole and
eventually the general public. In fact, it was with this consideration, during the recent global financial
crisis, the Reserve Bank provided temporary liquidity support to even the non-deposit taking NBFCs
that are systemically important through a special purpose vehicle (SPV), i.e., by way of purchasing of
government guaranteed bonds.

4.6 Analysis of NBFCs and Banks Financial Inter:

4.6.1 Connectedness:

Against the above setting, an attempt is made, in this section, to analyse the extent that NBFCs (both
deposit taking and non-deposit taking systemically important) and the banking system are financially
inter-linked. The financial institutions have become increasingly and intricately inter-connected
among each other world over. From the financial stability point of view, the inter-connectedness
would also mean that anything happening in a particular segment of the financial system will have its
consequence over the entire financial system. Kroszner et al, (2010) pointed out that many layers of
intermediation create chains of inter-linkages that can make the entire system more vulnerable to
shocks in any one market or at any single institution.

The inter-connectedness can be explained in two forms i.e., organizational (structural) and financial.
The former refers to a situation where NBFCs are either subsidiaries of the banks or the holding
companies with banks and other type of financial institutions as their subsidiaries. In India as of now,
barring HDFC Bank, being a subsidiary of an NBFC (Housing Development Finance Company Ltd),
there seems no other bank a subsidiary of an NBFC, whereas the reverse is common. In fact, there
has been increasing interest in the recent past in setting up NBFCs in general by banks (RBI, 2018).
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. For instance, all major
banks and financial Institutions both in private and public sector (domestic and foreign) have some
form of subsidiary or an NBFC. Even this type of inter-connected NBFCs are less in number when
compared with NBFCs that are standalone entities, or mostly owned by the industrial houses.
However, practically all major banks in India have subsidiaries which undertake some or the other
form of financial services activities such as mutual funds, merchant banking, insurance business,
venture capital etc13. Although this kind of organizational interconnectedness is worthwhile to
explore in a more comprehensive manner, due to paucity of relevant data, this study is delimited to
only the financial inter-connectedness between banking system and the NBFCs (Exhibit II).
4.7 Banks’ Exposure to NBFCs:

In the context of the recent global crisis, it was observed that undue reliance on borrowed funds can
be a source of risk and a more stable retail base of deposits are good for both the bottom line and
resilience of the financial institutions. In that context, analysis of liabilities side of the balance sheets
of NBFCs revealed that the major sources of finance are public deposits, debentures, borrowings,
commercial papers and inter-corporate loans. Liabilities of the consolidated balance sheets of NBFCs
revealed that borrowings constitute the largest size of liabilities, even for the deposit taking NBFCs;
corresponding to this, the size of public deposits are very miniscule as pointed out earlier.

The consolidated balance sheets of NBFCs (both the categories i.e., deposit taking and non-deposit
taking and systemically important companies) revealed that more than 68 per cent of the
consolidated balance sheet constitutes borrowings. Out of which, 30 per cent resources are borrowed
from banks and financial institutions as at the end of March 2018. These borrowings are in the forms
of direct advances and loans (both secured and unsecured). These apart, borrowings by way of
debentures issued by the NBFCs constituted around 33 per cent and of which a sizable portion is
subscribed by the banking system. Both of these are on the rise over a period .
 sources of Borrowings of NBFcs-ND:

At end- At end- At end- Share in per cent

Items March March Sept March March Sept
2017 2018 2018 2017 2018 2018
1 2 3 4 5 6 7
1. Debentures 5,795 6,321 6,681 48.6 46.2 42.5
2. Bank borrowings 2,527 3,318 4,108 21.2 24.2 26.1
3. Borrowings from FIs 263 221 277 2.2 1.6 1.8
4. Inter-corporate 404 500 701 3.4 3.7 4.5
borrowings
5. Commercial paper 1,119 1,224 1,525 9.4 8.9 9.7
6. Borrowings from 193 175 1 1.6 1.3 0.01
government
7. Subordinated debts 333 352 361 2.8 2.6 2.3
8. Other borrowings 1,283 1,580 2,062 10.8 11.5 13.1
9. total borrowings 11,917 13,691 15,71 100.0 100.0 100.0
6
Note: Data are provisional.
source: RBI Supervisory Returns.

4.8 Experiences of Select Countries: Banks Exposures to NBFCs:

It is significant to note that the practice of NBFCs borrowing from banking system is not un-common
in many countries. A survey of select countries experience revealed that the NBFCs in general are
relying on the banking system for their source of funds to a great extent. In Bangladesh, for instance,
NBFCs collect funds from a wide range of sources including borrowings from banks, financial
institutions, insurance companies and international agencies as well as deposits from other
institutions and the public. Incidentally, line of credit from banks constitutes the major portion of
total funds for NBFCs in that country. Deposit from public is another important source of fund for
NBFIs, which is stated to be increasing over the years. NBFIs are allowed to take deposits directly
from the public as well as institutions. Just as the case of India, there are regulatory restrictions for
the NBFIs to collect public deposits with less than one year. Pointed out that there is evident that
loan from bank and deposit base are the key sources for NBFIs‘ fund and account for nearly 75 per
cent of the total. At the same time over the period bank loans as the main source of funds is
decreasing, while the importance deposit base is gaining momentum. NBFIs have to offer higher rates
on deposits due to competition from banks to attract deposits and such high cost of fund for NBFIs
compel them to operate on a relatively low profit margin.

Similarly it was observed from the analysis that in several other countries such as Indonesia, Thailand
etc. similar kind of interconnectivity between banks and NBFCs were found with higher exposures to
NBFCs.

4.9 Conclusion and Policy Implications:

It is thus clear from the analysis that NBFCs are highly reliant on the banking system for their large
chunk of funds. As a policy when the NBFCs are discouraged from raising public deposits, these
companies are becoming non-deposit taking, while increasingly substituting public deposits with
borrowings from the banking system. Some NBFCs, being deposit taking companies, rely heavily on
borrowings from banks. Thus there seems to be strong growing systemic inter-connectedness
between banks and NBFCs with high dependency of the latter on the former. This has even more
systemic concerns than NBFCs directly raising resources by way of public deposits. NBFCs‘ high
dependency on the banks for their funding means short term funding of longer term assets of NBFCs.

There is a possibility that chains of inter-connectedness can make the system more vulnerable to
shocks in any one market or at any single larger institution. This kind of high dependency of NBFCs
on banking system would mean systemic vulnerability in the context that NBFCs are involved in
higher risk activities vis-à-vis the banking system. In other words, banks are indirectly exposed to a
different cost incentive structure. Even the slightest symptoms of crisis or crisis like situations,
NBFCs can face pressure of withdrawal from the banks similar to the one encountered from mutual
funds immediately after the Lehman Brothers episode. The banking system‘s exposure to NBFCs has
considerably increased over the years and the concerns will be further accentuated in case the banks
face tight liquidity conditions. If there are any troubles in the NBFCs segment, it can spill over to the
banking system and the financial system, especially as they have high exposures to capital market and
high risk business. The spill over can also be possible from the banking system and NBFCs could be
placed in a vulnerable situation when banks become over sensitive to a liquidity crisis or imminent
crisis like situation. Banks may either become too reluctant to lend to NBFCs or at the extreme case,
they may completely refrain from lending to NBFCs which would further precipitate the situation.
Any strain in the normal chain would compel NBFCs to turn to money market with higher costs to
wade over the tight liquidity conditions disturbing the money market as well. As NBFCs lend
medium to long term when compared with the banks, while borrowing short from the banking
system, there is possibility of asset-liability mismatch.

4.9.1 Policy Implications:

As the assets of NBFCs are expanding considerably, there is a clear need for the services of both
deposit taking and non-deposit taking NBFCs in India. There is even more strong case when the
economy is on the fast growth track requiring strong support of the well developed and diversified
financial system. Therefore, the correct policy choices should include promoting an appropriate
degree of diversity in channels for financing, along with a balanced set of incentives for
complementary development of banking and NBFCs and markets in promoting economic growth.
Given a regulated approach rather than restrictive policy approach, NBFCs will be able to play a
more positive role for the promotion of economic activities that are not served by the banking system.
Further, NBFCs may be encouraged with proactive policy measures to create a healthy competition
for the banking system, while also provide wider choice to investors for savings.

NBFCs should give serious thought to broad base the sources of funding by raising resources through
the issue of bonds/ debentures. This requires a strong policy stimulus for the development of
corporate bond /debentures market. Such development would provide an alternate avenue for the
savers and also compete directly with the banking system to promote efficiency. NBFCs‘ future
growth depends to a large extent on the success they achieve in diversification of sources of funds.
When it comes to the prudential regulation of banks‘ exposures to NBFCs, there is no distinction
between NBFC-D and NBFC-ND and all are permitted to borrow from the banking system equally. It
is possible that those companies which are non-deposit taking with less than Rs. 100 crore assets
would indulge in even higher risk activities as they are ‗not regulated‘. Hence, there seems to be a
scope to fix separate ceiling for NBFC-ND companies to borrow from the banking system. In the fast
changing scenario, supervisory efforts require a shift in balance from a focus on the ‗traditional
system oriented mainly to compliance‘ to ‗risk prevention‘ measures. Perhaps the policy can
encourage more consolidation among the NBFCs and reduce the total number of registered
companies from existing 12400 companies to a smaller number of strong companies by weeding out
the unviable and weaker companies. This would ensure the feasibility of bringing the entire NBFCs
segment under the regulatory framework on par with banking system. Going forward, there is a
requirement for redefinition of ‗systematically important NBFCs-ND‘ as against the present
definition based only on the size of assets. In line with the Basel Committee on Banking Supervisors
(BCBS)‘s recommendations, besides the size, it needs to take into account the degree of inter-
connectedness with other financial institutions within the domestic financial system, and the degree
of specialized services they provide for which there are few substitutes. In fact the definition can go a
step ahead of BCBS‘s definition by taking into account the ‗complexity of business‘ undertaken by
them. Progressive movement towards Basel norms is expected to help mitigate the systemic risks as
there are relevant provisions in Basel III to address systemic risks and inter-connectedness among
systemically important institutions by mitigating the risks arising from firm-level exposures. Higher
liquidity requirements against the excessive reliance on wholesale short-term funding and higher
capital requirements for inter-financial sector and intra-financial sector exposures are some of the key
prudential requirements need consideration. Prudential norms relating to NBFCs‘ exposures to capital
markets also need a relook. Last but not least, presently the system-wide inter-institutional exposure
related data is not available at a single point. This is essential, particularly for the regulators to take a
wholesome view.

4.9.2 Types of Non Banking financial institutions:

Nabard:

National Bank for Agriculture and Rural Development (NABARD) is an Apex Development
Financial Institution in India. The Bank has been entrusted with "matters
concerning Policy Planning and Operations in the field of credit for Agriculture and
other Economic activities in Rural areas in India". NABARD is active in developing Financial
Inclusion policy.
NABARD was established on the recommendations of B.Sivaramman Committee, (by Act 61, 1981
of Parliament) on 12 July 1982 to implement the National Bank for Agriculture and Rural
Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning
and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development
Corporation (ARDC). It is one of the premier agencies providing developmental credit in rural areas.
NABARD is India's specialised bank for Agriculture and Rural Development in India.

The initial corpus of NABARD was Rs.100 crores. Consequent to the revision in the composition of
share capital between Government of India and RBI, the paid up capital as on 31 May 2017, stood at
Rs.6,700 crore with Government of India holding Rs.6,700 crore (100% share). The authorized share
capital is Rs.30,000 crore.[5][6]

International associates of NABARD include World Bank-affiliated organisations and global

developmental agencies working in the field of agriculture and rural development. These
organizations help NABARD by advising and giving monetary aid for the upliftment of the people in
the rural areas and optimising the agricultural process

NABARD has been instrumental in grounding rural, social innovations and social enterprises in the
rural hinterlands. It has in the process partnered with about 4000 partner organisations in grounding
many of the interventions be it, SHG-Bank Linkage programme, tree-based tribal communities‘
livelihoods initiative, watershed approach in soil and water conservation, increasing crop productivity
initiatives through lead crop initiative or dissemination of information flow to agrarian communities
through Farmer clubs. Despite all this, it pays huge taxes too, to the exchequer – figuring in the top
50 tax payers consistently. NABARD virtually ploughs back all the profits for development spending,
in their unending search for solutions and answers. Thus the organisation had developed a huge
amount of trust capital in its 3 decades of work with rural communities.

NABARD is the most important institution in the country which looks after the development of the
cottage industry, small scale industry and village industry, and other rural industries.

NABARD also reaches out to allied economies and supports and promotes integrated development.

NABARD discharge its duty by undertaking the following roles :

  Serves as an apex financing agency for the institutions providing investment and production
credit for promoting the various developmental activities in rural areas
 Takes measures towards institution building for improving absorptive capacity of the credit
delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of
credit institutions, training of personnel, etc.

Annual Report and balance sheet of NABARD:

National Bank for Agriculture and Rural Development Cash flow for the year ended 31 March 2019

Net Cash Flow from Operating Activities (A) -69889,19,62 -56435,59,14

(b) Cash Flow from Investing Activities
Income from Investment (including Discount Income) 3370,93,64 2996,53,41
Purchase of Fixed Asset -80,57,00 -106,93,90
Sale of Fixed Assets 7,17,55 6,49,66
Increase / Decrease in Investment -9479,34,46 -5627,99,87
Net Cash used / generated from Investing Activities (B) -6181,80,27 -2731,90,70
(c) Cash Flow from Financing Activities
Grants / Contributions received -262,07,41 -441,15,07
Proceeds of Bonds 31781,87,15 23483,61,72
Increase / (Decrease) in Borrowings 33787,29,07 10120,19,34
Increase / (Decrease) in Deposits 9696,68,77 20035,15,45
Divided Paid including Tax on Dividend -10,12,92 -7,73,66
Increase in Share capital 2087,25,98 3889,44,00
Net Cash raised from Financing Activities (C) 77080,90,64 57079,51,79
Net increase in Cash and Cash Equivalent (A)+(B)+(C ) 1009,90,75 -2087,98,04
Cash and Cash Equivalent at the beginning of the year 2045,56,91 4133,54,95
Cash and cash equivalent at the end of the year 3055,47,66 2045,56,91

4.9.3 IDBI:
Industrial Development Bank of India (IDBI Bank Limited) was established in 1964 by an Act to
provide credit and other financial facilities for the development of the fledgling Indian industry.
Initially it operated as a subsidiary of Reserve Bank of India RBI transferred it to GOI . Many
institutes of national importance finds their roots in IDBI like Sidbi, Exim bank, NSE and NSDL. The
war cry for reforms in financial space saw GOI reducing its stake in the bank in the year 2019. At
present, Life Insurance Corporation of India holds 51% stake in IDBI Bank. Following Life Insurance
Corporation of India (LIC) acquiring 51 per cent of the total paid-up equity share capital of the bank,
IDBI Bank has been categorised as a private sector bank for regulatory purposes with effect from
January 21, 2019.

For the first quarter of the current financial year 2017-18, the bank reported a net loss of Rs.853 crore
compared to a profit of Rs.241 crore during the corresponding period last financial year. In the fourth
quarter of financial year 2016-17, the bank had reported a loss of Rs.3,200 crore.

While the reported loss was lower than the preceding quarter, bad loans continued to surge. In the
quarter ending September 2017 the bank bounced back with a loss of Rs.198 crore compared to a loss
of over Rs.2,000 crore in the previous quarter. The bank is expected to return to profit in the
upcoming financial year.

Annual Report of IDBI:

Period Ending: 2019 2018 2017 2016

31-Mar 31-Mar 31-Mar 31-Mar
Total Current Assets - - - -
Total Assets 3211113.98 3509088.63 3624879.58 3752747.21
Cash & Due from Banks 134937.74 155666.25 143409.15 234403.14
Other Earning Assets, Total 1016012.71 1118405.1 1121083.5 928942.06
Net Loans 1463151.01 1699480.63 1901583.42 2156515.79
Property/Plant/Equipment, Total -
83099.08 68529.28 74332.26 75219.25
Net
Property/Plant/Equipment, Total -
112979.61 97659.64 100493.06 97984.83
Gross
Accumulated Depreciation, Total -29880.53 -29130.36 -26160.79 -22765.58
Goodwill, Net - - - -
Intangibles, Net - - - -
Long Term Investments 119.4 135 255 255 z
Other Long Term Assets, Total 196886.12 119891.24 76242.11 39514.3
Other Assets, Total 316907.92 346981.15 307974.14 317897.68
Total Current Liabilities - - - -
Total Liabilities 2827646.89 3290009.07 3392256.47 3472162.86
Accounts Payable 10834.06 15137.53 17670.84 19620.03
Payable/Accrued - - - -
Accrued Expenses - - - -
Total Deposits 2271901.07 2477765.67 2682156.79 2650873.93
Other Bearing Liabilities, Total - - - -
Total Short Term Borrowings 16765.26 15577.92 14299.45 9896.19
Current Port. of LT Debt/Capital
- - - -
Leases
Other Current liabilities, Total 975.91 815.79 581.08 401.21
Total Long Term Debt 452877.24 631855.27 563639.77 705916.43
Long Term Debt 452877.24 631855.27 563639.77 705916.43
Capital Lease Obligations - - - -
Deferred Income Tax - - - -
Minority Interest 969.79 859.57 705.68 614.56
Other Liabilities, Total 73323.56 147997.32 113202.86 84840.5
Total Equity 383467.09 219079.56 232623.11 280584.35
Redeemable Preferred Stock, Total - - - -
Preferred Stock - Non
- - - -
Redeemable, Net
Common Stock, Total 77362.95 30838.63 20588.15 20588.15
Additional Paid-In Capital 430131.96 181604.83 123015.3 123015.3
Retained Earnings (Accumulated
-191304.74 -43902.72 34842.16 80902.63
Deficit)
Treasury Stock - Common - - - -
ESOP Debt Guarantee - - - -
Unrealized Gain (Loss) 67276.91 50538.82 54177.49 56078.27
Other Equity, Total - - - -
Total Liabilities & Shareholders'
3211113.98 3509088.63 3624879.58 3752747.21
Equity
Total Common Shares Outstanding 7736.29 3083.86 2058.82 2058.82
Total Preferred Shares Outstanding - - - -
4.9.4 IFCI:
IFCI, previously Industrial Finance Corporation of India, is a Non-Banking Finance Company in the
public sector. Established in 1948 as a statutory corporation, IFCI is currently a company listed
on BSE and NSE. IFCI has seven subsidiaries and one associate.

It provides financial support for the diversified growth of Industries across the spectrum. The
financing activities cover various kinds of projects such as airports, roads, telecom, power, real estate,
manufacturing, services sector and such other allied industries. During its 70 years of existence,
mega-projects like Adani Mundra Ports, GMR Goa International Airport, Salasar Highways, NRSS
Transmission, Raichur Power Corporation, among others, were set up with the financial assistance of
IFCI.

The company has played a pivotal role in setting up various market intermediaries of repute in several
niche areas like stock exchanges, entrepreneurship development organisations, consultancy
organisations, educational and skill development institutes across the length and breadth of the
country.

The Govt. of India has placed a Venture Capital Fund of Rs. 200 crore for Scheduled Castes (SC)
with IFCI with an aim to promote entrepreneurship among the Scheduled Castes (SC) and to provide
concessional finance. IFCI has also committed a contribution of Rs.50 crore as lead investor and
Sponsor of the Fund. IFCI Venture Capital Funds Ltd., a subsidiary of IFCI Ltd., is the Investment
Manager of the Fund. The Fund was operationalized during FY 2014-15 and IVCF is continuously
making efforts for meeting the stated objective of the scheme.

Further, the Government of India designated IFCI as a nodal agency for the ―Scheme of Credit
Enhancement Guarantee for Scheduled Caste (SC) Entrepreneurs‖ in March, 2015, with the objective
of encouraging entrepreneurship in the lower strata of society. Under the scheme, IFCI would provide
guarantees to banks against loans to young and start-up entrepreneurs belonging to scheduled castes.
Annual Report of IFCI:

At as on March At as on March
31, 2018 31, 2019
I. Equity & Liablities
(1) Shareholders' Funds
(a) Share Capital 1,920.99 1,925.88
(b) Reserves and Surplus 3,859.14 4,804.44
(2) Non-current Liabilities
(a) Long-term Borrowings 16,105.17 19,170.10
(b) Long-term Liabilities 875.71 761.45
(c) Long-term Provisions 141.1 238.49
(3) Current Liabilities
(a) Short-term Borrowings 200 –
(b) Trade Payables 92.98 48.56
(c) Other Current Liabilities 4,752.00 4,703.68
(d) Short-term Provisions 18.42 21.84
Total 27,965.51 31,674.44
II. Assets
(1) Non-current Assets
(a) Fixed Assets
(i) Tangible Assets 955.46 992.38
(ii) Intangible Assets 1.99 2.46
(iii) Capital work-in-progress 0.31 0.64
(b) Non–current Investments 5,479.38 5,557.40
(c) Deferred Tax Assets (Net) 1,717.11 985.96
(d) Long–term Loans & Advances
(i) Loans 14,143.30 18,149.81
(ii) Others 146.41 92.1
(e) Other non–current assets 5.1 5.14
(2) Current Assets
(a) Current Investments 1,157.18 836.14
(b) Trade Receivables 15.5 30.28
(c) Cash and Bank Balances 847.54 1,181.95
(d) Short–term Loans and Advances
(i) Loans (Current Maturity of Long–term
3,201.91 3,615.18
Loans)
(ii) Others 137.23 76.43
(e) Other Current Assets 157.09 148.57
Total 27,965.51 31,674.44

4.9.5 EXIM:
Export–Import Bank of India is a finance institution in India, established in 1982 under Export-
Import Bank of India Act 1981. Since its inception, Exim Bank of India has been both a catalyst and
a key player in the promotion of cross border trade and investment. Commencing operations as a
purveyor of export credit, like other export credit agencies in the world, Exim Bank India has, over
the period, evolved into an institution that plays a major role in partnering Indian industries,
particularly the Small and Medium Enterprises, in their globalisation efforts, through a wide range of
products and services offered at all stages of the business cycle, starting from import
of technology and export product development to export production, export marketing, pre-shipment
and post-shipment and overseas investment.

The Bank's functions are segmented into several operating groups including:

Corporate Banking Group which handles a variety of financing programmes for Export Oriented
Units (EOUs), Importers, and overseas investment by Indian companies.

 Project Finance / Trade Finance Group handles the entire range of export credit services such
as supplier's credit, pre-shipment Agriculture Business Group, to spearhead the initiative to
promote and support Agricultural exports. The Group handles projects and export transactions
in the agricultural sector for financing.
 Small and Medium Enterprise: EXIM Bank India handles credit proposals from SMEs under
various lending programmes of the Bank.
 Export Services Group offers variety of advisory and value-added information services aimed
at investment promotion
Annual report of EXIM:

Previous Year This year

As on 31.12.2018 As on 31.12.2019
LIABILITIES
SCHEDULE
73,593,663,881 1.Capital I 78,593,663,881
51,645,199,126 2.Reserves II 22,407,896,155
-6,297,093,518 3.Profit & Loss Account Ill 852,410,797
807,006,844,695 4.Notes, Bonds & Debentures 736,604,069,436
5.Bills Payable
2,895,662,115 6.Deposits IV
188,381,345,943 7.Borrowings V 2,631,885,888
137,179,101,933
8.Current Liabilities
59,885,289,452 & Provisions for contingencies 46,077,677,609
41,318,412,742 9.Other Liabilities 53,068,592,621

1,218,429,324,436 Total 1,077,415,298,320

ASSETS
71,678,740,155 1. Cash & Bank Balances VI 23,032,304,262
64,121,018,098 2. Investments VII 52,101,590,047
982,493,226,261 3. Loans & Advances VIII 925,544,729,032
4. Bills of Exchange and
Promissory
24,300,000,000 Notes Discounted/Rediscounted IX
1,248,611,517 5. Fixed Assets X 2,297,705,021
74,587,728,405 6. Other Assets XI 74,438,969,958

1,218.429,324,436 Total 1,077.,415.298,32D

CONTINGENT LIABILITIES
(As at 31 12 2018)
GENERAL FUND
 (i) Acceptances,Guarantees,
endorsements & other
108,838,516,000 obligations 156,411,320,366
(ii) On outstanding forward
2,834,132,600 exchange contracts 1,786,996,597
(iii) On underwriting
commitments
(iv) Uncalled Liability on
155,363,300 partly paid investments 167,934,900
(v) Claims on the Bank not
1,851,000,000 acknowledged as debts 7,234,407,205
(vi) Bills for collection
(vii) On participation certificates
(viii) Bills
Discounted/Rediscounted
(ix) Other monies for which the
40,878,511,200 Bank is contingently liable 9,763,835,473

154,557,523,100 Total 175,384,494,541

4.9.6 SIDBI:
Small industrial Development Bank of India (SIDBI) is a development financial institution in India,
headquartered at Lucknow and having its offices all over the country. Its purpose is to provide
refinance facilities and short term lending to industries, and serves as the principal financial
institution in the Micro, Small and Medium Enterprises (MSME) sector. SIDBI also coordinates the
functions of institutions engaged in similar activities. It was established on April 2, 1990, through an
Act of Parliament. It is headquartered in Lucknow. SIDBI operates under the Department of Financial
Services, Government of India.

SIDBI is one of the four All India Financial Institutions regulated and supervised by the Reserve
Bank; other three are EXIM Bank, NABARD and NHB. But recently NHB is in government control
by taking more than 51% stack. They play a salutary role in the financial markets through credit
extension and refinancing operation activities and cater to the long-term financing needs of the
industrial sector.
SIDBI is active in the development of Micro Finance Institutions through SIDBI Foundation for
Micro Credit, and assists in extending microfinance through the Micro Finance Institution (MFI)
route.[4] Its promotion & development program focuses on rural enterprises promotion and
entrepreneurship development.

In order to increase and support money supply to the MSE sector, it operates a refinance program
known as Institutional Finance program. Under this program, SIDBI extends Term Loan assistance to
Banks, Small Finance Banks and Non-Banking Financial Companies. Besides the refinance
operations, SIDBI also lends directly to MSMEs.

As part of non-financial intervention in the MSME sector, SIDBI had also undertaken various
measures in the past. Recently, in association with credit rating agency CRISIL and Credit
Information Company TransUnion CIBIL it has introduced "CriSidEx" and "MSME Pulse".

CriSidEx, India‘s first sentiment index for micro and small enterprises (MSEs) has been developed
jointly by CRISIL & SIDBI. It is a composite index based on a diffusion index of 8 parameters and
measures MSE business sentiment on a scale of 0 (extremely negative) to 200 (extremely positive).
The crucial benefit of CriSidEx is that its readings will flag potential headwinds and changes in
production cycles and thus help improve market efficiencies. And by capturing the sentiment of
exporters and importers, it will also offer actionable indicators on foreign trade.

Annual Report of SIDBI:

March 31, March 31,

Capital SCHEDULE 2019 2018
Capital I 5,319,220,309 4,869,822,500
Reserves, Surplus and Funds II 133,001,467,502 112,300,669,051
Deposits III 239,869,217,622 205,751,227,905
Borrowings IV 433,824,406,602 423,566,851,125
Other Liabilities and provisions V 68,676,106,996 69,259,689,195
Deferred Tax Liability 216,046,642 417,430,482
Total 880,906,465,673 816,165,690,258

ASSETS
Cash and bank balances VI 31,516,520,257 32,853,858,558
Investments VII 79,395,107,745 71,262,958,093
 Loans and Advances VIII 742,417,939,816 688,737,941,265
Fixed Assets IX 2,059,343,964 2,105,737,391
Other Assets X 25,517,553,891 21,205,194,951
Total 880,906,465,673 816,165,690,258

Contingent Liabilities XI 100,119,646,746 104,107,698,369

INCOME
Interest and Discount XII 65,084,900,033 58,790,790,854
Other Income XIII 3,798,119,063 2,812,057,033
Total 68,883,019,096 61,602,847,887

EXPENDITURE
Interest and Financial charges 43,864,721,888 37,453,910,605
Operating expenses XIV 5,472,419,960 4,318,565,251
Provisions and Contingencies 915,870,357 2,348,718,729
Total 50,253,012,205 44,121,194,585
Profit before Tax 18,630,006,891 17,481,653,302
Provision for Income Tax 6,551,517,517 5,823,390,333
Deferred Tax Adjustment 201,383,841 807,702,628
Share of earning/loss in associates 9,341,843 15,786,774
Profit after tax 12,289,215,058 12,481,752,371
Profit brought Forward 726,574,101 613,043,673
Total Profit and Loss 13,015,789,159 13,094,796,044

4.9.7 LIC:
Life Insurance Corporation of India (abbreviated as LIC) is an Indian state-owned insurance group
and investment corporation owned by the Government of India.
The Life Insurance Corporation of India was founded in 1956 when the Parliament of India passed
the Life Insurance of India Act that nationalised the insurance industry in India. Over 245 insurance
companies and provident societies were merged to create the state-owned Life Insurance Corporation
of India.

As of 2019, Life Insurance Corporation of India had total life fund of 28.3 trillion.The total value of
sold policies in the year 2018-19 is ₹21.4 million. Life Insurance Corporation of India settled 26
million claims in 2018-19. It has 290 million policy holders.
The Oriental Life Insurance Company, the first company in India offering life insurance coverage,
was established in Kolkata in 1818. Its primary target market was the Europeans based in India, and it
charged Indians heftier premiums. Surendranath Tagore had founded Hindusthan Insurance Society,
which later became Life Insurance Corporation.

The Bombay Mutual Life Assurance Society, formed in 1870, was the first native insurance provider.
Other insurance companies established in the pre-independence era included.

Postal Life Insurance (PLI) was introduced on 1 February 1884

 Bharat Insurance Company (1896)

 United India (1906)
 National Indian (1906)
 National Insurance (1906)
 Co-operative Assurance (1906)
 Hindustan Co-operatives (1907)

Annual Report of LIC:

Particulars As at As at As at
March 31, March 31, April 1,
2019 2018 2017
Balance at the end of the year
(i) Statutory Reserve u/s 29C of the National
Housing Bank 0.15 0.14 0.13
Act, 1987
(ii) Amount of Special Reserve u/s 36(1)(viii) of
Income-Tax Act, 5,104.34 4,354.35 3,794.36
1961 taken into account for the purposes of
Statutory Reserve
u/s 29C of the NHB Act, 1987
Total 5,104.49 4,354.49 3,794.49
(v) General Reserve
Opening Balance 5,252.98 4,752.93 -
Add: Current Year Transfer 599.99 500.38 -
Add: Minority Adjustment - - -
 Less : Considered for Cost of Control for additional
shares in LICHFL 0.25 0.33 -
Care Homes Ltd
Closing Balance 5,852.72 5,252.98 4,752.93
(vi) Surplus in the Statement of Profit and Loss
Opening balance 2,833.41 2,265.18 -
Add: Total Comprehensive Income for the year 2,433.35 2,013.67 -
Less: Appropriations
Dividend Paid and Tax on Dividend Paid 413.70 376.62 -

Transfer to General Reserve 599.99 500.38 -

Transfer to Special Reserve - II 749.99 559.99 -

Transfer to Statutory Reserve u/s 29C of the NHB

Act, 1987 0.01 0.01 -

Share of Post Acquistion Profit considered in Cost of

Control for 18.86 8.44 -
additional shares in LICHFL Care Homes Ltd.

Closing Balance 3,484.21 2,833.41 2,265.18

Total 16,229.83 14,210.19 12,573.14

All India Financial Institutions:

At the end of March 2018, there were four financial institutions under the regulation and supervision
of the Reserve Bank viz., the Export Import Bank of India (EXIM Bank), the National Bank for
Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India
(SIDBI) and the National Housing Bank (NHB) Financial assistance sanctioned by AIFIs during
2017-18 increased by 2.4 per cent whereas disbursement growth was robust at 21.1 per cent in line
with an upturn in overall economic activity. Disbursement by all AIFIs expanded during the year,
with the largest expansion recorded by SIDBI mainly reflecting increase in refinancing to the banks
for on-lending to the MSME sector
4.9.8 SEBI:
The Securities and Exchange Board of India (SEBI) is the Regulator for the Securities market
in India owned by Government of India. It was established in 1988 and given Statutory Powers on 30
January 1992 through the SEBI Act, 1992.

Functions and responsibilities

The Preamble of the Securities and Exchange Board of India describes the basic functions of the
Securities and Exchange Board of India as "...to protect the interests of investors in securities and to
promote the development of, and to regulate the securities market and for matters connected there
with or incidental there to".

SEBI has to be responsive to the needs of three groups, which constitute the market:

 Issuers of securities
 Investors
 Market intermediaries

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive. It
drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its
executive function and it passes rulings and orders in its judicial capacity. Though this makes it very
powerful, there is an appeal process to create accountability. There is a Securities Appellate Tribunal
which is a three-member tribunal and is currently headed by Justice Tarun Agarwala, former Chief
Justice of the Meghalaya High Court. A second appeal lies directly to the Supreme Court. SEBI has
taken a very proactive role in streamlining disclosure requirements to international standards.

For the discharge of its functions efficiently, SEBI has been vested with the following powers:

 To approve by−laws of Securities exchanges.

 To require the Securities exchange to amend their by laws.
  Inspect the books of accounts and call for periodical returns from recognized Securities
exchanges.
 Inspect the books of accounts of financial intermediaries.
 Compel certain companies to list their shares in one or more Securities exchanges.
 Registration of Brokers and sub-brokers

Introduction of SEBI:
The Government issued an ordinance on January 30, 1992 for giving statutory powers to SEBI. This
Act was passed by the Parliament as Act No. 15 of 1992 which received the assent of the Parliament
on 4th April, 1992.

Further, on May 29, 1992 the Government issued an ordinance abolishing the Capital Issues Control
Act, 1947. The ordinance also supersedes the various guidelines issued by the CCI from time to time.
Accordingly, SEBI has been set up under the SEBI Act, 1992.

Purpose of SEBI:
The purpose of the SEBI Act is to provide for the establishment of a Board called Securities and
Exchange Board of India.

The purpose of the Board as laid down in its preamble is as below:

To protect the interests of investors in securities;

To promote the development of the securities market;

To regulate the securities market; and

For matters connected therewith or incidental thereto.

SEBI’s Board of Management:

Formation of the Board:

As per section 4 of the SEBI Act, 1992 as amended by the Securities and Exchange Board of India
(Amendment) Act, 2002, the Board shall consist of the following members, namely:

 A chairman;

 Two members from amongst the officials of the Ministry of the Central Government dealing
with Finance and administration of the Companies Act, 1956;

 One member from amongst the officials of the Reserve Bank;

 five other members of whom at least three shall be the whole time members to be appointed
by the Central Government.

 The Chairman and members referred to clauses (a) and (d) above shall be appointed by the
Central Government and the members referred to in clause (b) and (c) shall be nominated by
the Central Government and the Reserve Bank respectively.

 The Chairman and other members shall be persons of ability, integrity and standing who have
shown capacity in dealing with problems relating to securities market or have special
knowledge or experience of law, finance, economics, accountancy, administration or in any
other discipline which, in the opinion of the Central Government, shall be useful to the Board.
  The general superintendence, direction and management of the affairs of the Board is vested
in the Board which may exercise all powers and do all acts and things which may be exercised
or done by the Board. The Chairman of the Board can exercise all powers of the Board,
except those specified in the regulations.

Function of SEBI:

SEBI Act specifies that basic duty of SEBI is to:

Protect the interests of investors in securities, and to promote the development of, and to regulate the
securities market.

The following measures may be taken by SEBI to fulfill its duties:

 Regulating the business in stock exchanges and any other securities markets;

 Registering and regulating the working of stock brokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries who may
be associated with securities markets in any manner;

 registering and regulating the working of the depositories, participants, custodians of

securities, foreign institutional investors, credit rating agencies and such other intermediaries
as the Board may, by notification, specify in this behalf;

 Registering and regulating the working of venture capital funds and collective investment
schemes, including mutual funds;

 Promoting and regulating self-regulatory organisations;

 Prohibiting fraudulent and unfair trade practices relating to securities markets;

 Promoting investors‘ education and training of intermediaries of securities markets;

  Prohibiting insider trading in securities;

 Regulating substantial acquisition of shares and take-over of companies;

 Calling for information from, undertaking inspection, conducting inquiries and audits of the
stock exchanges, mutual funds, other persons associated with the securities market,
intermediaries and self-regulatory organisations in the securities market;

 Calling for information and record from any bank or any other authority or board or
corporation established or constituted by or under any Central, State or Provincial Act in
respect of any transaction in securities which is under investigation or inquiry by the Board.
[Inserted by the Securities and Exchange Board of India (Amendment) Act, 2002].

 Performing such functions and exercising such powers under the provisions of the Securities
Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government.

 Levying fees or other charges for carrying out the purposes of this section;

Conducting research for the above purposes:

 Calling from or furnishing to any such agencies, as may be specified by the Board, such
information as may be considered necessary by it for the efficient discharge of its functions;

 Performing such other functions as may be prescribed.

SEBI Guidelines for Issue of Securities:

 SEBI has issued detailed guidelines in respect of issue of securities to public. The guidelines
were first issued on 11th June, 1992 and were amended subsequently from time to time. SEBI
issued consolidated guidelines as SEBI (Disclosure and Investor Protection) Guidelines, 2000
vide its circular No. 1 dated 19-1-2000.

 These guidelines were applicable to all public issues by listed and unlisted companies, all
offers for sale and rights issues by listed companies whose equity share capital is listed,
 except in case of rights issues where the aggregate value of securities offered does not exceed
Rs. 50 lacs.

Broadly, there are three methods for issuing securities to the public:

 Conventional mode of receiving applications through bankers,

 Book building, and

 On line system of stock exchange (e-IPO).

 Other Measures Taken By SEBI:

 The Securities and Exchange Board of India, in addition to the above mentioned guidelines
‗for disclosure and investor protection‘, has taken a number of other measures for healthy
development and regulation of the capital market.

 Guidelines for Merchant Bankers.

 Guidelines for EURO Issues.

 Guidelines for Mutual Funds and Asset Management Companies.

 Guidelines for Foreign Institutional Investors.

 Guidelines to Development Financial Institutions for Disclosure and Investor Protection.

 Guidelines for Book Building, Employees Stock Option Scheme (ESOS) and Employee
Stock Purchase Scheme (ESPS).

 Guidelines for Preferential Issues.

 Guidelines for OTCEI Issues.

  Guidelines on External Commercial Borrowings.

 Regulatory measures for Stock Brokers and Sub-brokers, Underwriters, Portfolio Managers,
Registrars to an Issue and Share Transfer Agents, Insider Trading, Bankers to an Issue,
Depositories and Participants, Venture Capital Funds, etc.

Limitations of SEBI:

Though SEBI has started as a watchdog in protecting investors‘ interests, regulating the working of
Stock Exchanges and promoting capital market, still it faces a number of problems in its working.

Some of these limitations are as follows:

 The Central Government has authorized SEBI to frame its rules and regulations for actively
monitoring capital markets. These rules and regulations will have to be approved by the
government first. This will cause unnecessary delays and interference by the Finance
Ministry.

 The bureaucratic delays in clearing the rules will hamper the working of SEBI. The
government should direct SEBI to frame or change the rules as per the demand of the situation
so that it is able to achieve professional efficiency.

 SEBI will have to seek prior approval for filing criminal complaints for violations of the
regulations. This will again cause delays at government level.

 SEBI has not been given autonomy. Its Board of Directors is dominated by government
nominees. The Chairman of the Board has no fixed tenure and can be sacked with three
months‘ notice. These appointments should be for a fixed tenure to regulate the SEBI‘s
working in the long run.
 Chapter 5: Contribution of Non-Banking and
Banking sector in GDP of country

Though India has a bank dominated financial system but recently Non Banking Financial
Companies are competing with the banks in providing financial services and has been playing a
complementary role with other financial institutions in the Indian Economy. The study has made an
attempt to compare the performance of growth of Non Banking Financial Companies with Banks
and their contribution in the Indian economy. For this study, data have been collected from
secondary sources and simple statistical tools, tables have been used. The results show that during
the study period, i.e. from the year 2013 to 2019, total assets of Non-Banking Financial Companies
have been increasing at higher rate than the Banking Sector in India and also contribution to GDP
of NBFC sector has been increasing more steadily than that of banks.
The Indian banking sector consists of 12 public sector banks, 21 private sector banks and 45 foreign
banks along with 56 regional rural banks (RRBs) and India's co-operative banking sector comprised
of 1,574 urban cooperative banks (UCBs) and 93,913 rural co-operative credit institutions

120000

100000

80000

60000

40000

20000

0
Public Sector Private sector Foreign Bank Regional Rural Bank Credit Cooperatives

Contribution of the Banking sector

The Contribution of the banking sector to GDP is about 7.7% of GDP.

Banking Sector NBFC Sector

OBJECTIVES OF THE STUDY:

 To observe the similarity and differences of NBFCs and Banks in India;

 To compare the growth of NBFC sector and Banking Sector in India;
 To observe the contribution of NBFCs and Banks to the GDP of India.

The data have been collected from the website of Reserve Bank of India. So the data are secondary in
nature and the time period is taken from the year 2015 to 2019 for this analysis. Statistical table,
column chart and line chart has been used for this analysis. The data collected from the website are
presented below:
Figure 1: Lending to Infrastructure Sector-NBFCs vs Banks (Rs. Billion)

NBFC's Banks

9000

8000

7000

6000

5000

4000

3000

2000

1000

0
2016 2017 2018 2019

Source: COSMOS Database for NBFC-IFCs and Hand Book of Statistics on Indian Economy
for Banks, 2015-19.

Figure 2: Balance Sheet Growth at the end of Financial Year of– NBFCs vs Banks

35

30

25

20

15

10

0
2013 2014 2015 2016 2017 2018 2019

% of Growth of NBFC Sector % of Growth of Banking Sector % of GDP Growth

Source: Reports on Trend and Progress of Banking and Hand book of Indian Economy 2013-
Figure 3: Growth in Credit at the end of Financial Year of – NBFCs vs Banks

35

30

25

20

15

10

0
2013 2014 2015 2016 2017 2018 2019

% Growth of credit of NBFCs % Growth of credit of Banks

Source: Reports on Trend and Progress of Banking in India 2013-2019

Figure 4: Trends in Return on Assets – NBFCs vs. Banks

0
2013 2014 2015 2016 2017 2018 2019

Return on Assets of NBFC Sector (%) Return on Assets of Banking Sector (%)2

Source: Reserve Bank of India 2013-2019.

Figure 5: Proportion of NBFC Assets to Bank Assets

35

30

25

20

15

10

0
2013 2014 2015 2016 2017 2018 2019

Proportion of NBFC Assets to Bank Assets

Assets of NBFC and Banking (SCBs) Sector as a percentage to GDP

Ratio 2013 2014 2015 2016 2017 2018 2019

NBFC Assets to GDP (%) 12.5 12.9 13.1 14.0 15.5 20.1 25
Banks Assets to GDP (%) 87.5 87.1 86.9 86.0 84.5 79.1 75

Holding on an average almost 13% of total assets (Figure-5), NBFC sector has been granting loan
almost 58% to the infrastructure sector in comparison to the volume of credit granting by the
banks, i.e. NBFCs have granted major portion of fund as a loan to infrastructure sector in
comparison to banking sector (Figure-1). From Figure-2 it is seen that there is a positive.
relationship between the GDP growth rate and banking and NBFCs growth rate but in most of the
years, Balance Sheet growth of NBFC sector grew at faster rate than that of banking sector.
Similarly credit of NBFC sector grew more rapidly as compared with banking sector (Figure-3).
Return on Assets of NBFCs has shown stability with figure ranging around 7 percent in 2019
(Figure 4). The return on assets of NBFCs is typically higher than that of banks. Return on Assets
in Banking Sector is 0.83 percent per year on an average. The share of NBFCs‟ assets has grown
from 11.70 percent of banking assets in 2013 to 28.5 percent of banking assets in 2019 (Figure 5).
From Table A it is also seen that percentage of NBFCs assets to GDP has grown to 25.0 in the
year 2019 from 12.5 of the year 2013 so rate of increase is almost 50% but percentage of banks
assets to GDP has been increased all most 27% in the same period. So the overall performance of
growth of NBFC sector is better than that of banking sector during the study period.

CONCLUDING REMARKS:

During the study period the proportion of NBFCs‟ assets to Banks‟ assets has been increasing
steadily and the Returns on Assets are better than that of banking sector. So the NBFCs have
been growing at a steady rate and its growth rate is far better than that of banking sector.
Proportion of credit provided by the NBFCs to infrastructure sector is far better than that of
banks during the study period. Hence the contribution of NBFC sector to capital formation as
well as overall economic growth has been increasing at a higher rate than that of banks.
 Chapter 6: Literature of Review Non-Banking
Financial Institution
 Kantawala (1997) studied on ―Financial Performance of Non Banking Finance Companies
in India‖ for the period from 1985-86 to 1994-95 based on secondary data collected from
RBI Bulletins regarding financial and Investment Companies. In this study various ratios
and one way analysis of variance (ANOVA) have been applied and concluded that different
categories of NBFCs behave differently and it is entrepreneur‟s choice in the light of
behavior of some the parameters which go along with the category of NBFC.

 Harikrishnan (2008) researched on the topic ―Receivable Management in Non Banking

Finance Companies with Special Reference to Vehicle Financing‖. The objective of the
study was to identify the major issues and problems in managing the receivable in respect
of vehicle financing of NBFCs. For this study, data have been collected from the primary
and secondary sources for the period 1999-2007. Primary sources of data are NBFCs and

 Analysis of collecting data from the Annual Reports and the Balance Sheets of the sample
companies. The study reveals that SF has performed better in terms of Earnings Per share
(EPS) followed by STF, BF, CF & M&MF but STF and M&MF are far better than other in
NPM (Net Profit Margin).
 Perumal and Satheskumar (2013) studied on the topic ―Non Banking Financial Companies‖
analyzing the Balance Sheets and income statements of two sample companies, viz.,
Sundaram Finance Limited and Lakshmi General Finance Limited for the period 2007-2012
using primary and secondary data. The study was performed using various statistical
techniques such as average, standard deviation, co-efficient of variation, trend analysis,
index number, etc. and concluded that the contribution of NBFCs to economic development
is highly significant and there is need to integrate it with the mainstream financial system
and RBI should be vested with more power to monitor NBFCs in a effective manner.
 Kaur and Tanghi (2013) investigated on the topic ―Non Banking Financial Companies, Role
& Future Prospects‖ with a focus to analyze role and significance of NBFCs in India. The
paper concludes that NBFCs have to focus more on their core strengths and must constantly
endeavour to search for new products and services in order to survive and grow constantly.

 Khan and Fozia (2013) have researched on the topic ―Growth and Development in Indian
Banking Sector Introduction‖ based on the secondary data. The purpose of the study was to
show the growth and technological development in Indian Banking sector. Statistical tables
and charts have been used by the researcher and concluded that banks need to optimally
leverage technology to increase penetration, improve the productivity and efficiency, better
customer service and contribute to the overall growth and development of the country.

 Arun kumar (2014) has made an attempt on the topic ―Non Banking Financial Companies:
A Review‖ and after observing twelve studies of different authors he concluded that due to
the regulations of the Reserve Bank of India, still the NBFCs are not entering into more
credit and suggested to the NBFC credit policy to reduce rates of interest. The study finds a
research gap which is „evaluation of performance of NBFCs in India‟.

 Mohan (2014) observed on the topic ―Non Banking Financial Companies in India: Types,
Needs, Challenges, and Importance in Financial Inclusion‖ and suggested to improve
Corporate Governance Standards and concluded that NBFCs have turned out to be engines
of growth and are integral part of the Indian financial system, enhancing competition and
diversification in financial sector, spreading risks specifically at times of financial distress
and have been increasingly recognized as complementary of banking system at competitive
prices
 Chapter 7: Conclusion

7.1 Conclusion:
Thus it can be concluded that the financial institutions provide a broad range of business operations
within the financial services sector. While some of the financial institutions have a focus on providing
the services to the general public, on the other hand, some others financial institutions are there who
are serve only to the certain consumers with the more specialized offerings. n conclusion: financial
institutions, national authorities, and the international community have begun to respond to the issue
of ethics in finance. Still, swifter action is needed to restore trust in the financial sector. The public
needs reassurance that misconduct issues that caused the failures in institutions and markets in the
past few years have been dealt with.For our part, the IMF has supported this effort on several fronts,
including through an incipient research agenda on ethics in finance. We have also leveraged the
convening power of the Fund to shed new perspectives on this issue – bringing together
policymakers, industry specialists, clergy and even young professionals to develop a shared
understanding of how to instill ethical behavior at all levels in finance.I started by arguing that the
appropriate regulatory and governance framework must be in place to support the ethics of behavior
of individuals. Yet the opposite is also true. Without individual integrity, even the best regulatory and
governance structures can be gamed.So let me leave you with this thought, from Warren Buffett: ―In
looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they
don't have the first, the other two will kill you."Today‘s sessions offer an excellent opportunity to
exchange views on how to promote integrity at the individual level and restore trust at the corporate
level. This is vital for the industry, and society.
 Chapter 8: Bibliography

8.1 REFERENCES:

I. Arunkumar, B. (2014). Non Banking Financial Companies (NBFCs): A Review. Indian

Journal of Research, Volume: 3, Issue: 10, 87-88.

II. Gumparthi, Srinivas and Manickavasagam, Dr. V. (2010). Risk Assessment Model for
Assessing NBFCs‟ (Asset Financing) Customers. International Journal of Trade,
Economics, and Finance (IJTEF), August.

III. Harikrishnan, K. (2008). Receivable Management in Non Banking Finance Companies

with Special Reference to Vehicle Financing (Doctoral thesis, Cochin University of
Science and Technology). Retrieved from
http://dyuthi.cusat.ac.in/xmlui/bitstream/handle/purl/3466/Dyuthi-

IV. Kantawala, Amita S. (1997). Financial Performance of Non Banking Finance Companies
in India. The Indian Economic Journal, Vol. 49, No.1, 86-92.

V. Kaur, Harsimram and Tanghi, Bhavdeep Singh (2013). Non Banking Financial
Companies, Role & Future Prospects. International Journal of Global Research Analysis,
Volume: 2, Issue: 8, 125-126.

VI. Khalil Ahmed and Group (2011). Financial Performance of Non Banking Finance
Companies in Pakistan, Interdisciplinary Journal of Contemporary Research in Business,
Volume: 2, Number: 12, Page: 732-742.

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VII. Khan Nafees A. and Ms. Fozia (2013). Growth and Development in Indian Banking
Sector Introduction. International journal of Advanced Research in Management and
Social Sciences, Vol: 2, No. 2, p 197-211.

VIII. Mohan, Brij (2014). Non Banking Financial Companies in India: Types, Needs,
Challenges, and Importance in Financial Inclusion. International Journal of in
Multidisciplinary and Academic Research, Vol: 3, No. 6, 1-11.

IX. Perumal, A. and Satheskumar, L. (2013). Non Banking Financial Companies. Asia
Pacific Journal of Research, Vol. 2, Issue: VIII, 128-135.

X. Samal S. C. and Pande J. K. (2012). A Study on Technology Implications in NBFCs:

Strategic Measures on Customer Retention and Satisfaction, International Business
Research Journal, Volume 1, Number 1, pp 49-62.

XI. Sornaganesh, V. and Navis Soris, N. Maria (2013). A Fundamental Analysis of NBFC in
India. Outreach: A Multi- Disciplinary Refereed Journal, Vol. 6, 119-125.

XII. Vadde, Suresh (2011). Performance of Non-Banking Financial Companies in India – An

Evaluation. Researchers World - Journal of Arts Science & Commerce, Vol: II, Issue: 1,
123-131.
XIII. https://www.rbi.org.in/
XIV. www.rural.nic.in/

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