A Report on NBFCs in India

A REPORT ON NBFCs IN INDIA

SUBMITTED BY:GEETIKA MBA (GB) ROLL NO:338

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A Report on NBFCs in India

TABLE OF CONTENTS Executive Summary................................................................................................3 Non-Banking Financial Company (NBFC)..............................................................4 NBFCs: Why are they required?.............................................................................5 Re-classification of NBFCs.....................................................................................6 NBFCs are different from Banks.............................................................................7 Residuary Non-Banking Companies (RNBCs) ......................................................8 Ceiling on RNBCs taking Deposits.........................................................................8 Interest Payment on Deposits.................................................................................8 Eligibility Criteria for Starting NBFC........................................................................9 Capital Requirement.............................................................................................11 Net Owned Fund...................................................................................................11 Classification of NBFCs according to RBI............................................................11 Regulations on NBFCs taking Deposits...............................................................12 Ceiling on NBFC-D (Taking Public deposits).......................................................13 Ongoing Regulations: NBFCs-D (Holding Public Deposits).................................14 Other Regulations: NBFCs-ND (Not Holding Public Deposits)............................14 Directions given to NBFCs and its Auditors by RBI..............................................16 A Special Mention : FDI in NBFC sector..............................................................17 References............................................................................................................22

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Hence the business carried out by NBFCs is of great importance for overall development of the country. Think of buying an automobile.A Report on NBFCs in India Executive Summary India growth story is most talked about and why not? The country’s GDP is pegged to grow at a rate of more than 7.5%.727 crore as on June 2009. and one will find financing companies that provide EMIs at the doorstep. NFBIs (Non Banking Financial Institutions) play an important role in realizing the economic growth. The total assets managed by NBFCs amount to 95. NBFIs in India are discussed with a focus on NBFCs. one would be amazed the number of financing companies that one can approach to make a deal. one can strongly say that sufficient liquidity has to be maintained in the system to enhance credit and economic growth. to 262 billion $. Think of buying any electronics. In the following document. India’s Stock market has given the best returns in the last 6-8 months of more than 60%. 3 . Overall the country is all set to grow at a rapid pace and the government has laid a strong foundation for this. Also various regulations are levied on NBFCs for making the overall system robust. Current Budget focuses on reducing fiscal deficit by the measures of disinvestments and improving the infrastructure of the country. The household savings continues to be as high as 35% inspite of slowdown and recessionary pressures. Forex reserves have increased by more than 10billion $ in the 1st quarter and the total reserves are up. Thus the competitiveness of the companies combined with fierce penetration across the length of the country enables NBFIs to grow at a rapid pace.1 % of assets of the total financial system [1]. They have access to larger markets and provide financing for almost all activities. This accounts for around 9. Thus RBI is implementing various schemes and policies for maintaining enough liquidity for funding requirements. Having realized this.

They score over the traditional banks by providing enhanced equity and risk-based products.The Hierarchy of NBFCs in India NBFIs Development Finance Institutions (DFIs) Non-banking financial companies (NBFCs) Insurance companie s Primary dealers (PDs) Mutual Funds Investment Company Hire Purchase Leasing Equipment Leasing Loan Company Non-Banking Financial Company (NBFC) 4 .A Report on NBFCs in India Non-Banking Financial Institutions (NBFIs) Non-Banking Financial Institutions (NBFIs) play an important role in the Indian financial system given their unique position of providing complimentary and competitiveness to banks. Fig1.

small ticket loans. NBFCs are classified into four categories 1. Equipment Leasing Company Some of the prominent NBFCs in India are Infrastructure Development Finance Corporation (IDFC) Rural Electric Corporation ( REC) Industrial Finance corporation of India (IFCI ) GE Capital     Till March 2009 there were 12. However this scenario is changing. chit funds etc They also provide products/services that includes margin funding. It is engaged in the business of loans. investment in non-convertible debentures. Generally banks to reduce their operational costs establish NBFC. Hire. RBI now has strict measures for NBFCs also. IPO funding. NBFC enjoys many liberal policies by RBI in comparison with the commercial banks. securities.A Report on NBFCs in India Non-Banking Financial Company (NBFC) is a company registered under the Companies Act. corporate loans. venture capital etc. insurance. leasing and hire purchase. As in the diagram.739 NBFCs out of which 336 NBFCs were permitted to accept public deposits [2] [2] Source: RBI Annual Report 2008-2009 NBFCs: Why are they required? NBFCs are required as they have a greater reach to various markets and have great efficiency in mobilizing funds.Purchase Leasing 2. Investment Company 4. Loan Company 3. 5 . 1956.

.A Report on NBFCs in India Re-classification of NBFCs From December 6. Gilt firms Loan Companies (LC) LCs are loan giving companies which operate in the business of providing loans. Loan Company (LC) Asset finance Companies (AFC) AFC are financial institutions whose principal business is of financing physical assets such as automobiles. Asset Finance Company (AFC) 2. debentures issued by government or local authority that are marketable in nature Eg: Stock Broking Companies. construction equipments material handling equipments and other machines. bonds. Eg: Bajaj Auto Finance corp. Investment Company (IC) 3. stocks. HDFC 6 . tractors. Fullerton India etc Investment Companies (IC) ICs generally are involved in the business of shares. These can be housing loans. gold loans etc Eg: Mannapuram Gold Finance. 2006 NBFCs registered with RBI have been reclassified as 1.

 They should have minimum investment grade credit rating.: Savings account.g. that are payable immediately on demand e. Current account etc)  A NBFC cannot issue cheques. Note: The figures for 2009 & 2010 are estimated figures 7 .A Report on NBFCs in India NBFCs are different from Banks NBFCs cannot accept demand deposits ( Demand deposits are funds deposited in an institution. (Currently the ceiling rate is 12.5%)  They cannot offer gifts/incentives or any other additional benefit to the depositors. to their customers and is not a part of the payment and settlement system  Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation (DICGC) is not available for NBFC depositors  They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.  They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. from the credit rating agencies Fig2: Pulic Deposits in NBFCs & RNBCs 35000 30000 INR (Crores) 25000 20000 15000 10000 5000 0 19 98 20 00 20 02 20 04 20 06 20 08 20 10  Public Deposits Expon. (Public Deposits) Year Source:RBI.

These companies are required to maintain investments as per directions of RBI. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds • Sahara Mutual Fund was the first RNBC started in India. etc Interest Payment on Deposits • The amount payable by way of interest. asset financing. bonus or other advantage. and at the rate of 3. by a RNBC in respect of deposits received shall not be less than 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals. 8 . fixed deposit of scheduled commercial banks (SCB). Certificate of deposits of SCB/FIs. an RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. units of Mutual Funds.5% (to be compounded annually) on the amount deposited under daily deposit scheme.A Report on NBFCs in India Residuary Non-Banking Companies (RNBCs) They form a part of NBFCs however their functioning is different from the regular NBFCs Residuary Non-Banking Company is a class of NBFC whose principal business is receiving of deposits. under any scheme or arrangement. The deposits received do not involve investment. • Further. in addition to liquid assets. Ceiling on RNBCs taking Deposits • There is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure that the amounts deposited and investments made by the company are not less that the aggregate amount of liabilities to the depositors • To ensure the safely of public investments RNBCs are required to invest in a portfolio comprising of highly liquid and secured instruments viz. They cannot accept deposits repayable on demand. premium. Central/State Government securities. or loans.

Nature of Business The company should not have its principal business as (a) Agricultural operations (b) Industrial activity (b) The purchase or sale of any goods (other than securities) or the providing of any services 9 .rbi. the company is required to fill the application. the company should take the hard copy of the same with the supported documents and submit it to the concerned regional office. RBI then issues certificate of registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act. Housing finance companies regulated by National Housing Bank. After downloading the EXCEL based application form.aspx. 1956 It should be registered with RBI. Once uploaded.in. Insurance companies holding a valid certificate of registration are regulated by IRDA. it can be uploaded in the RBI's Secure website https://secweb.org. which can be downloaded from www.org. data should be keyed in. 1934 The company is required to submit the application for registration in the prescribed format along with necessary documents for RBI's consideration. under Section 45-I of the RBI Act. the company will get a CoR (Company Application Reference Number).in/scripts/BS/viewforms. Subsequently. 1934 are satisfied • For registration with RBI.A Report on NBFCs in India Eligibility Criteria for Starting NBFC Initial Procedure • • • The Start up NBFC should be incorporated under the Companies Act.rbi. • NOTE: Certain category of NBFCs like Venture Capital Fund/Merchant Banking Companies/Stock Broking Companies etc need not be registered with RBI they are governed by SEBI.

A Report on NBFCs in India (c) The purchase. Moreover no portion of the income should be derived from the financing of purchases. constructions or sales of immovable property by other persons 10 . construction or sale of immovable property.

A Report on NBFCs in India Capital Requirement The start up company should have a minimum net owned fund (NOF) of Rs 25 lakh which is raised to Rs 200 lakh from April 21. (i) Investments in shares of subsidiaries/companies in the same group/ all other NBFCs (ii) The book value of debentures/bonds/ outstanding loans and advances. deferred revenue expenditure and other intangible assets Less.ND Those NBFCs NBFCs-ND with an asset size of Rs. Net Owned Fund Paid-up capital and free reserves.100 crore and above (as per the last audited balance sheet) are designated as systemically important NBFCsND (NBFCs-ND-SI) • • NBFCs-ND-SI are advised to attain minimum CRAR of 12 per cent by March 31. However RBI can still extend this time period for an additional 3 years subject to the condition that such NBFCs should intimate the RBI about attaining the NOF within 3 months from the date of attainment Classification of NBFCs according to RBI NBFCs are classified into two categories (i) (ii) • NBFC accepting deposits from customers NBFC which does not take deposits from customers NBFCs taking deposits from public are referred to as NBFC-D and those who dont take public deposits are referred to as NBFC. minus accumulated losses. in excess of 10% of the owned funds. subsidiaries/ companies in the same group. 2011 11 . and deposits with. Note: NBFCs that were in existence who had previously NOF of Rs25 Lakhs (before the act) are given a time period of 3 years to attain a NOF of 200 Lakhs. 2010 and 15 per cent by March 31. 1999. including hire purchase and lease finance made to.

Only those NBFCs holding a valid certificate of registration with authorization to accept public deposits can accept/hold public deposits 2. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. 5. detailed review is taken of the company by the regulator 3. The present ceiling is 12. Evaluation of the quality of management in respect of the promoters/directors is taken into consideration while giving allowance for taking public deposits Minimum Investment Level Credit Rating: The symbols of minimum investment grade rating of the Credit rating agencies are: Name of rating agencies CRISIL ICRA CARE FITCH Ratings India Pvt.(MA MINUS) CARE BBB (FD) tA-(ind)(FD) 12 . 6.5 per cent per annum.A Report on NBFCs in India Regulations on NBFCs taking Deposits 1. All NBFCs are not entitled to accept public deposits. The interest may be paid or compounded at rests not shorter than monthly rests. After completion of two years. New NBFCs are not allowed to raise public deposits for period of two years from the date of registration. Ltd Level of minimum investment grade credit rating (MIGR) FA. They cannot accept deposits repayable on demand 4. NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR account. 25 lakhs (with or without credit rating) are not entitled to accept public deposits 7.(FA MINUS) MA. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. NBFCs with net owned fund (NOF) of less than Rs.

5 times of NOF or Rs 10 crore whichever is less 4 times of NOF 1.A Report on NBFCs in India Ceiling on NBFC-D (Taking Public deposits) (i) NBFCs having Net Owned Fund (NOF) of more than 200 Lakhs Category of NBFC AFCs maintaining CRAR of 15% without credit rating AFCs with CRAR of 12% and having minimum investment grade credit rating LC/IC with CRAR of 15% and having minimum investment grade credit rating AFC= Asset Finance Company LC/IC= Loan Company/ Investment Company Ceiling on public deposits 1.5 times of NOF Equal to NOF( 1xNOF) 13 .5 times of NOF (ii) NBFCs having NOF more than 25 lakhs but less than 200 Lakhs Category of NBFC AFCs maintaining CRAR of 15% without credit rating AFCs with CRAR of 12% and having minimum investment grade credit rating LC/IC with CRAR of 15% and having minimum investment grade credit rating Ceiling on public deposits Equal to NOF (1xNOF) 1.

A Report on NBFCs in India Ongoing Regulations: NBFCs-D (Holding Public Deposits) . The NBFCs accepting public deposits should furnish to RBI: • Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors • • Statutory Annual Return on deposits .NBS 1 Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise Quarterly Return on liquid assets Half-yearly Return on prudential norms Half-yearly ALM (Asset Liability Management) Returns by companies having public deposits of Rs 20 crore and above or with assets of Rs 100 crore and above irrespective of the size of deposits • • • • Monthly return on exposure to capital market by companies having public deposits of Rs 50 crore and above A copy of the Credit Rating obtained once a year along with one of the Halfyearly returns on prudential norms • Other Regulations: NBFCs-ND (Not Holding Public Deposits) • The NBFCs-ND having assets size of Rs 100 crore are required to submit a Monthly Return on important financial parameters of the company Board resolution to be passed to the effect that the company have neither accepted public deposit nor would accept any public deposit during the year • 14 .

Prudential Norms NBFCs should comply with RBIs policies and directions regarding prudential norms and Deployment of funds 15 . government guaranteed bonds and term deposits with any scheduled commercial bank..A Report on NBFCs in India General Norms: RBI Maintenance of Liquid Assets: Minimum level of liquid asset to be maintained by NBFCs is 15 % of public deposits outstanding as on the last working day of the second preceding quarter . NBFCs are required to invest not less than 10% in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. Information Exchange: NBFCs are required to furnish the information in respect of any change in the composition of its board of directors. 1934.Of the 15%. Thus. Creation and Maintenance of Reserve fund: All NBFCs are required to create a reserve fund and transfer not less than 20% of their net profit (before declaration of dividend) to the fund Submission of Certificate: All NBFCs should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR (Company Application Reference Number) under Section 45-IA of the RBI Act. the liquid assets may consist of government securities. address of the company and its directors and the name/s and official designations of its principal officers and the name and office address of its auditors.

within 3 years It has to reduce the amount of excess public deposit to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions. It is on the lines of bank deposits If an NBFC is downgraded to below minimum investment grade rating. it has to stop accepting public deposit.A Report on NBFCs in India o Income Reconition o Accounting Standards o Classification of Assets o Provision for NPA (Non Performing assets) o Capital Adequacy o Declaration of Purpose. Quantum & Advances of Loan Directions given to NBFCs and its Auditors by RBI • RBI is empowered to give directions to NBFCs and their auditors in matters related to 1) Profit and Loss account 2) Balance Sheet 3) Books of Accounts 4) Disclosure of liabilities 5) Any other matters or queries • Special Audits can be done by the RBI of any NBFC and also appoint auditors for the same RBI can prohibit any NBFC for taking public deposit for violation of any provisions of RBI act Nomination facility for deposits held by a NBFC is introduced. 1998 16 . • • • • Once downgraded. report the position within fifteen working days to the RBI.

US $ 50 million out of which US $ 7.5 million should be brought upfront For FDI above 51% and up to 75% .fund based NBFCs with foreign investment Foreign investors to set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities.US$ 0. subject to bringing in US$ 50 million as per minimum capitalization norms above (without any restriction on number of operating subsidiaries without bringing in additional capital) • 17 .5 million is applicable in respect of all permitted non.US $ 5 million should be brought upfront For FDI above 75% and up to 100% .5 million should be brought upfront and the balance in 24 months Minimum capitalization norms for Non-fund based activities: • Minimum capitalization norm of US $ 0.A Report on NBFCs in India A Special Mention : FDI in NBFC sector FDI/NRI investments allowed in the following 19 NBFC activities shall be as per levels indicated below: Merchant banking Credit Reference Agencies Underwriting Credit rating Agencies Portfolio Management ServicesLeasing & Finance Investment Advisory Services Housing Finance Financial Consultancy Forex Broking Stock Broking Credit card business Asset Management Money changing Business Venture Capital Micro Credit Custodial Services Rural Credit Factoring Regulations for FDI in NBFCs Minimum Capitalization Norms for Fund based NBFCs: • • • For FDI up to 51% .

A Report on NBFCs in India • Joint Venture operating NBFC’s which have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities. ANNEXURE FORM-I [see rule 4(1)] 18 . subject to the subsidiaries also complying with the applicable minimum capital inflow • FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India.

--. 2003.-.--.--.--.--.--.--.--.A Report on NBFCs in India APPLICATION FOR PERMISSION TO FORM A NON – BANKING FINANCE COMPANY Dated:_______________ To The Securities and Exchange Commission of Pakistan.--.--.--.--.--. Name of the company ANNEXURE TO FORM-I [see rule 4] INFORMATION TO BE SUPPLIED FOR OBTAINING 19 . Dear Sir.--. Yours faithfully.--.----. to form a Non-Banking Finance Company under the name and style of *-. We undertake to keep this information upto date by communicating changes or modifications therein within fourteen days of such changes or modifications.--.--. We hereby apply for grant of permission under rule 4 of the Non-Banking Finance Companies (Establishment and Regulation) Rules.--is enclosed.--.--.--. A receipt of rupees one hundred thousand (Rs.The information and documents as required in the Annexure to this form duly verified and signed by all promoters and proposed directors along with five spare copies of this application and an affidavit by them as to the correctness of the details. deposited in-------------on.--. 100.--.--. Islamabad.--.--.--.--. is submitted.--.--.--. -----------------------Verification by Oath Commissioner.--.--.--.000/-) being the processing fee.

national tax number. Feasibility report of the proposed company. Percentage of capital. firms. each sponsor proposes to contribute in the proposedcompany. 3. firms and other organizations of which the aforesaid sponsors. nationality. present occupation of each sponsor. Affidavit from each person mentioned in paragraph 1 above. 6. former name if any. 9. proposed chief executive and proposed chairman of the Board. (b) he and companies in which he is a director or major shareholder have no over20 . free reserves. proposed director. (Institutional sponsors shall mention their names and addresses only instead of giving all these particulars of their nominee directors).A Report on NBFCs in India PERMISSION TO FORM A NON – BANKING FINANCE COMPANY AND SUBSEQUENT CHANGE IN DIRECTORSHIP AND CHIEF EXECUTIVE 1. Evidence of payment of income tax and wealth tax by the sponsors in individual capacity as well as by the companies.. 2. Copies of annual accounts of such companie s and firms for the last three years alongwith summary of their paid-up share capital. 7. etc. 5. 10. Net-worth certificate of each sponsor supported by a duly authenticated copy of the latest wealth statement filed with the taxation department. Names of the bankers of the sponsors alongwith their account numbers. Financial standing. Draft of the Memorandum and Articles of Association. profit after tax and dividend payment to be provided. residential and business address. partners or office holders during the last ten years. father’s or husband’s name. deposit taking or financial dealings. proposed chief executive and proposed chairman are or have been directors. wherein they are or have been directors during the preceding five years. Full name. a certificate of personal networth and general reputation issued by a bank of international repute shall be acceptable. Names and addresses of companies. supported by documentary evidence. educational as well as professional qualifications and experience of persons mentioned in paragraph 1 above. In the case of sponsors or directors residing in countries where filing of wealth statement is not the requirement of law. 4. stating that(a) he has not been associated with any illegal banking business. 8.

(c) neither he nor companies in which he is a director or major shareholder has defaulted in paying taxes as on the date of application. (d) he has not been sponsor. the-------------- 21 .A Report on NBFCs in India due loans or installments outstanding towards banks or other financial institutions. and (g) his net-worth is not less than twice the amount to be subscribed by him personally (not applicable to a nominee director). to his creditors. (f) he has neither been adjudged an insolvent nor has defaulted in making payments. (e) he has never been convicted of fraud or breach of trust or of an offence involving moral turpitude or removed from service for misconduct. FORM-II [see rule 5(1)] APPLICATION FOR OBTAINING LICENCE TO UNDERTAKE OR CARRY OUT *_________________ AS NON – BANKING FINANCE COMPANY Dated. director or chief executive of a defaulting cooperative finance society or finance company.

3.A Report on NBFCs in India To. deposited in __________on ________ is enclosed. References Web References 22 . if any. (f) names of holding. direct or indirect. We hereby furnish the following information. A receipt of rupees one hundred thousand (Rs. 100. (e) details of persons or group controlling the company including major shareholders with number and value of shares held. The Securities and Exchange Commission of Pakistan. (b) authorised. (h) reasons for selecting the proposed place of business with statistical data. in any other company with details of such interest. We hereby apply for grant of licence under rule 5 of the Non-Banking Finance Companies (Establishment and Regulation) Rules. (c) names and addresses of directors and number of shares held by each of them. subscribed and paid-up share capital of the company (sponsors' equity indicated separately). Islamabad.__ (a) date of incorporation as a limited company. Yours faithfully. Dear Sir. and (i) additional facts in support of this application. subsidiary and associated undertaking. (d) directors' interest. to undertake__________* as a Non-Banking Finance Company. We undertake to keep this information upto date by communicating changes or modifications therein within fourteen days of such change or modifications 5. Certified copies of the memorandum and articles of association and certificate of incorporation are enclosed. 2003. 2. (g) details of qualified staff engaged.000/-) being the processing fee. An affidavit as to the correctness of the above information by the chief executive and two directors is also furnished herewith. 4.

23 .in. www.economywatch.in nbfc.rbi.org.org.A Report on NBFCs in India • • • www.com.rbi.

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