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Non Banking Institutes and Norms

INTRODUCTION
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.

WHAT IS AN NBFC?
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.

NBFC V/s BANK
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.

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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 .

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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.