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Non Banking Institutes and Norms

A company whose principal business is to receive deposits and lend funds, but not qualified enough to be called as a “Bank” as qualified in Banking Regulation Act, 1949.

As per Sec. 45 I (f) of RBI Act, 1934 A financial institution is an NBFC… • which has a principle business of receiving deposits under any scheme or an arrangement or lending in any manner, • Approved by Central Govt. and Notified by Official Gazette.

i. an NBFC cannot accept demand deposits ii. it is not a part of the payment and settlement system - cannot issue cheques to its customers; and iii. deposit insurance facility of DICGC (Deposit Insurance and Credit Guarantee Corporation) is not available for NBFC depositors. iv. U/S 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of nonbanking financial institution

Loan Company (LC) . Asset Finance Company (AFC) • ii.Types of NBFC • i. Investment Company (IC) • iii.

• It is regulated by RBI. general purpose industrial machines.g. Automobiles. e. generators sets.i. tractors. . Asset Finance Company (AFC) • Its principal business the financing of physical assets supporting productive/ economic activity.

g. • It is regulated by RBI. Kotak Mahindra Investment Co.ii. the acquisition of securities. its principal business. Investment Company (IC) • Company that is a financial institution carrying on. Tata Investment Corp. e. Ltd. .

ltd. • Regulated by RBI. Standard Charted Finance Ltd. • e. but does not include an asset finance company. . Loan Company (LC) • A company that is a financial institution whose principal business is providing finance.g.iii. Birla Financial Corp. whether by making loans or advances or otherwise for any activity other than its own.

Other Types • • • • Stock broking Co. . of India. Housing Finance co. affairs of the Govt. • Micro finance co. of co. Regulatory Authority -SEBI -SEBI -IRDA -National housing bank -Dept. Merchant banking co. Insurance Co.

.  Peerless General Finance and investment Company Limited (PGFIL) is the largest RNBC. in one lump-sum or in installments by way of contributions or subscriptions or by sale of units or certificates or other instruments. 1987.  At present .Residuary Non-Banking Companies: Company which receives deposits under any scheme by whatever name .  Governed by the provisions of Residuary Non-Banking Companies (Reserve Bank) Directions. or in any manner.there are 4 companies operate as RNBCs in India.  A type of NBFCs.

bonus or other advantage. by whatever name called in respect of deposits received: • Shall not be less than the rate of 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals.5% (to be compounded annually) on the amount deposited under daily deposit scheme. .  The amount payable by way of interest. Only class of NBFCs for which the floor rate of interest for deposits is specified by the RBI.  Can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. • At the rate of 3. premium.  Cannot accept deposits repayable on demand.

RNBCs are required to invest in a portfolio comprising of highly liquid and secure instruments like• Central/State Government securities. • Fixed deposits with scheduled commercial banks (SCB). etc . • Units of Mutual Funds. • Certificate of deposits of SCB/FIs. To secure the interest of depositor.

meaning that policyholders have the right to receive portions of the company's profits. .Mutual Benefit Financial Companies:  A company structure in which the company's owners are also its clients.  Also known as Nidhis.  Many insurance companies are structured as mutual companies.  The mutual company's profits are distributed to its participating customers each year in proportion to their individual exposures to the company. and often may elect the company's management.

 Are exempt from the provisions of the RBI Act and NBFC directions Act.1956. Type of NBFCs notified under Section 620 A of Companies Act.  Regulated by the Department of Company Affairs (DCA). 1956. .

.Miscellaneous Non-Banking Companies  Engaged in chit fund business. not the chit fund business.  RBI regulates only the deposits accepted by these companies.  Chit fund business is administered by the respective state governments.

Regulatory Norms and Directions for NBFCs .

A. Important statutory provisions of chapter 3B of the RBI Act as applicable to NBFCs .

in unencumbered approved securities. •Pre-requisite for CoR .Subject Certificate of registration Particulars • No company can commence or carry on NBFC without obtaining CoR from RBI. of an amount not less than 5% but not exceeding 25% of the deposits outstanding at the close of business on the last working day of the second preceding quarter • NBFC shall create reserve fund and transfer thereto a sum not less than 20% of net profit as disclosed in P&L account before any dividend is declared Creation of reserve fund .Minimum NOF(net owned fund) of 25 lakhs Maintenance of liquid assets • Investment.

B. Directions applicable to NBFCs .

Deposit Acceptance related Regulation .1.

5 times of NOF. Without MIG credit rating but CRAR 15% or above – 1. With MIG credit rating and 12% CRAR .a) Ceiling on quantum of public deposits • Loan and investment companies . or Rs 10 crore whichever is less . Minimum Investment Grade (MIG) credit rating 3.If company has NOF of Rs 25 lakhs. Capital to Risk Assets Ratio(CRAR)-15% • Equipment leasing and hire purchase finance companies .56 times of NOF if: 1. NOF.Rs 25 lakhs 2.4 times of NOF B.1. A.

15 % of outstanding public deposit liabilities of which: a) not less than 10% in approved securities. Or a depository . b) not more than 5 % in term deposits with scheduled commercial banks RNBCs – 10%of outstanding deposit liabilities Liquid assets securities are required to be lodged with scheduled commercial bank or Stock Holding Corporation of India Ltd.b. Investment in liquid assets NBFCs .

Period of Deposits • • • NBFCs – 12 to 60 months RNBCs – 12 to 84 months MNBCs – 6 to 36 months .C.

Ceiling on deposit rate • • NBFCs. RNBCs – Minimum interest of 4 % on daily deposits and 6 % on other than daily deposits . MNBCs and Nidhis – 12.5% p.a.d.

e. issue receipt for deposits. and maintain a deposit register . the deposit acceptance form should contain certain prescribed information. Advertisement and methodology for acceptance deposits/public deposits • Every company accepting deposits by advertisement has to comply with advertisement rules prescribed in this regard.

30 of the year . half-yearly and annual intervals.f. • Provisional return for the quarter ended March may be submitted within 30 days of the close of the quarter and final return should be submitted within a copy of the audited balance sheet as soon as the same is finalised but not later than Sept. Submission of returns • All NBFCs have to submit periodical returns to RBI at quarterly.


CRAR Type of companies Hire purchase finance companies (with MIG credit rating) Hire purchase finance companies (without MIG credit rating) Loan/Investment companies RNBCs CRAR 12% 15% 15% 12% .

Restrictive Norms • • • • Acceptance of public deposits Defaulter can’t create further assets Investments in real assets prohibited to 10% No investment in real estate or unquoted shares • Sufficient adjustment period is allowed .

Reporting System • Half yearly return to be submitted • Time allowed for submission is 3 months • Certified by the statutory auditors .


Norms • • • • • • Income recognition norms NPA norms Restrictive norms Policy on demand/call loans Accounting Standards Asset Classification .

Accounting for investments Investments Short-term Long-term Quoted Unquoted .

Provision for NPA (Loans and Advances) State of Asset Standard Sub-standard No Provision 10% on outstanding amount Unsecured : 100% Doubtful Loss Provision Secured : depending on the age of doubtful assets 100% on outstanding amount .

Provision for NPA (Equipment Lease & Hire Purchase) Time period 12 months to 24 months 24 months to 36 months 36 months to 48 months 48 months and more 10% on NBV 40% on NBV 70% on NBV Provision 100% on NBV .

Risk weights Credit Conversion factors • Risk weights are applied to all assets except intangible assets • After netting off provisions • Risk weights – Assets deducted from own fund to be assigned 0% – Exposure to AIFIs at 20% – Balance sheet items at 50% .

Disclosures • Disclose provision as outlined above • Provisions shall not be appropriated from GR • Provisions shall be debited to P & L A/c .

• Loss of Rs 212 crore reported • NBFCs reported profit of Rs 325 crore • 2002-03 – Decline trend broke .FINANCIAL HIGHLIGHTS OF NBFCs 2000-2006 SCENARIO • 2000-01 – Decline in the income of NBFCs • REASON – Drop in the fund based income which contributed 94% in this decline • 2001-02 – Decline trend continued.

.CONTD. • March 2006 – NBFCs held Rs 22842 crore of public deposits. • Major chunk of public deposits was held by RNBCs ( Residual non-banking companies) which was little over 80% .

of its aggregate risk weighted assets and of risk adjusted value of off-balance sheet items. . capital adequacy norms were made applicable to NBFCs • CRAR – Capital to risk weighted average ratio • According to norms – Every NBFC shall maintain a minimum capital ratio consisting of tier 1 & 2 capital that shall not be less than 12 per cent on or before 31 March 1999.INTRODUCTION OF CRAR • Following the 1997 scam.1998.

• NBFCs with less than 10 CRAR were existed during 2000-01 • Almost 73 % NBFCs had above 30% CRAR as on 31 march 2001 • As on 2006. around 94 % NBFCs had achieved capital adequacy norms of more than 12% • In march 2006 there were only 19 NBFCs with less than 12 CRAR .CONTD. .

• Key features : • Banks are not allowed to lend to NBFCs if: – Investments of NBFCs in shares & debentures of any company.2005-THE RBI RESTRICTIONS • The RBI placed restrictions on BANK FUNDINGS TO NBFCs in August 2005. . – Grants of unscheduled loans to and inter-corporate deposits by NBFCs in any company – Loans by NBFCs to subsidiaries any group companies and funding to NBFCs for on-lending to individuals for subscribing to IPOs and discounting or rediscounting of bills by NBFCs.

• Banks funding to RNBFs will be restricted to their net owned funds(NOF) • Banks are not allowed to execute guarantees covering intercompany deposits and loans to NBFCs • Banks cannot provide bridge loans of any kind against an upcoming equity or bond issue . .CONTD. . • Shares and debentures can not be accepted as collateral for secured loans granted to NBFCs.

• Banks cannot enter into lease agreements with equipment leasing firms . .CONTD. • Banks cannot provide bridge loans of any other form such as floating rate bonds. .

• NBFCs are leader in financing commercial vehicles.SMALL & LARGE NBFCs • Small NBFCs focus on deposit taking • Large NBFCs focus on asset financing • Large NBFCs have specialized skills in credit intermediation and have a collective asset base of Rs 17000 crore. tractors and autotomobiles • They offer personal loans . insurance and various other services .

• Foreign banks floated in India as a result of which no of NBFCs increased • RBI tightened the norms in 2006 according to which. non-deposit taking NBFCs having assets of Rs 100 crore will be subject to exposure and capital adequacy norms. .BANKS & NBFCs • Banks are entering the niche markets of NBFCs • Banks have edge over NBFCs as they have assess to low cost deposits which NBFCs don’t.

. non-deposit taking NBFCs having assets of Rs 100 crore will be subject to exposure and capital adequacy norms. • Banks will not be able to lend indiscriminately to them .NEW GUIDELINES – RBI(2006) • RBI tightened the norms in 2006 according to which. • Banks will not be allowed to hold more than 10 percent equity stake in deposit taking NBFCs • Foreign banks with NBFC subsidies will be required to include the activities of their NBFC arms in their reporting to Reserve Bank.