Non banking financial

companies
By Pinal Shah
Lecturer
L.J.Institute of Management
Studies
Ahmedabad, Gujarat
Introduction
NBFC are heterogeneous in nature in
terms of activity and size are important
financial intermediaries and and integral
part of IFS.
The main advantage is lower
transaction costs, quick decision
making, customer orientation and
prompt provision of services.
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 Contd
Able to carve niche in meeting credit
need of wholesale and retail customers.
Their number has gone up from 7,063
in 1981to 51,929 in 1996.
The regulated deposits of NBFCs
amounted to Rs. 20,428.93 cores in
1993

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Difference between NBFC and
Bank
(i) a NBFC cannot accept demand deposits
(demand deposits are funds deposited at a
depository institution that are payable on
demand -- immediately or within a very short
period -- like your current or savings
accounts.)
(ii) it is not a part of the payment and settlement
system and as such cannot issue cheques to
its customers; and
(iii) deposit insurance facility of DICGC is not
available for NBFC depositors unlike in case
of banks. Prepared by Pinal Shah 4
salient features of NBFCs
i) The NBFCs are allowed to accept/renew
public deposits for a minimum period of 12
months and maximum period of 60 months.
They cannot accept deposits repayable on
demand.
ii) NBFCs cannot offer interest rates higher
than the ceiling rate prescribed by RBI from
time to time. The present ceiling is 11 per
cent per annum. The interest may be paid or
compounded at rests not shorter than
monthly rests.
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 Contd
iii) NBFCs cannot offer gifts/incentives or any
other additional benefit to the depositors.
iv) NBFCs (except certain AFCs) should have
minimum investment grade credit rating.
v) The deposits with NBFCs are not insured.
vi) The repayment of deposits by NBFCs is
not guaranteed by RBI.
vii) There are certain mandatory disclosures
about the company in the Application Form
issued by the company soliciting deposits.
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NBFC
It means
1. A financial institutions that is company
2. A non-banking institution that is a company
whose principal business is the receiving of
deposits under any scheme or arrangement
or lending in any manner
3. Other non banking institutions with prior
approval of GOI.
It excludes FI which carry on agricultural
operations as their principal business.
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Contd
It is only non-banking institution that is
any hire-purchase finance, investment,
loan or mutual benefit financial
company and an equipment leasing
company but excludes and insurance
company/stock exchange/stock broking
company/ merchant banking company.

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Type of NBFC
1. An equipment leasing company (ELC)
2. A hire purchase company (HPC)
3. A housing finance company (HFC)
4. An investment company (IC)
5. A loan company(LC)
6. A mutual benefit financial companies
(MBFC)I.e. Nidhi companies
7. A Miscellaneous non-banking company I.e.
chit fund company (MNBC)
Residuary Non Banking companies (RNBC) (it
is not NBFC) Prepared by Pinal Shah 9
MBFCs
MBFCs or Nidhis were exempt from
provision of RBIs NBFCs directions.
However, the RBI imposed a ceiling of
15% interest rat on deposits and
prohibited from issuing advertisements
in any form and paying any brokerage
for soliciting deposits.

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MNBCs
A company or FI carrying all or any of following
types of business.
collection of money in one lump
sum/installments by way of
Contributions
Sale of units/certificates/other instruments
In any manner
As membership/admission fee/
Service charges to w.r.t MF, any savings, thrift etc.

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MNBC
Manage to an agreement with the
subscribers each one of whom
subscribes a certain sum in installment
saver definite period.
Conduct any other form of chit/.
Undertake/carry on/engage any
business similar to those referred to
above.

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RNBC
All non banking financial institutions
other than NBFC, MBFC and MNBCs are
known as RNBCs.

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Categorization of NBFC
Accepting public deposits
Not accepting public deposits but engaged in
loan, Investments, hire purchase, lease
finance.
Not accepting public deposits and have
acquired share/securities in their own
group/holding/subsidiary companies of not
less than 90% of their total assets and are
not trading in these shares.

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Public Deposits
It include FD, Recurring deposits, deposits
received from relatives and friends,
shareholders by public limited company and
money raised by issue of unsecured
debentures/bonds.
It will not include money raised by NBFCs by
way of issue of secured debentures/bonds,
borrowings from banks/ financial institutions
deposit form directors, foreign citizens, privet
limited companies form their shareholders.
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RBI (Amendment) Act, 1997
March
Minimum NOF Rs. 25 lakh
Compulsory registration with RBI
Maintenance of liquid assets
Creation of reserve fund into with 20%
of Net profit should be transferred

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Net Own Funds
Minimum NOF must be rs. 25 lakh or such
other amount not exceeding Rs 200 lakh.
NOF means
1. Paid up capital
2. Free reserves accumulated losses,
deferred revenue expenditure and other
intangible assets
3. Less investments in shares
4. Less the book value of
debentures/bonds/outstanding loans and
advances including hire-purchase and lease
finance. Prepared by Pinal Shah 17
NOF
NBFC not having NOF of less than rs.
25 lakh will not be entitled to accept
deposit from public.
But they can raise borrowings form
other resources.

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Registration
With effect from Jan 1997, to
commence a new company or to carry
on existing company the business of
NBFC must obtain certificate of
registration from RBI.

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Maintenance of Assets
They have to invest in unencumbered
approved Indian securities 5% or more their
outstanding deposits at the close of business
on the last working day of second preceding
quarter.
Approved securities it means securities of
any state government or central government
and bonds unconditionally guaranteed by
them as regards the payment of interest as
well as repayment of principal.

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 contd
Included in unencumbered approved
securities are approved securities
lodged by NBFCs with other institutions
for an advance/any other arrangement.
The basis of valuation of such securities
would be the cost or current market
price.

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Reserve Fund
Every NBFC must create a reserve fund
to which at least 20% of its net profits
must be transferred before the
declaration of any dividend.

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Minimum credit ratings
NBFCS that have minimum NOF of 25
lakh can accept public deposits but they
must have minimum investment grade
for their FD from one of approved rating
agencies at least once a year.
A copy of rating should be sent to RBI.

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Credit rating agency

Credit rating agency Min rating

Credit Rating Information FA -
services of India Ltd. (CRISIL)
Investment Information and MA-
credit rating agency of India Ltd.

Credit analysis and research ltd. CARE BBB

FITCH Rating India Private Ltd. Ind BBB -
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Ceiling on quantum of
deposits for ELC/HPC
NOF Rs. 25 Lakh
Capital adequacy ratio 15% (As per
last balance sheet)
Acceptance of deposits 1.5*NOF or 10
cr which ever is lower.
If they have minimum grade 4*NOF

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LC/IC
NOF Rs. 25 lakh
Min Investment grade
15% adequacy ratio as per last balance
sheet.
If AAA ratings ad. Ratio is below 15%- they
are prohibited from accepting/renewing
deposits in excess of amount outstanding as
on Dec 18 1998 or 1.5 NOF which ever is
low.

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 Contd..
If grading is AA but with less than
15% ad ratio than its allowed to accept
public deposit upto its NOF till it attains
15%
If grading is A and ad ratio is less
than 15% the ceiling on deposit is one
half of NOF.

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Interest rate ceiling.
It is the rate of interest on deposits.
It is paid or compounded at rests but
not shorter than monthly rests.
Currently ceiling is 12.5%.

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Brokerage
Brokerage payable by NBFCs on deposit
of one year to vie years has at 2%
uniformly.

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Other criteria
It must pay its present and future
depositors in full when they claim.
Its affairs are not detrimental to the
interests of its present and public
interest of depositors.
It has adequate capital structure and
earning prospects.

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Power of regulation
RBI can general regulate or prohibit the
issue by any NBI of any prospectus or
advertisement soliciting deposits of
money form the public and also specify
conditions subject to which they can be
issued.

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