AN INTRODUCTION TO NBFC

DR. PRADIPTARATHI PANDA

ASSISTANT PROFESSOR, NISM
 WHAT IS NBFC OR SHADOW BANKING?

Shadow Banking is an evolving concept. Many non-intersecting but non-contradictory definitions.

However, below are the key points emerged so far:

➢ Maturity, credit and liquidity transformation outside the traditional banking system;
➢ Less regulated than the traditional banking system or not regulated at all;
➢ No explicit access to central bank liquidity or public sector credit guarantees;
 WHAT IS SHADOW BANKING?

➢ Highly levered;
➢ Assets are risky and illiquid;
➢ Liabilities are prone to “bank runs”;
➢ Decomposes the process of credit intermediation into a sequence of discrete operations. Therefore,
➢ it can be a collection not only of
➢ single financial entities acting independently,
➢ but also of (and usually is)
➢ networks of multiple financial entities acting together or both:
➢ banks, formal and informal nonbank financial institutions, and even credit rating agencies,
regulators and governments.
➢ NBFCs garnered the attention of the Reserve Bank of India (‘RBI’) when several depositors lost their
money, during the failure of several banks in the late 1950s and early 1960s.

➢ In order to prevent the large number of depositors, RBI initiated regulating them by introducing Chapter
IIIB in the Reserve Bank of India Act, 1934.

➢ In March 1996, there were around 41,000 NBFCs in India and they were not recognised as a separate class.

➢ The capital requirement was changed in the year 1999, NBFCs getting registered on or after the issuance of
notification dated April 21, 19991 were required to have the minimum net owned funds of ` 200 lakhs in
order to commence the business of an NBFC.

➢ The NBFC-ND with asset size of ` 100 crores or more were considered to be systemically important
companies (SICs).
SHARE OF SHADOW BANKING ASSETS-GLOBAL POSITION 2015
BANKING AS A PERCENTAGE OF TOTAL FINANCIAL ASSETS
 RBI COMMITTEES ON NBFC

➢ Malegam Committee (2011) on Issues and Concerns in the Micro Finance Institutions (MFI) Sector

➢ Committee on Issues and Concerns in the NBFC Sector, chaired by Smt. Usha Thorat (2012)

➢ Committee on Comprehensive Financial Services for Small Businesses and Low-Income

Households, chaired by Dr. Nachiket Mor (2013)

 NON-BANKING FINANCIAL COMPANIES

➢ An NBFC is a company registered under the Companies Act, 1956 (‘Act, 1956’) or Companies Act,
2013 (‘Act, 2013’) and is engaged in the business of financial institution.

➢ Section 45I(f) of the RBI Act, 1934 defines ‘‘non-banking financial company’’ as –

➢ (i) a financial institution which is a company;

➢ (ii) a non-banking institution which is a company and which has as its principal business the receiving of
deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

➢ (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous
approval of the Central Government and by notification in the Official Gazette, specify;
 NBFCs

Non-deposit Taking – Systemically

Deposit taking
Important
NBFC-D
NBFC-ND-SI

Asset Finance
Asset Finance
Company
Company

Loan Company Loan Company

Investment
Investment
Company
Company

Core Investment
Residual NBFCs
Company

Infrastructure
Finance Company

10
11 CLASSIFICATION OF NBFCS ACTIVITY BASED
➢Asset Finance Company is a company:
➢ carrying on as its principal business the financing physical assets supporting productive/economic activity: autos, tractors,
material handling equipments, etc.
➢Loan Company is a company:
➢ carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any
activity other than its own.
➢Investment Company is a company:
➢ carrying on as its principal business the acquisition of securities.
➢Core Investment Company is an investment company whose:
➢ 90% of Net Assets in equity shares, preferred shares, bonds or loans of a group of companies or
➢ 60% of Net Assets in equity shares of a group of companies.
➢Infrastructure Finance Company is a company which:
➢ deploys at least 75 per cent of its total assets in infrastructure loans.
 BANKS VS. NBFCS
Particulars
Definition
Scope of business
Licensing requirements
Major limitations on business
Major privileges
Foreign investment
Banks
Definition: Banking is acceptance of
deposits withdrawable by cheque or
demand; NBFCs cannot accept demand
deposits
Scope of business for banks is limited by sec
6 (1) of the BR Act
Licensing requirements are quite stringent.
Transfer of shareholding also controlled by
RBI
No non-banking activities can be carried
Can exercise powers of recovery under
SARFAESI and Debt Recovery Tribunal
(DRT) law
Upto 74% allowed to private sector banks
NBFCs
NBFCs are companies carrying financial
business
There is no bar on NBFCs carrying
activities other than financial activities
It is quite easy to form an NBFC.
Acquisition of NBFCs is procedurally
regulated and are subject to approval
Cannot provide checking facilities
None, except 196 NBFC, specified by
Central Government, have powers
under SARFAESI or DRT law
Upto 100% allowed (only 18 activities)
 BANKS VS. NBFCS

Particulars Banks NBFCs

Regulations BR Act and RBI Act lay down stringent Controls over NBFCs are relatively
controls over banks lesser stringent

SLR/CRR requirements Banks are covered by SLR/ CRR NBFC-Ds have to maintain a certain
requirements ratio of deposits in specified securities;
no such requirement for non deposit
taking companies

Priority sector lending requirements Certain minimum exposure to priority Priority sector norms are not
sector required applicable to NBFCs
 BASIC REGULATORY FRAMEWORK ON NBFCS

Basic regulatory instruments:

• RBI Act, 1934
• Master Direction - Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016
• Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016
• Master Direction - Exemptions from the provisions of RBI Act, 1934
• Master Direction - Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 2016
• Master Direction - Residuary Non-Banking Companies (Reserve Bank) Directions, 2016
• Master Direction - Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve
Bank) Directions, 2016
• Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit
taking Company (Reserve Bank) Directions, 2016
• Master Direction- Non-Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016
• Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016
• Master Direction - Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2016
• Master Direction - Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016
• Master Directions - Mortgage Guarantee Companies (Reserve Bank) Directions, 2016
INDIA WORKS ON A MULTI-REGULATOR MODEL

Reserve Bank Ministry of State Registrar of National

IRDA SEBI
of India Corporate Affairs Chit Funds Housing Bank

Nidhi Insurance Merchant Broker/

NBFCs Chit Funds HFC
Companies Companies Banker Sub-broker

Venture Capital Stock

Fund Company Exchanges

IC AFC IDF Factor RNBC

LC IFC MFI CIC AA

CATEGORY WISE LIST OF NBFC-RBI

• https://www.rbi.org.in/scripts/BS_NBFCList.aspx
 REGULATORY DIFFERENCES BETWEEN BANKS AND NBFCS
Requirement Banks NBFC-Ds NBFC-ND-SIs

Liquidity as % of Demand and

Time Deposits

Cash Reserve (CRR) 4% NA NA

Statutary Liquidity (SLR) 18% 15% NA

Capital as % of Risk Weighted

Assets (CRAR) 9% 15% 15%

Priority Sector Lending as % of

Total Credit 40% NA NA

Nonperforming Asset Norms

(Days in Delinquency) 90 now 180 180 180

Restriction of Financial Activity YES NO NO

Restrictions of Foreign
Ownership YES NO NO
 NUMBER OF NBFC REGISTERED WITH RBI
16000

14077 13849 13765

14000 13261 13014 12968 12809 12740 12630 12409 12385 12225 12029 11842 11682 11555
12000

10000

8000

6000

4000

2000
784 710 604 507 428 401 364 336 308 297 271 254 241 220
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Number of NBFCs Number of NBFCs-D

 STATISTICS
Over 95% of the registered NBFCs are either
Investment Companies or Loan Companies

NUMBER OF NBFCS IN INDIA

12400
12225
12200
12029
12000
11842
11800
11682

11600 11555

11400

11200
FY 2013 FY 2014 FY 2015 FY 2016 H1 FY 2017

Data source: RBI AFC CIC-SI IDF IFC Factor MFI LC + IC

Source of funding
 Thank You

Pradiptarathi.panda@nism.ac.in